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Glatfelter Corp - Quarter Report: 2017 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2017

or

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

For the transition period from           to

 

 

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      No  .

 

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

 

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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

Common Stock outstanding on April 25, 2017 totaled 43,558,387 shares.

 

 

 


 

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

REPORT ON FORM 10-Q

For the QUARTERLY PERIOD ENDED

March 31, 2017

Table of Contents

 

 

Page

 

Page

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1

Financial Statements

 

 

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2017 and 2016 (unaudited)

 

2

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016 (unaudited)

 

3

 

Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 (unaudited)

 

4

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited)

 

5

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

6

 

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

 

9

 

 

 

 


 

PART I

Item 1 – Financial Statements

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

 

Three months ended

March 31

 

In thousands, except per share

2017

 

 

2016

 

Net sales

$

390,713

 

 

$

402,218

 

Energy and related sales, net

 

1,129

 

 

 

666

 

Total revenues

 

391,842

 

 

 

402,884

 

Costs of products sold

 

334,913

 

 

 

345,041

 

Gross profit

 

56,929

 

 

 

57,843

 

Selling, general and administrative expenses

 

35,086

 

 

 

31,858

 

Losses on dispositions of plant, equipment and timberlands, net

 

32

 

 

 

24

 

Operating income

 

21,811

 

 

 

25,961

 

Non-operating income (expense)

 

 

 

 

 

 

 

Interest expense

 

(4,008

)

 

 

(4,116

)

Interest income

 

113

 

 

 

91

 

Other, net

 

(279

)

 

 

(700

)

Total non-operating expense

 

(4,174

)

 

 

(4,725

)

Income before income taxes

 

17,637

 

 

 

21,236

 

Income tax provision

 

6,034

 

 

 

5,068

 

Net income

$

11,603

 

 

$

16,168

 

Earnings per share

 

 

 

 

 

 

 

Basic

$

0.27

 

 

$

0.37

 

Diluted

 

0.26

 

 

 

0.37

 

Cash dividends declared per common share

$

0.13

 

 

$

0.125

 

Weighted average shares outstanding

 

 

 

 

 

 

 

Basic

 

43,583

 

 

 

43,521

 

Diluted

 

44,493

 

 

 

43,871

 

 

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

 

 

- 2 -

GLATFELTER

03.31.17 Form 10-Q


 

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

 

Three months ended

March 31

 

 

In thousands

2017

 

 

2016

 

 

Net income

$

11,603

 

 

$

16,168

 

 

Foreign currency translation adjustments

 

6,065

 

 

 

13,419

 

 

Net change in:

 

 

 

 

 

 

 

 

Deferred (gains) losses on cash flow hedges, net of taxes

 

 

 

 

 

 

 

 

of $288 and $57, respectively

 

(946

)

 

 

66

 

 

Unrecognized retirement obligations, net of taxes

 

 

 

 

 

 

 

 

of $(1,248) and $(1,367), respectively

 

2,074

 

 

 

2,257

 

 

Other comprehensive income

 

7,193

 

 

 

15,742

 

 

Comprehensive income

$

18,796

 

 

$

31,910

 

 

 

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

 

 

- 3 -

GLATFELTER

03.31.17 Form 10-Q


 

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

 

March 31

 

 

December 31

 

In thousands

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

57,227

 

 

$

55,444

 

Accounts receivable, net

 

165,420

 

 

 

152,989

 

Inventories

 

260,744

 

 

 

249,669

 

Prepaid expenses and other current assets

 

33,263

 

 

 

36,157

 

Total current assets

 

516,654

 

 

 

494,259

 

Plant, equipment and timberlands, net

 

803,997

 

 

 

775,898

 

Goodwill

 

74,099

 

 

 

73,094

 

Intangible assets, net

 

55,922

 

 

 

56,259

 

Other assets

 

124,094

 

 

 

121,749

 

Total assets

$

1,574,766

 

 

$

1,521,259

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

Current portion of long-term debt

$

9,416

 

 

$

8,961

 

Accounts payable

 

172,295

 

 

 

164,345

 

Dividends payable

 

5,675

 

 

 

5,455

 

Environmental liabilities

 

25,000

 

 

 

25,000

 

Other current liabilities

 

108,449

 

 

 

119,250

 

Total current liabilities

 

320,835

 

 

 

323,011

 

Long-term debt

 

400,470

 

 

 

363,647

 

Deferred income taxes

 

57,830

 

 

 

54,995

 

Other long-term liabilities

 

126,845

 

 

 

125,780

 

Total liabilities

 

905,980

 

 

 

867,433

 

Commitments and contingencies

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Common stock

 

544

 

 

 

544

 

Capital in excess of par value

 

59,623

 

 

 

57,917

 

Retained earnings

 

968,813

 

 

 

962,884

 

Accumulated other comprehensive loss

 

(197,413

)

 

 

(204,606

)

 

 

831,567

 

 

 

816,739

 

Less cost of common stock in treasury

 

(162,781

)

 

 

(162,913

)

Total shareholders’ equity

 

668,786

 

 

 

653,826

 

Total liabilities and shareholders’ equity

$

1,574,766

 

 

$

1,521,259

 

 

 

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

- 4 -

GLATFELTER

03.31.17 Form 10-Q


 

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

Three months ended

March 31

 

In thousands

2017

 

 

2016

 

Operating activities

 

 

 

 

 

 

 

Net income

$

11,603

 

 

$

16,168

 

Adjustments to reconcile to net cash provided by operations:

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

17,282

 

 

 

16,646

 

Amortization of debt issue costs

 

289

 

 

 

290

 

Pension expense, net of unfunded benefits paid

 

928

 

 

 

767

 

Deferred income tax benefit

 

1,704

 

 

 

2,436

 

Losses on dispositions of plant, equipment and timberlands, net

 

32

 

 

 

24

 

Share-based compensation

 

1,648

 

 

 

1,217

 

Change in operating assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

(11,462

)

 

 

2,376

 

Inventories

 

(9,907

)

 

 

(5,888

)

Prepaid and other current assets

 

1,670

 

 

 

(1,980

)

Accounts payable

 

2,903

 

 

 

(15,759

)

Accruals and other current liabilities

 

(8,874

)

 

 

(4,897

)

Other

 

(255

)

 

 

41

 

Net cash provided by operating activities

 

7,561

 

 

 

11,441

 

Investing activities

 

 

 

 

 

 

 

Expenditures for purchases of plant, equipment and timberlands

 

(36,783

)

 

 

(43,294

)

Proceeds from disposals of plant, equipment and timberlands, net

 

 

 

 

33

 

Other

 

 

 

 

(300

)

Net cash used by investing activities

 

(36,783

)

 

 

(43,561

)

Financing activities

 

 

 

 

 

 

 

Net borrowings under revolving credit facility

 

38,236

 

 

 

 

Payments of borrowing costs

 

 

 

 

(51

)

Repayment of term loans

 

(2,190

)

 

 

(1,926

)

Payments of dividends

 

(5,455

)

 

 

(5,231

)

Proceeds from government grants

 

 

 

 

3,861

 

Payments related to share-based compensation awards and other

 

(112

)

 

 

(751

)

Net cash provided (used) by financing activities

 

30,479

 

 

 

(4,098

)

Effect of exchange rate changes on cash

 

526

 

 

 

1,176

 

Net increase (decrease) in cash and cash equivalents

 

1,783

 

 

 

(35,042

)

Cash and cash equivalents at the beginning of period

 

55,444

 

 

 

105,304

 

Cash and cash equivalents at the end of period

$

57,227

 

 

$

70,262

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest, net of amounts capitalized

$

293

 

 

$

474

 

Income taxes, net

 

2,194

 

 

 

5,188

 

 

 

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

 

- 5 -

GLATFELTER

03.31.17 Form 10-Q


 

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. The terms “we,” “us,” “our,” “the Company,” or “Glatfelter,” refer to P. H. Glatfelter Company and subsidiaries unless the context indicates otherwise. 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 2016 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.” 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. In addition, as permitted by the ASU, we have elected to account for the impact of forfeitures as they occur rather to estimate forfeitures for purposes of recognizing compensation expense. We adopted this standard effective January 1, 2017, on a prospective basis; however, the adoption of the new standard did not 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 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 transition approach. We are currently assessing the impact this standard may have on our results of operations and financial position.

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. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The guidance allows for both retrospective and modified retrospective

- 6 -

GLATFELTER

03.31.17 Form 10-Q


 

methods of adoption. We will apply the modified retrospective method of adoption. We have performed an initial assessment of the impact of the ASU on our policies, processes, systems and controls and are developing processes to obtain the information necessary for the new disclosures. We are in the process of evaluating the impact this standard may have, if any, on our reported results of operations or financial position. Based on the initial assessment, we do not expect this ASU will have a significant impact on the timing or amount of revenue recognition.

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). The update requires entities to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. All other components are to be presented below the determination of operating income. Entities will be required to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. ASU 2017-07 is effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted. We do not expect the adoption of ASU 2017-07 will have a material impact on our consolidated financial statements.

 

 

3.

EARNINGS PER SHARE

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

 

 

Three months ended

March 31

 

In thousands, except per share

2017

 

 

 

2016

 

Net income

$

11,603

 

 

 

$

16,168

 

Weighted average common shares

 

 

 

 

 

 

 

 

outstanding used in basic EPS

 

43,583

 

 

 

 

43,521

 

Common shares issuable upon

 

 

 

 

 

 

 

 

exercise of dilutive stock options

 

 

 

 

 

 

 

 

and PSAs / RSUs

 

910

 

 

 

 

350

 

Weighted average common shares

 

 

 

 

 

 

 

 

outstanding and common share

 

 

 

 

 

 

 

 

equivalents used in diluted EPS

 

44,493

 

 

 

 

43,871

 

Earnings per share

 

 

 

 

 

 

 

 

Basic

$

0.27

 

 

 

$

0.37

 

Diluted

 

0.26

 

 

 

 

0.37

 

 

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

 

 

March 31

 

In thousands

2017

 

 

 

2016

 

Three months ended

 

592

 

 

 

 

1,694

 

 

 

 

 

 

 

 

- 7 -

GLATFELTER

03.31.17 Form 10-Q


 

4.

ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table sets forth details of the changes in accumulated other comprehensive income (losses) for the three months ended March 31, 2017 and 2016.

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, 2017

$

(100,448

)

 

$

1,500

 

 

$

(110,656

)

 

$

4,998

 

 

$

(204,606

)

Other comprehensive income

   before reclassifications  (net of tax)

 

6,065

 

 

 

(255

)

 

 

 

 

 

 

 

 

5,810

 

Amounts reclassified from accumulated

   other comprehensive income  (net of tax)

 

 

 

 

(691

)

 

 

2,190

 

 

 

(116

)

 

 

1,383

 

Net current period other comprehensive

   income (loss)

 

6,065

 

 

 

(946

)

 

 

2,190

 

 

 

(116

)

 

 

7,193

 

Balance at March 31, 2017

$

(94,383

)

 

$

554

 

 

$

(108,466

)

 

$

4,882

 

 

$

(197,413

)

Balance at January 1, 2016

$

(73,041

)

 

$

(225

)

 

$

(120,714

)

 

$

3,494

 

 

$

(190,486

)

Other comprehensive income

   before reclassifications  (net of tax)

 

13,419

 

 

 

252

 

 

 

 

 

 

 

 

 

13,671

 

Amounts reclassified from accumulated

   other comprehensive income  (net of tax)

 

 

 

 

(186

)

 

 

2,315

 

 

 

(58

)

 

 

2,071

 

Net current period other comprehensive

   income (loss)

 

13,419

 

 

 

66

 

 

 

2,315

 

 

 

(58

)

 

 

15,742

 

Balance at March 31, 2016

$

(59,622

)

 

$

(159

)

 

$

(118,399

)

 

$

3,436

 

 

$

(174,744

)

 

Reclassifications out of accumulated other comprehensive income were as follows:

 

 

 

Three months ended

March 31

 

 

 

In thousands

 

2017

 

 

2016

 

 

 

Description

 

 

 

 

 

 

 

 

 

Line Item in Statements of Income

Cash flow hedges (Note 11)

 

 

 

 

 

 

 

 

 

 

Gains on cash flow hedges

 

$

(931

)

 

$

(298

)

 

Costs of products sold

Tax expense

 

 

240

 

 

 

112

 

 

Income tax provision

Net of tax

 

 

(691

)

 

 

(186

)

 

 

Retirement plan obligations (Note 7)

 

 

 

 

 

 

 

 

 

 

Amortization of deferred benefit pension plans

 

 

 

 

 

 

 

 

 

 

Prior service costs

 

 

526

 

 

 

503

 

 

Costs of products sold

 

 

 

178

 

 

 

171

 

 

Selling, general and administrative

Actuarial losses

 

 

2,108

 

 

 

2,281

 

 

Costs of products sold

 

 

 

714

 

 

 

773

 

 

Selling, general and administrative

 

 

 

3,526

 

 

 

3,728

 

 

 

Tax benefit

 

 

(1,336

)

 

 

(1,413

)

 

Income tax provision

Net of tax

 

 

2,190

 

 

 

2,315

 

 

 

Amortization of deferred benefit other plans

 

 

 

 

 

 

 

 

 

 

Prior service costs

 

 

(37

)

 

 

(37

)

 

Costs of products sold

 

 

 

(8

)

 

 

(8

)

 

Selling, general and administrative

Actuarial losses

 

 

(118

)

 

 

(42

)

 

Costs of products sold

 

 

 

(25

)

 

 

(9

)

 

Selling, general and administrative

 

 

 

(188

)

 

 

(96

)

 

 

Tax expense

 

 

72

 

 

 

38

 

 

Income tax provision

Net of tax

 

 

(116

)

 

 

(58

)

 

 

Total reclassifications, net of tax

 

$

1,383

 

 

$

2,071

 

 

 

 

 

 

- 8 -

GLATFELTER

03.31.17 Form 10-Q


 

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 March 31, 2017 and December 31, 2016, we had $16.1 million and $14.2 million of gross unrecognized tax benefits. As of March 31, 2017, if such benefits were to be recognized, approximately $13.0 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 - 2016

 

 

N/A

 

State

2012 - 2016

 

 

2014

 

Canada(1)

2010 - 2016

 

 

N/A

 

Germany(1)

2012 - 2016

 

 

2011 - 2013

 

France

2014 - 2016

 

 

2011 - 2012

 

United Kingdom

2015 - 2016

 

 

N/A

 

Philippines

2015 -2016

 

 

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 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 $0.9 million. Substantially all of this range relates to tax positions taken in the United Kingdom and the U.S.

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:

 

 

Three months ended

March 31

 

In millions

2017

 

 

 

2016

 

Interest expense (income)

$

0.1

 

 

 

$

0.1

 

Penalties

 

 

 

 

 

 

 

 

March 31

 

 

 

December 31

 

 

2017

 

 

 

2016

 

Accrued interest payable

$

0.6

 

 

 

$

0.5

 

 

 

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 to members of management and vesting is based on achievement of cumulative financial performance targets covering a two year period followed by an additional one-year service period. 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

2017

 

 

 

2016

 

Balance at January 1,

 

679,038

 

 

 

 

674,523

 

Granted

 

290,880

 

 

 

 

220,105

 

Forfeited

 

(90,801

)

 

 

 

(116,640

)

Shares delivered

 

 

 

 

 

(126,914

)

Balance at March 31,

 

879,117

 

 

 

 

651,074

 

 

- 9 -

GLATFELTER

03.31.17 Form 10-Q


 

The amount granted in 2017 and 2016 includes PSAs of 157,064 and 191,548, respectively, exclusive of reinvested dividends.

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

 

 

March 31

 

In thousands

2017

 

 

 

2016

 

Three months ended

$

1,039

 

 

 

$

467

 

 

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 for the three months ended March 31;

 

 

2017

 

 

2016

 

SOSARS

Shares

 

 

 

Wtd Avg

Exercise

Price

 

 

Shares

 

 

Wtd Avg

Exercise

Price

 

Outstanding at January 1,

 

2,736,616

 

 

 

$

17.64

 

 

 

2,199,742

 

 

$

17.82

 

Granted

 

 

 

 

 

 

 

 

724,914

 

 

17.47

 

Exercised

 

(33,050

)

 

 

 

14.65

 

 

 

 

 

 

 

Canceled / forfeited

 

(17,420

)

 

 

 

18.38

 

 

 

(24,712

)

 

 

26.90

 

Outstanding at March 31,

 

2,686,146

 

 

 

$

17.67

 

 

 

2,899,944

 

 

$

17.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SOSAR Grants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average grant date

   fair value per share

$

-

 

 

 

 

 

 

 

$

4.04

 

 

 

 

 

Aggregate grant date

   fair value (in thousands)

$

-

 

 

 

 

 

 

 

$

2,919

 

 

 

 

 

Black-Scholes assumptions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend yield

 

-

 

 

 

 

 

 

 

 

2.87

%

 

 

 

 

Risk free rate of return

 

-

 

 

 

 

 

 

 

 

1.34

%

 

 

 

 

Volatility

 

-

 

 

 

 

 

 

 

 

32.01

%

 

 

 

 

Expected life

-

 

 

 

 

 

 

 

6 yrs

 

 

 

 

 

 

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

 

 

March 31

 

In thousands

2017

 

 

 

2016

 

Three months ended

$

609

 

 

 

$

732

 

 

 

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

March 31

 

In millions

 

2017

 

 

 

2016

 

Pension Benefits

 

 

 

 

 

 

 

 

 

Service cost

 

$

2,721

 

 

 

$

2,730

 

Interest cost

 

 

5,907

 

 

 

 

6,087

 

Expected return on plan assets

 

 

(10,831

)

 

 

 

(11,386

)

Amortization of prior service

   cost

 

 

704

 

 

 

 

674

 

Amortization of unrecognized

   loss

 

 

2,822

 

 

 

 

3,054

 

Total net periodic benefit cost

 

$

1,323

 

 

 

$

1,159

 

 

 

 

 

 

 

 

 

 

 

Other Benefits

 

 

 

 

 

 

 

 

 

Service cost

 

$

295

 

 

 

$

323

 

Interest cost

 

 

485

 

 

 

 

540

 

Amortization of prior

   service credit

 

 

(45

)

 

 

 

(45

)

Amortization of

   actuarial gain

 

 

(143

)

 

 

 

(51

)

Total net periodic

   benefit cost

 

$

592

 

 

 

$

767

 

 

 

- 10 -

GLATFELTER

03.31.17 Form 10-Q


 

8.

INVENTORIES

Inventories, net of reserves, were as follows:

 

 

March 31

 

 

 

December 31

 

In thousands

2017

 

 

 

2016

 

Raw materials

$

65,021

 

 

 

$

66,359

 

In-process and finished

 

122,792

 

 

 

 

112,507

 

Supplies

 

72,931

 

 

 

 

70,803

 

Total

$

260,744

 

 

 

$

249,669

 

 

 

9.

LONG-TERM DEBT

Long-term debt is summarized as follows:

 

 

March 31

 

 

 

December 31

 

In thousands

2017

 

 

 

2016

 

Revolving credit facility, due Mar. 2020

$

100,000

 

 

 

$

61,595

 

5.375% Notes, due Oct. 2020

 

250,000

 

 

 

 

250,000

 

2.40% Term Loan, due Jun. 2022

 

8,018

 

 

 

 

8,282

 

2.05% Term Loan, due Mar. 2023

 

34,237

 

 

 

 

35,163

 

1.30% Term Loan, due Jun. 2023

 

9,545

 

 

 

 

9,788

 

1.55% Term Loan, due Sep. 2025

 

10,480

 

 

 

 

10,333

 

Total long-term debt

 

412,280

 

 

 

 

375,161

 

Less current portion

 

(9,416

)

 

 

 

(8,961

)

Unamortized deferred issuance costs

 

(2,394

)

 

 

 

(2,553

)

Long-term debt, net of current portion

$

400,470

 

 

 

$

363,647

 

 

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. On February 1, 2017, the Revolving Credit Facility was further amended to, among other things, change the definition of earnings before interest, taxes, depreciation and amortization (“EBITDA”) for purposes of calculating covenant compliance.

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 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 March 31, 2017, the leverage ratio, as calculated in accordance with the definition in our amended credit agreement, was 2.4x. 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 any time on or after October 15, 2016 at the redemption prices specified in the applicable 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.

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 Facility at maturity or a default under the Revolving Credit Facility that accelerates the debt outstanding thereunder. As of March 31, 2017, we met all of the requirements of our debt covenants.

- 11 -

GLATFELTER

03.31.17 Form 10-Q


 

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 Facility.

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 as of March 31, 2017 and December 31, 2016. 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.

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:

 

 

March 31, 2017

 

 

 

December 31, 2016

 

In thousands

Carrying

Value

 

 

Fair Value

 

 

 

Carrying

Value

 

 

Fair Value

 

Variable rate debt

$

100,000

 

 

$

100,000

 

 

 

$

61,595

 

 

$

61,595

 

Fixed-rate bonds

 

250,000

 

 

 

255,938

 

 

 

 

250,000

 

 

 

256,563

 

2.40% Term loan

 

8,018

 

 

 

8,207

 

 

 

 

8,282

 

 

 

8,877

 

2.05% Term loan

 

34,237

 

 

 

34,745

 

 

 

 

35,163

 

 

 

37,089

 

1.30% Term Loan

 

9,545

 

 

 

9,463

 

 

 

 

9,788

 

 

 

10,062

 

1.55% Term loan

 

10,480

 

 

 

10,402

 

 

 

 

10,333

 

 

 

10,082

 

Total

$

412,280

 

 

$

418,755

 

 

 

$

375,161

 

 

$

384,268

 

 

As of March 31, 2017, and December 31, 2016, we had $250.0 million of 5.375% fixed rate bonds. These bonds 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 11.

 

 

11.

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 March 31, 2017, the maturity of currency forward contracts ranged from one month to 18 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

- 12 -

GLATFELTER

03.31.17 Form 10-Q


 

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

March 31   2017

 

 

December 31   2016

 

Derivative

 

 

 

 

 

 

 

Sell/Buy - sell notional

 

 

 

 

 

 

 

Euro / British Pound

 

9,768

 

 

 

10,373

 

Sell/Buy - buy notional

 

 

 

 

 

 

 

Euro / Philippine Peso

 

730,295

 

 

 

699,279

 

British Pound / Philippine Peso

 

529,192

 

 

 

557,025

 

Euro / U.S. Dollar

 

44,021

 

 

 

43,951

 

U.S. Dollar / Canadian Dollar

 

34,615

 

 

 

35,290

 

U.S. Dollar / Euro

 

12,090

 

 

 

15,379

 

 

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.”

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

March 31   2017

 

 

December 31   2016

 

Derivative

 

 

 

 

 

 

 

Sell/Buy -  sell notional

 

 

 

 

 

 

 

U.S. Dollar / British Pound

 

12,500

 

 

 

10,500

 

British Pound / Euro

 

2,500

 

 

 

2,500

 

Sell/Buy - buy notional

 

 

 

 

 

 

 

Euro / U.S. Dollar

 

7,500

 

 

 

3,500

 

British Pound / Euro

 

17,000

 

 

 

18,500

 

 

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

March 31   2017

 

 

December 31    2016

 

 

March 31   2017

 

 

December 31    2016

 

 

Prepaid Expenses

and Other

 

 

Other

 

Balance sheet caption

Current Assets

 

 

Current Liabilities

 

Designated as hedging:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward foreign currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

exchange contracts

$

1,206

 

 

$

2,625

 

 

$

983

 

 

$

1,493

 

Not designated as hedging:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward foreign currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

exchange contracts

$

101

 

 

$

60

 

 

$

52

 

 

$

104

 

 

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

March 31

 

 

In thousands

 

 

2017

 

 

2016

 

 

Designated as hedging:

 

 

 

 

 

 

 

 

 

 

Forward foreign currency exchange contracts:

 

 

 

 

 

 

 

 

 

 

Effective portion – cost of products sold

 

 

$

931

 

 

$

298

 

 

Ineffective portion – other – net

 

 

 

50

 

 

$

(403

)

 

Not designated as hedging:

 

 

 

 

 

 

 

 

 

 

Forward foreign currency

 

 

 

 

 

 

 

 

 

 

exchange contracts:

 

 

 

 

 

 

 

 

 

 

Other – net

 

 

$

21

 

 

$

589

 

 

 

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

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GLATFELTER

03.31.17 Form 10-Q


 

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

2017

 

 

2016

 

Balance at January 1,

$

1,882

 

 

$

(178

)

Deferred (losses) gains

 

 

 

 

 

 

 

on cash flow hedges

 

(303

)

 

 

307

 

Reclassified to earnings

 

(931

)

 

 

(298

)

Balance at March 31,

$

648

 

 

$

(169

)

 

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 12 to 18 months and the amount ultimately recognized will vary depending on actual market rates.

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.

 

 

12.

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 Site has been subject to certain studies, demonstration projects and interim cleanups. The permanent cleanup, known as a “remedial action” under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), 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 originally notified several entities that they were potentially responsible parties (“PRPs”); however, after giving effect to settlements reached with the

Governments, the remaining PRPs exposed to continuing obligations to implement the remainder of the cleanup consist of us, Georgia Pacific Consumer Products, L.P. (“Georgia Pacific”) and NCR Corporation (“NCR”). In addition to the government claims, Appvion retains a claim against us and Georgia Pacific.

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, one of the PRPs, 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 majority of that work to date has been funded or conducted by parties other than us, although before the UAO, we contributed to a project in that area and we have conducted about $13.4 million of cleanup work under the UAO in 2015 and 2016. The cleanup is expected to continue through 2018. However, as discussed below, under a proposed consent decree between the United States, Wisconsin, NCR and Appvion, Inc. (“Appvion”), we would not be responsible for any additional cleanup at the Site.

Litigation and Settlement.  In 2008, in an allocation action, NCR and Appvion sued us and many other defendants in an effort to allocate among the liable parties the costs of cleaning up this Site and compensating the Governments for their costs and the natural resource trustees for NRDs. This case has been called 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.

On appeal, the United States Court of Appeals for the Seventh Circuit affirmed the district court’s ruling, 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

- 14 -

GLATFELTER

03.31.17 Form 10-Q


 

court’s further consideration of whether any other equitable factors might cause the district court to alter its allocation.

In 2010, in an enforcement action, the Governments sued us and other defendants for (a) an injunction to require implementation of the cleanup ordered by the 2007 UAO, (b) recovery of the Governments’ past and future costs of response, (c) recovery of NRDs, and (d) recovery of a declaration of liability for the Site. After appeals, the Governments did not obtain an injunction and they withdrew their claims for NRDs. The Governments obtained a declaration of our liability to comply with the 2007 UAO. The Governments’ costs claims remained pending.

On January 17, 2017, the United States filed a consent decree with the federal district court among the United States, Wisconsin, NCR, and Appvion (the “NCR/Appvion consent decree”) under which NCR would agree to complete the remaining cleanup and both NCR and Appvion would agree not to seek to recover from us or anyone else any amounts they have spent or will spend, and we and others would be barred from seeking claims against NCR or Appvion. On March 29, 2017, the United States moved for entry of a somewhat revised version of the NCR/Appvion consent decree. If the proposed consent decree is approved by the district court and if it were to withstand any appeal, then we would only face exposure to: (i) government past oversight costs, (ii) government future oversight costs, (iii) long term monitoring and maintenance, and (iv) depending on the reason, a further remedy if necessary in the event the currently ordered remedy fails, over 30 or more years, to achieve its objectives. As the result of earlier settlements, Georgia Pacific is only jointly liable with us to the Governments for monitoring and maintenance costs incurred in the most downstream three miles of the river (“OU4b”) and the bay of Green Bay (“OU5”). In addition, we and Georgia Pacific have claims against each other to reallocate the costs that we have each incurred or will incur. In connection with the filing of the proposed consent decree, NCR and Appvion filed a request to stay the trial scheduled to commence in April 2017. The courts granted the stay.

Cost estimates. The proposed NCR/Appvion consent decree, as revised, states that all parties combined have spent more than approximately $1 billion to date towards remedial actions and NRDs, of which we have contributed approximately $65 million. In addition, work to complete the remaining site remedy under the UAO is anticipated to cost approximately $200 million. If the consent decree were entered, we would no longer be exposed to reallocation of any of those amounts other than the portion contributed by Georgia Pacific, which Georgia Pacific claims to be about $145 million.

Under the proposed NCR/Appvion consent decree, we would remain responsible for the Governments’ unreimbursed past costs, which although they are in dispute, are represented

to total approximately $34 million and the Governments’ future costs. Furthermore, we, along with Georgia Pacific, would be responsible for long term monitoring and maintenance required pursuant to the Lower Fox River 100% Remedial Design Report dated December 2009 – Long Term Monitoring Plan (the “Plan”). The Plan requires long term monitoring of each of OU1 through OU5 over a period of at least 30 years. The monitoring activities consist of, among others, testing fish tissue, sampling water quality and sediment, and inspections of the engineered caps. Each operable unit is required to be monitored; however, in the event the NCR/Appvion consent decree is entered by the court, we believe the cost of portions of the plan would be subject to allocation between us and Georgia Pacific. Although we are unable to determine with certainty the timing of cash expenditures for the above matters, they are reasonably likely to extend over a period of at least 30 years.

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:

 

 

 

Three months ended

March 31

 

In thousands

 

 

2017

 

 

 

 

2016

 

Balance at January 1,

 

$

52,788

 

 

 

$

17,105

 

Payments

 

 

(85

)

 

 

 

(658

)

Accruals

 

 

-

 

 

 

 

-

 

Balance at March 31,

 

$

52,703

 

 

 

$

16,447

 

The payments set forth above represent cash paid towards completion of remediation activities in connection with the 2016 and 2015 Work Plans and ongoing monitoring activities. Of our total reserve for the Fox River, $25.0 million is recorded in the accompanying March 31, 2017 condensed consolidated balance sheet under the caption “Environmental liabilities” and the remaining $27.7 million is recorded under the caption “Other long term liabilities.”

Range of Reasonably Possible Outcomes.  Based on our analysis of all available information, including but not limited to decisions of the courts, official documents such as records of decision, discussions with legal counsel, cost estimates for future monitoring and maintenance and other post-remediation costs to be performed at the Site, and substantially dependent on whether the NCR/Appvion consent decree is entered and the resolution of the allocation issues between Georgia Pacific and us, we believe it is reasonably possible that our costs associated with the Fox River matter could exceed the aggregate amounts accrued by amounts ranging from insignificant to approximately $40 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. However, in the event the NCR/Appvion consent decree is not entered, the ultimate

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GLATFELTER

03.31.17 Form 10-Q


 

resolution of this matter would likely resort to extensive litigation involving various matters, including allocation of remedial action and related costs. In such a scenario, although we should ultimately bear a very small share, it is reasonably possible that our costs associated with the Fox River matter could exceed the aggregate amounts accrued by amounts ranging from insignificant to $150 million.

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 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 material adverse effect on our consolidated financial position, liquidity and results of operations and might result in a default under our loan covenants. If the proposed NCR/Appvion consent decree is not approved and a court grants relief requiring us individually either to perform directly or to contribute significant amounts towards remedial action downstream of OU1 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.

 

 

- 16 -

GLATFELTER

03.31.17 Form 10-Q


 

13.

SEGMENT INFORMATION

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

 

Three months ended March 31

 

 

 

Advanced Airlaid

 

 

 

 

 

Other and

 

 

 

 

Dollars in millions

Composite Fibers

 

 

Materials

 

 

Specialty Papers

 

 

Unallocated

 

 

Total

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net sales

$

125.1

 

 

$

123.5

 

 

$

59.8

 

 

$

60.8

 

 

$

205.8

 

 

$

217.9

 

 

$

 

 

$

 

 

$

390.7

 

 

$

402.2

 

Energy and related sales, net

 

 

 

 

 

 

 

 

 

 

 

1.1

 

 

 

0.7

 

 

 

 

 

 

 

 

 

1.1

 

 

 

0.7

 

Total revenue

 

125.1

 

 

 

123.5

 

 

 

59.8

 

 

60.8

 

 

 

206.9

 

 

 

218.6

 

 

 

 

 

 

 

 

 

391.8

 

 

 

402.9

 

Cost of products sold

 

99.6

 

 

101.2

 

 

 

50.5

 

 

 

52.2

 

 

 

180.1

 

 

 

191.1

 

 

 

4.7

 

 

 

0.5

 

 

 

334.9

 

 

 

345.0

 

Gross profit (loss)

 

25.5

 

 

 

22.3

 

 

 

9.3

 

 

 

8.6

 

 

 

26.8

 

 

 

27.5

 

 

 

(4.7

)

 

 

(0.5

)

 

 

56.9

 

 

 

57.8

 

SG&A

 

11.1

 

 

 

11.1

 

 

 

2.2

 

 

 

2.0

 

 

 

13.6

 

 

 

12.5

 

 

 

8.2

 

 

 

6.3

 

 

 

35.1

 

 

 

31.9

 

Losses on dispositions of plant,

   equipment and timberlands, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating income (loss)

 

14.4

 

 

 

11.2

 

 

 

7.1

 

 

 

6.6

 

 

 

13.2

 

 

 

15.0

 

 

 

(12.9

)

 

 

(6.8

)

 

 

21.8

 

 

 

26.0

 

Non-operating expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4.2

)

 

 

(4.7

)

 

 

(4.2

)

 

 

(4.7

)

Income (loss) before

   income taxes

$

14.4

 

 

$

11.2

 

 

$

7.1

 

 

$

6.6

 

 

$

13.2

 

 

$

15.0

 

 

$

(17.1

)

 

$

(11.5

)

 

$

17.6

 

 

$

21.2

 

Supplementary Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net tons sold (thousands)

 

38.8

 

 

 

36.9

 

 

 

24.8

 

 

 

24.5

 

 

 

197.2

 

 

 

205.8

 

 

 

 

 

 

 

 

 

260.8

 

 

 

267.2

 

Depreciation, depletion and

   amortization

$

6.8

 

 

$

7.1

 

 

$

2.3

 

 

$

2.3

 

 

$

7.2

 

 

$

6.7

 

 

$

1.0

 

 

$

0.5

 

 

$

17.3

 

 

$

16.6

 

Capital expenditures

 

4.7

 

 

 

6.3

 

 

 

10.6

 

 

 

14.7

 

 

 

18.3

 

 

 

22.0

 

 

 

3.2

 

 

 

0.3

 

 

 

36.8

 

 

 

43.3

 

 

 

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.

 

 

 

- 17 -

GLATFELTER

03.31.17 Form 10-Q


 

14.

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; or (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 ended March 31, 2017 and 2016, our condensed consolidating balance sheets as of March 31, 2017 and December 31, 2016, and our condensed consolidating cash flows for the three months ended March 31, 2017 and 2016.

Condensed Consolidating Statement of Income for the three months ended March 31, 2017

In thousands

Parent

Company

 

 

Guarantors

 

 

Non

Guarantors

 

 

Adjustments/

Eliminations

 

 

Consolidated

 

 

Net sales

$

205,771

 

 

$

19,533

 

 

$

185,887

 

 

$

(20,478

)

 

$

390,713

 

 

Energy and related sales, net

 

1,129

 

 

 

 

 

 

 

 

 

 

 

 

1,129

 

 

Total revenues

 

206,900

 

 

 

19,533

 

 

 

185,887

 

 

 

(20,478

)

 

 

391,842

 

 

Costs of products sold

 

183,946

 

 

 

18,586

 

 

 

152,859

 

 

 

(20,478

)

 

 

334,913

 

 

Gross profit

 

22,954

 

 

 

947

 

 

 

33,028

 

 

 

 

 

 

56,929

 

 

Selling, general and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses

 

20,371

 

 

 

74

 

 

 

14,641

 

 

 

 

 

 

35,086

 

 

Loss on dispositions of plant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

equipment and timberlands, net

 

32

 

 

 

 

 

 

 

 

 

 

 

 

32

 

 

Operating income

 

2,551

 

 

 

873

 

 

 

18,387

 

 

 

 

 

 

21,811

 

 

Other non-operating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(4,661

)

 

 

(113

)

 

 

(504

)

 

 

1,270

 

 

 

(4,008

)

 

Interest income

 

149

 

 

 

1,161

 

 

 

73

 

 

 

(1,270

)

 

 

113

 

 

Equity in earnings of subsidiaries

 

13,617

 

 

 

13,852

 

 

 

 

 

 

(27,469

)

 

 

 

 

Other, net

 

493

 

 

 

(2,206

)

 

 

1,434

 

 

 

 

 

 

(279

)

 

Total other non-operating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   income (expense)

 

9,598

 

 

 

12,694

 

 

 

1,003

 

 

 

(27,469

)

 

 

(4,174

)

 

Income before income taxes

 

12,149

 

 

 

13,567

 

 

 

19,390

 

 

 

(27,469

)

 

 

17,637

 

 

Income tax provision

 

546

 

 

 

(50

)

 

 

5,538

 

 

 

 

 

 

6,034

 

 

Net income

 

11,603

 

 

 

13,617

 

 

 

13,852

 

 

 

(27,469

)

 

 

11,603

 

 

Other comprehensive income

 

7,193

 

 

 

5,102

 

 

 

5,014

 

 

 

(10,116

)

 

 

7,193

 

 

Comprehensive income

$

18,796

 

 

$

18,719

 

 

$

18,866

 

 

$

(37,585

)

 

$

18,796

 

 

 

- 18 -

GLATFELTER

03.31.17 Form 10-Q


 

Condensed Consolidating Statement of Income for the three months ended March 31, 2016

In thousands

Parent

Company

 

 

Guarantors

 

 

Non

Guarantors

 

 

Adjustments/

Eliminations

 

 

Consolidated

 

 

Net sales

$

217,888

 

 

$

18,646

 

 

$

184,466

 

 

$

(18,782

)

 

$

402,218

 

 

Energy and related sales, net

 

666

 

 

 

 

 

 

 

 

 

 

 

 

666

 

 

Total revenues

 

218,554

 

 

 

18,646

 

 

 

184,466

 

 

 

(18,782

)

 

 

402,884

 

 

Costs of products sold

 

191,959

 

 

 

18,050

 

 

 

153,814

 

 

 

(18,782

)

 

 

345,041

 

 

Gross profit

 

26,595

 

 

 

596

 

 

 

30,652

 

 

 

 

 

 

57,843

 

 

Selling, general and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses

 

18,445

 

 

 

(185

)

 

 

13,598

 

 

 

 

 

 

31,858

 

 

Loss on dispositions of plant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

equipment and timberlands, net

 

2

 

 

 

-

 

 

 

22

 

 

 

 

 

 

24

 

 

Operating income

 

8,148

 

 

 

781

 

 

 

17,032

 

 

 

 

 

 

25,961

 

 

Other non-operating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(4,415

)

 

 

 

 

 

(787

)

 

 

1,086

 

 

 

(4,116

)

 

Interest income

 

181

 

 

 

992

 

 

 

4

 

 

 

(1,086

)

 

 

91

 

 

Equity in earnings of subsidiaries

 

12,872

 

 

 

11,754

 

 

 

 

 

 

(24,626

)

 

 

 

 

Other, net

 

(542

)

 

 

20

 

 

 

(178

)

 

 

 

 

 

(700

)

 

Total other non-operating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   income (expense)

 

8,096

 

 

 

12,766

 

 

 

(961

)

 

 

(24,626

)

 

 

(4,725

)

 

Income before income taxes

 

16,244

 

 

 

13,547

 

 

 

16,071

 

 

 

(24,626

)

 

 

21,236

 

 

Income tax provision

 

76

 

 

 

675

 

 

 

4,317

 

 

 

 

 

 

5,068

 

 

Net income

 

16,168

 

 

 

12,872

 

 

 

11,754

 

 

 

(24,626

)

 

 

16,168

 

 

Other comprehensive income

 

15,742

 

 

 

13,553

 

 

 

13,117

 

 

 

(26,670

)

 

 

15,742

 

 

Comprehensive income

$

31,910

 

 

$

26,425

 

 

$

24,871

 

 

$

(51,296

)

 

$

31,910

 

 

 

 

 

 

 

Condensed Consolidating Balance Sheet as of March 31, 2017

 

In thousands

 

Parent

Company

 

 

Guarantors

 

 

Non

Guarantors

 

 

Adjustments/

Eliminations

 

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,220

 

 

$

2,653

 

 

$

49,354

 

 

$

 

 

$

57,227

 

Other current assets

 

 

221,540

 

 

 

266,193

 

 

 

253,831

 

 

 

(282,137

)

 

 

459,427

 

Plant, equipment and timberlands, net

 

 

373,725

 

 

 

48,238

 

 

 

382,034

 

 

 

 

 

 

803,997

 

Investments in subsidiaries

 

 

808,301

 

 

 

559,296

 

 

 

 

 

 

(1,367,597

)

 

 

 

Other assets

 

 

125,388

 

 

 

 

 

 

128,727

 

 

 

 

 

 

254,115

 

Total assets

 

$

1,534,174

 

 

$

876,380

 

 

$

813,946

 

 

$

(1,649,734

)

 

$

1,574,766

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

421,731

 

 

$

42,433

 

 

$

138,808

 

 

$

(282,137

)

 

$

320,835

 

Long-term debt

 

 

321,839

 

 

 

26,000

 

 

 

52,631

 

 

 

 

 

 

400,470

 

Deferred income taxes

 

 

11,505

 

 

 

(668

)

 

 

46,993

 

 

 

 

 

 

57,830

 

Other long-term liabilities

 

 

110,313

 

 

 

314

 

 

 

16,218

 

 

 

 

 

 

126,845

 

Total liabilities

 

 

865,388

 

 

 

68,079

 

 

 

254,650

 

 

 

(282,137

)

 

 

905,980

 

Shareholders’ equity

 

 

668,786

 

 

 

808,301

 

 

 

559,296

 

 

 

(1,367,597

)

 

 

668,786

 

Total liabilities and shareholders’ equity

 

$

1,534,174

 

 

$

876,380

 

 

$

813,946

 

 

$

(1,649,734

)

 

$

1,574,766

 

 

- 19 -

GLATFELTER

03.31.17 Form 10-Q


 

Condensed Consolidating Balance Sheet as of December 31, 2016

 

In thousands

 

Parent

Company

 

 

Guarantors

 

 

Non

Guarantors

 

 

Adjustments/

Eliminations

 

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,082

 

 

$

1,461

 

 

$

48,901

 

 

$

 

 

$

55,444

 

Other current assets

 

 

206,002

 

 

 

256,289

 

 

 

242,187

 

 

 

(265,663

)

 

 

438,815

 

Plant, equipment and timberlands, net

 

 

360,521

 

 

 

31,455

 

 

 

383,922

 

 

 

 

 

 

775,898

 

Investments in subsidiaries

 

 

789,565

 

 

 

540,029

 

 

 

 

 

 

(1,329,594

)

 

 

 

Other assets

 

 

123,010

 

 

 

 

 

 

128,092

 

 

 

 

 

 

251,102

 

Total assets

 

$

1,484,180

 

 

$

829,234

 

 

$

803,102

 

 

$

(1,595,257

)

 

$

1,521,259

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

426,628

 

 

$

26,085

 

 

$

135,961

 

 

$

(265,663

)

 

$

323,011

 

Long-term debt

 

 

283,686

 

 

 

14,000

 

 

 

65,961

 

 

 

 

 

 

363,647

 

Deferred income taxes

 

 

10,221

 

 

 

(729

)

 

 

45,503

 

 

 

 

 

 

54,995

 

Other long-term liabilities

 

 

109,819

 

 

 

313

 

 

 

15,648

 

 

 

 

 

 

125,780

 

Total liabilities

 

 

830,354

 

 

 

39,669

 

 

 

263,073

 

 

 

(265,663

)

 

 

867,433

 

Shareholders’ equity

 

 

653,826

 

 

 

789,565

 

 

 

540,029

 

 

 

(1,329,594

)

 

 

653,826

 

Total liabilities and shareholders’ equity

 

$

1,484,180

 

 

$

829,234

 

 

$

803,102

 

 

$

(1,595,257

)

 

$

1,521,259

 

 

 

 

 

 

 

Condensed Consolidating Statement of Cash Flows for the three months ended March 31, 2017

 

In thousands

 

Parent

Company

 

 

Guarantors

 

 

Non

Guarantors

 

 

Adjustments/

Eliminations

 

 

Consolidated

 

 

Net cash provided (used) by

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

(19,330

)

 

$

(307

)

 

$

27,839

 

 

$

(641

)

 

$

7,561

 

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures for purchases of plant, equipment and timberlands

 

 

(21,515

)

 

 

(9,551

)

 

 

(5,717

)

 

 

 

 

 

(36,783

)

 

Repayments from intercompany loans

 

 

 

 

 

8,000

 

 

 

 

 

 

(8,000

)

 

 

 

 

Advances of intercompany loans

 

 

 

 

 

(8,550

)

 

 

 

 

 

8,550

 

 

 

 

 

Intercompany capital contributed

 

 

 

 

 

(400

)

 

 

 

 

 

400

 

 

 

 

 

Total investing activities

 

 

(21,515

)

 

 

(10,501

)

 

 

(5,717

)

 

 

950

 

 

 

(36,783

)

 

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net long-term borrowings

 

 

38,000

 

 

 

12,000

 

 

 

(13,954

)

 

 

 

 

 

36,046

 

 

Payment of dividends to shareholders

 

 

(5,455

)

 

 

 

 

 

 

 

 

 

 

 

(5,455

)

 

Repayments of intercompany loans

 

 

 

 

 

 

 

 

(8,000

)

 

 

8,000

 

 

 

 

 

Borrowings of intercompany loans

 

 

8,550

 

 

 

 

 

 

 

 

 

(8,550

)

 

 

 

 

Intercompany capital received

 

 

 

 

 

 

 

 

400

 

 

 

(400

)

 

 

 

 

Payment of intercompany dividend

 

 

 

 

 

 

 

 

(641

)

 

 

641

 

 

 

 

 

Payments related to share-based compensation awards and other

 

 

(112

)

 

 

 

 

 

 

 

 

 

 

 

(112

)

 

Total financing activities

 

 

40,983

 

 

 

12,000

 

 

 

(22,195

)

 

 

(309

)

 

 

30,479

 

 

Effect of exchange rate on cash

 

 

 

 

 

 

 

 

526

 

 

 

 

 

 

526

 

 

Net increase in cash

 

 

138

 

 

 

1,192

 

 

 

453

 

 

 

 

 

 

1,783

 

 

Cash at the beginning of period

 

 

5,082

 

 

 

1,461

 

 

 

48,901

 

 

 

 

 

 

55,444

 

 

Cash at the end of period

 

$

5,220

 

 

$

2,653

 

 

$

49,354

 

 

$

 

 

$

57,227

 

 

 

- 20 -

GLATFELTER

03.31.17 Form 10-Q


 

Condensed Consolidating Statement of Cash Flows for the three months ended March 31, 2016

 

In thousands

 

Parent

Company

 

 

Guarantors

 

 

Non

Guarantors

 

 

Adjustments/

Eliminations

 

 

Consolidated

 

 

Net cash provided (used) by

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

10,563

 

 

$

(74

)

 

$

952

 

 

$

 

 

$

11,441

 

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures for purchases of plant, equipment and timberlands

 

 

(22,297

)

 

 

(13,686

)

 

 

(7,311

)

 

 

 

 

 

(43,294

)

 

Proceeds from disposals of plant, equipment and timberlands, net

 

 

21

 

 

 

 

 

 

12

 

 

 

 

 

 

33

 

 

Repayments from intercompany loans

 

 

 

 

 

4,000

 

 

 

 

 

 

(4,000

)

 

 

 

 

Advances of intercompany loans

 

 

 

 

 

(3,210

)

 

 

 

 

 

3,210

 

 

 

 

 

Intercompany capital (contributed) returned

 

 

(17,000

)

 

 

(500

)

 

 

 

 

 

17,500

 

 

 

 

 

Other

 

 

(300

)

 

 

 

 

 

 

 

 

 

 

 

(300

)

 

Total investing activities

 

 

(39,576

)

 

 

(13,396

)

 

 

(7,299

)

 

 

16,710

 

 

 

(43,561

)

 

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net repayments of indebtedness

 

 

 

 

 

 

 

 

(1,926

)

 

 

 

 

 

(1,926

)

 

Payments of borrowing costs

 

 

(51

)

 

 

 

 

 

 

 

 

 

 

 

(51

)

 

Payment of dividends to shareholders

 

 

(5,231

)

 

 

 

 

 

 

 

 

 

 

 

(5,231

)

 

Repayments of intercompany loans

 

 

 

 

 

 

 

 

(4,000

)

 

 

4,000

 

 

 

 

 

Borrowings of intercompany loans

 

 

3,210

 

 

 

 

 

 

 

 

 

(3,210

)

 

 

 

 

Intercompany capital (returned) received

 

 

 

 

 

17,000

 

 

 

500

 

 

 

(17,500

)

 

 

 

 

Proceeds from government grants

 

 

1,861

 

 

 

2,000

 

 

 

 

 

 

 

 

 

3,861

 

 

Payments related to share-based compensation awards and other

 

 

(751

)

 

 

 

 

 

 

 

 

 

 

 

(751

)

 

Total financing activities

 

 

(962

)

 

 

19,000

 

 

 

(5,426

)

 

 

(16,710

)

 

 

(4,098

)

 

Effect of exchange rate on cash

 

 

 

 

 

 

 

 

1,176

 

 

 

 

 

 

1,176

 

 

Net increase (decrease) in cash

 

 

(29,975

)

 

 

5,530

 

 

 

(10,597

)

 

 

 

 

 

(35,042

)

 

Cash at the beginning of period

 

 

59,130

 

 

 

465

 

 

 

45,709

 

 

 

 

 

 

105,304

 

 

Cash at the end of period

 

$

29,155

 

 

$

5,995

 

 

$

35,112

 

 

$

 

 

$

70,262

 

 

 

 

 

- 21 -

GLATFELTER

03.31.17 Form 10-Q


 

 

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 2016 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 or changes in pre-tax income and its impact on the valuation of deferred taxes;

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.

Introduction We manufacture a wide array of specialty papers and 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 wallcovering base materials, metallized products, composite laminate 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, specialty wipes, home care products 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 other niche specialty applications.

 


- 22 -

GLATFELTER

03.31.17 Form 10-Q


 

RESULTS OF OPERATIONS

Three months ended March 31, 2017 versus the three months ended March 31, 2016

Overview For the first quarter of 2017, net income totaled $11.6 million, or $0.26 per diluted share compared with $16.2 million, or $0.37 per diluted share in the first quarter of 2016. Adjusted earnings for the first quarter of 2017 were $17.2 million, or $0.39 per diluted share compared with $16.3 million, or $0.37 per diluted share, for the same period a year ago. Our Composite Fibers and Advanced Airlaid Materials businesses, which combined represented 47.3% of consolidated net sales and 62.0% of business unit operating income, reported significantly higher operating income and operating margin expansion in the comparison driven by higher shipping volumes and improved productivity. Specialty Papers’ results were lower in the comparison primarily reflecting challenging market conditions.

The following table sets forth summarized consolidated results of operations:

 

 

Three months ended

March 31

 

 

In thousands, except per share

2017

 

 

 

2016

 

 

Net sales

$

390,713

 

 

 

$

402,218

 

 

Gross profit

 

56,929

 

 

 

 

57,843

 

 

Operating income

 

21,811

 

 

 

 

25,961

 

 

Net income

 

11,603

 

 

 

 

16,168

 

 

Earnings per diluted share

 

0.26

 

 

 

0.37

 

 

 

In addition to the results reported in accordance with GAAP, we evaluate our performance using adjusted earnings and adjusted earnings per diluted share. We disclose this information to allow investors to evaluate our performance exclusive of certain items that impact the comparability of results from period to period and we believe it is helpful in understanding underlying operating trends and cash flow generation. Adjusted earnings consists of net income determined in accordance with GAAP adjusted to exclude the impact of the following:

Specialty Papers environmental compliance. These adjustments reflect non-capitalized, one-time costs incurred by the business unit directly related to the compliance with the U.S. EPA Best Available Retrofit Technology rule and the Boiler Maximum Achievable Control Technology rule.  This adjustment includes costs incurred during the transition period in which the newly installed equipment was brought on-line.

Airlaid capacity expansion costs. These adjustments reflect non-capitalized, one-time costs incurred related to the start-up of a new airlaid production facility in Ft. Smith, Arkansas.

Cost optimization actions. This adjustment reflects charges incurred in connection with initiatives to optimize the cost structure of certain business units in response to changes in business conditions. The costs are primarily related to headcount reduction efforts, asset write-offs and certain contract termination costs.

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 forth the reconciliation of net income to adjusted earnings for the three months ended March 31, 2017 and 2016:

 

 

Three months ended March 31

 

 

2017

 

 

2016

 

In thousands, except per share

Amount

 

 

Diluted EPS

 

 

Amount

 

 

Diluted EPS

 

Net income

$

11,603

 

 

$

0.26

 

 

$

16,168

 

 

$

0.37

 

Adjustments (pre-tax)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty Papers' environmental compliance

 

2,264

 

 

 

 

 

 

 

37

 

 

 

 

 

Airlaid capacity expansion costs

 

1,958

 

 

 

 

 

 

 

56

 

 

 

 

 

Cost optimization actions

 

2,013

 

 

 

 

 

 

 

88

 

 

 

 

 

Total adjustments (pre-tax)

 

6,235

 

 

 

 

 

 

 

181

 

 

 

 

 

Income taxes (1)

 

(682

)

 

 

 

 

 

 

(56

)

 

 

 

 

Total after-tax adjustments

 

5,553

 

 

 

0.12

 

 

 

125

 

 

 

-

 

Adjusted earnings

$

17,156

 

 

$

0.39

 

 

$

16,293

 

 

$

0.37

 

 

(1)

Tax effect on adjustments calculated based on the incremental effective tax rate of the jurisdiction in which each adjustment originated and the related impact of valuation allowances.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 23 -

GLATFELTER

03.31.17 Form 10-Q


 

Business Unit Performance

Three months ended March 31

 

 

 

Advanced Airlaid

 

 

 

 

 

Other and

 

 

 

 

Dollars in millions

Composite Fibers

 

 

Materials

 

 

Specialty Papers

 

 

Unallocated

 

 

Total

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net sales

$

125.1

 

 

$

123.5

 

 

$

59.8

 

 

$

60.8

 

 

$

205.8

 

 

$

217.9

 

 

$

 

 

$

 

 

$

390.7

 

 

$

402.2

 

Energy and related sales, net

 

 

 

 

 

 

 

 

 

 

 

1.1

 

 

 

0.7

 

 

 

 

 

 

 

 

 

1.1

 

 

 

0.7

 

Total revenue

 

125.1

 

 

123.5

 

 

 

59.8

 

 

 

60.8

 

 

 

206.9

 

 

 

218.6

 

 

 

 

 

 

 

 

 

391.8

 

 

 

402.9

 

Cost of products sold

 

99.6

 

 

 

101.2

 

 

 

50.5

 

 

 

52.2

 

 

 

180.1

 

 

 

191.1

 

 

 

4.7

 

 

 

0.5

 

 

 

334.9

 

 

 

345.0

 

Gross profit (loss)

 

25.5

 

 

 

22.3

 

 

 

9.3

 

 

 

8.6

 

 

 

26.8

 

 

 

27.5

 

 

 

(4.7

)

 

 

(0.5

)

 

 

56.9

 

 

 

57.8

 

SG&A

 

11.1

 

 

 

11.1

 

 

 

2.2

 

 

 

2.0

 

 

 

13.6

 

 

 

12.5

 

 

 

8.2

 

 

 

6.3

 

 

 

35.1

 

 

 

31.9

 

Loss (gains) on dispositions of plant,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

equipment and timberlands, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating income (loss)

 

14.4

 

 

 

11.2

 

 

 

7.1

 

 

 

6.6

 

 

 

13.2

 

 

 

15.0

 

 

 

(12.9

)

 

 

(6.8

)

 

 

21.8

 

 

 

26.0

 

Non-operating expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4.2

)

 

 

(4.7

)

 

 

(4.2

)

 

 

(4.7

)

Income (loss) before

   income taxes

$

14.4

 

 

$

11.2

 

 

$

7.1

 

 

$

6.6

 

 

$

13.2

 

 

$

15.0

 

 

$

(17.1

)

 

$

(11.5

)

 

$

17.6

 

 

$

21.2

 

Supplementary Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net tons sold (thousands)

 

38.8

 

 

 

36.9

 

 

 

24.8

 

 

 

24.5

 

 

 

197.2

 

 

 

205.8

 

 

 

 

 

 

 

 

 

260.8

 

 

 

267.2

 

Depreciation, depletion and

   amortization

$

6.8

 

 

$

7.1

 

 

$

2.3

 

 

$

2.3

 

 

$

7.2

 

 

$

6.7

 

 

$

1.0

 

 

$

0.5

 

 

$

17.3

 

 

$

16.6

 

Capital expenditures

 

4.7

 

 

 

6.3

 

 

 

10.6

 

 

 

14.7

 

 

 

18.3

 

 

 

22.0

 

 

 

3.2

 

 

 

0.3

 

 

 

36.8

 

 

 

43.3

 

 

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.

 

- 24 -

GLATFELTER

03.31.17 Form 10-Q


 

Sales and Costs of Products Sold

 

 

Three months ended

March 31

 

 

 

 

 

In thousands

2017

 

 

 

2016

 

 

Change

 

Net sales

$

390,713

 

 

 

$

402,218

 

 

$

(11,505

)

Energy and related

   sales, net

 

1,129

 

 

 

 

666

 

 

 

463

 

Total revenues

 

391,842

 

 

 

 

402,884

 

 

 

(11,042

)

Costs of products sold

 

334,913

 

 

 

 

345,041

 

 

 

(10,128

)

Gross profit

$

56,929

 

 

 

$

57,843

 

 

$

(914

)

Gross profit as a percent

   of Net sales

 

14.6

%

 

 

 

14.4

%

 

 

 

 

 

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

 

 

Three months ended

March 31

 

 

Percent of Total

2017

 

 

 

2016

 

 

Business Unit

 

 

 

 

 

 

 

 

 

Composite Fibers

 

32.0

%

 

 

 

30.7

%

 

Advanced Airlaid Material

 

15.3

 

 

 

 

15.1

 

 

Specialty Papers

 

52.7

 

 

 

 

54.2

 

 

Total

 

100.0

%

 

 

 

100.0

%

 

 

Net sales totaled $390.7 million and $402.2 million in the first three months of 2017 and 2016, respectively. The $11.5 million decrease was primarily driven by lower selling prices and unfavorable currency translation of $6.8 million each. Shipping volumes decreased 2.4%.

Composite Fibers’ net sales increased $1.6 million, or 1.3%. Shipping volumes increased 5.1%; however, unfavorable currency translation and lower selling prices adversely impacted the comparison by $5.7 million and $1.9 million, respectively.

Composite Fibers’ operating income for the three months of 2017 increased $3.2 million to $14.4 million compared to the year-ago period primarily due to higher volumes and a $4.1 million benefit from improved operating efficiencies including the impact of our cost optimization program. The primary drivers are summarized in the following chart:  

 

Advanced Airlaid Materials’ net sales decreased $1.0 million in the year-over-year comparison primarily due to a

$1.1 million unfavorable impact from currency translation and $0.4 million of lower selling prices from the contractual pass through of lower raw material costs. Shipping volumes increased 1.2% primarily due to higher shipments of wipes and personal hygiene products.

Advanced Airlaid Materials’ operating income totaled $7.1 million, an increase of $0.5 million compared to the same period a year ago. The primary drivers are summarized in the following chart:

Specialty Papers’ net sales decreased $12.1 million, or 5.6%, due to a 4.2% decrease in shipping volumes and a $4.5 million impact from lower selling prices.

Operating income totaled $13.2 million, a decrease of $1.8 million compared to the first three months of 2016. The primary drivers are summarized in the following chart:

 

We sell excess power generated by the Spring Grove, PA facility. The following table summarizes this activity for the first three months of 2017 and 2016:

 

 

Three months ended

March 31

 

 

 

 

 

In thousands

2017

 

 

 

2016

 

 

Change

 

Energy sales

$

1,006

 

 

 

$

982

 

 

$

24

 

Costs to produce

 

(1,438

)

 

 

 

(1,109

)

 

 

(329

)

Net

 

(432

)

 

 

 

(127

)

 

 

(305

)

Renewable energy credits

 

1,561

 

 

 

 

793

 

 

 

768

 

Total

$

1,129

 

 

 

$

666

 

 

$

463

 

 

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

- 25 -

GLATFELTER

03.31.17 Form 10-Q


 

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 $12.9 million in the first three months of 2017 compared with $6.8 million in the first three months of 2016. The increase in Other and Unallocated expenses primarily relates to Specialty Papers environmental compliance, the Airlaid capacity expansion project and the cost optimization initiative.

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

 

 

Three months ended

March 31

 

 

 

 

 

In thousands

2017

 

 

 

2016

 

 

Change

 

Recorded as:

 

 

 

 

 

 

 

 

 

 

 

 

Costs of products sold

$

594

 

 

 

$

437

 

 

$

157

 

SG&A expense

 

729

 

 

 

 

722

 

 

 

7

 

Total

$

1,323

 

 

 

$

1,159

 

 

$

164

 

 

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 2017 is expected to be approximately $5.3 million compared with $5.5 million in 2016, excluding a $7.3 million settlement charge. 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 three months of 2017, we recorded a provision for income taxes of $6.0 million on pre-tax income of $17.6 million. The comparable amounts in the first quarter of 2016 were $5.1 million and $21.2 million, respectively. The effective tax rate of 34.1% in the first quarter of 2017 compared with 24.1% in the first quarter of 2016 reflects the adverse impact of an increase in unrecognized tax benefits and in our valuation allowances for U.S. deferred tax assets. We currently expect to record valuation allowances of between $6 million and $10 million for the full year 2017. The effective tax rate in future periods may be affected by changes in U.S.-based pre-tax income and its impact on the valuation of deferred taxes.

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 €125 million to €130 million. For the first three months of 2017, the average

currency exchange rate was essentially unchanged in the year over year comparison. With respect to the British Pound Sterling, Canadian dollar, and Philippine Peso, we have differing amounts of inflows and outflows of these currencies, although to a lesser degree than the euro. As a result, we are exposed to changes in currency exchange rates and such changes could be significant. The translation of the results from international operations into U.S. dollars is subject to changes in foreign currency exchange rates.

 

The table below summarizes the translation impact on reported results that changes in currency exchange rates had on our non-U.S. based operations from the conversion of these operation’s results for the first three months of 2017.

 

In thousands

Three months ended

March 31, 2017

 

 

 

Favorable

(unfavorable)

 

 

Net sales

 

 

 

$

(6,760

)

 

Costs of products sold

 

 

 

 

5,621

 

 

SG&A expenses

 

 

 

 

587

 

 

Income taxes and other

 

 

 

 

276

 

 

Net income

 

 

 

$

(276

)

 

 

The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2017 were the same as 2016. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.

LIQUIDITY AND CAPITAL RESOURCES

Our business is capital intensive and requires significant expenditures for new or enhanced equipment, to support our research and development efforts, for environmental compliance matters including, but not limited to, the Clean Air Act, and to support our business strategy. In addition, we have mandatory debt service requirements of both principal and interest. The following table summarizes cash flow information for each of the periods presented:

 

 

Three months ended

March 31

 

In thousands

2017

 

 

 

2016

 

Cash and cash equivalents at

 

 

 

 

 

 

 

 

beginning of period

$

55,444

 

 

 

$

105,304

 

Cash provided (used) by

 

 

 

 

 

 

 

 

Operating activities

 

7,561

 

 

 

 

11,441

 

Investing activities

 

(36,783

)

 

 

 

(43,561

)

Financing activities

 

30,479

 

 

 

 

(4,098

)

Effect of exchange rate

 

 

 

 

 

 

 

 

changes on cash

 

526

 

 

 

 

1,176

 

Net cash used

 

1,783

 

 

 

 

(35,042

)

Cash and cash equivalents at

 

 

 

 

 

 

 

 

end of period

$

57,227

 

 

 

$

70,262

 

 

- 26 -

GLATFELTER

03.31.17 Form 10-Q


 

At March 31, 2017, we had $57.2 million in cash and cash equivalents held by both domestic and foreign subsidiaries. Unremitted earnings of our foreign subsidiaries are deemed to be indefinitely reinvested and therefore no U.S. tax liability is reflected in the accompanying condensed consolidated financial statements. As of March 31, 2017, the majority of our cash is held by our international subsidiaries and the repatriation of such funds would result in additional tax liability. In addition to our cash and cash equivalents, $150.4 million is available under our revolving credit agreement, which matures in March 2020.

Cash provided by operating activities totaled $7.6 million in the first three months of 2017 compared with $11.4 million in the same period a year ago. The decrease in cash from operations primarily reflects lower operating income.

Net cash used by investing activities decreased by $6.8 million in the year-over-year comparison due to lower capital expenditures. Capital expenditures are expected to total between $125 million and $140 million for 2017, including approximately $10 million for the Specialty Papers’ environmental compliance projects and $45 million to $50 million for the Airlaid capacity expansion.

Net cash provided by financing activities totaled $30.5 million in the first three months of 2017 compared with a use of $4.1 million in the same period of 2016. The increase in cash provided by financing activities primarily reflects additional borrowings under our credit agreement.

The following table sets forth our outstanding long-term indebtedness:

 

 

March 31

 

 

 

December 31

 

In thousands

2017

 

 

 

2016

 

Revolving credit facility, due Mar. 2020

$

100,000

 

 

 

$

61,595

 

5.375% Notes, due Oct. 2020

 

250,000

 

 

 

 

250,000

 

2.40% Term Loan, due Jun. 2022

 

8,018

 

 

 

 

8,282

 

2.05% Term Loan, due Mar. 2023

 

34,237

 

 

 

 

35,163

 

1.30% Term Loan, due Jun. 2023

 

9,545

 

 

 

 

9,788

 

1.55% Term Loan, due Sep. 2025

 

10,480

 

 

 

 

10,333

 

Total long-term debt

 

412,280

 

 

 

 

375,161

 

Less current portion

 

(9,416

)

 

 

 

(8,961

)

Unamortized deferred issuance costs

 

(2,394

)

 

 

 

(2,553

)

Long-term debt, net of current portion

$

400,470

 

 

 

$

363,647

 

 

Our revolving credit facility contains a number of customary compliance covenants, the most restrictive of which is a maximum leverage ratio of 3.5x. As of March 31, 2017, the leverage ratio, as calculated in accordance with the definition in our amended credit agreement, was 2.4x, within the limits set forth in our credit agreement. Based on our expectations of future results of operations and capital needs, we do not believe the debt covenants will impact our operations or limit our ability to undertake financings that may be necessary to meet our capital needs.

The 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 credit agreement at maturity, or a default under the credit agreement that accelerates the debt outstanding thereunder. As of March 31, 2017, we met all of the requirements of our debt covenants. The significant terms of the debt instruments are more fully discussed in Item 1 - Financial Statements – Note 9.

Financing activities includes cash used for common stock dividends which increased in the comparison reflecting a 4% increase in our quarterly cash dividend. In the first three months of 2017, we used $5.5 million of cash for dividends on our common stock compared with $5.2 million in the same period of 2016. Our Board of Directors determines what, if any, dividends will be paid to our shareholders. Dividend payment decisions are based upon then-existing factors and conditions and, therefore, historical trends of dividend payments are not necessarily indicative of future payments.

We are subject to various federal, state and local laws and regulations intended to protect the environment as well as human health and safety. At various times, we have incurred significant costs to comply with these regulations and we could incur additional costs as new regulations are developed or regulatory priorities change.

- 27 -

GLATFELTER

03.31.17 Form 10-Q


 

As more fully discussed in Item 1 - Financial Statements – Note 12 – Commitments, Contingencies and Legal Proceedings (“Note 12”), we are involved in the Lower Fox River in Wisconsin (the “Fox River”), an EPA Superfund site for which we remain potentially liable for certain response costs and long-term monitoring and maintenance related matters. Based on the recent developments more fully discussed in Note 12, it is conceivable the resolution of this matter may require us to spend in excess of $25 million in 2017. Although we are unable to determine with any degree of certainty the amount we may be required to spend, the recent developments provide greater clarity to the extent of such amounts.

We expect to meet all of our near and long-term cash needs from a combination of operating cash flow, cash and cash equivalents, our existing credit facility and other long-term debt. However, as discussed in Note 12, an unfavorable outcome of the Fox River matters could have a material adverse impact on our consolidated financial position, liquidity and/or results of operations.

Off-Balance-Sheet Arrangements As of March 31, 2017 and December 31, 2016, we had not entered into any off-balance-sheet arrangements. Financial derivative instruments, to which we are a party, and guarantees of indebtedness, which solely consist of obligations of subsidiaries, are reflected in the condensed consolidated balance sheets included herein in Item 1 – Financial Statements.

 

 

Outlook Composite Fibers’ shipping volumes in the second quarter of 2017 are expected to be approximately 5% higher than the first quarter. Selling prices are expected to be in-line with the first quarter and raw material and energy prices are expected to increase slightly.

 

Advanced Airlaid Materials’ shipping volumes are expected to be slightly higher than the 2017 first quarter. Selling prices and raw material and energy prices are expected to be in-line with the first quarter.

 

Specialty Papers’ shipping volumes in the second quarter are expected to be slightly below the first quarter of 2017. Selling prices are expected to decline slightly. We anticipate raw material and energy prices to increase slightly.

 

We also plan to complete the annual maintenance outages at our U.S. facilities in the second quarter of 2017, which are expected to adversely impact operating income by approximately $22.0 million to $24.0 million, compared with $26.3 million in the second quarter of 2016. In addition, in order to manage inventory levels, we expect to incur approximately $3 million of costs due to market related downtime in excess of the first quarter of 2017.

 

Consolidated capital expenditures are expected to total between $125 million and $140 million for 2017.

 

The effective tax rate on adjusted earnings is expected to be approximately 28% in 2017 compared with 16.5% for 2016.

 

 

 

 

- 28 -

GLATFELTER

03.31.17 Form 10-Q


 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

 

 

Year Ended December 31

 

 

March 31, 2017

 

Dollars in thousands

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Carrying Value

 

 

Fair Value

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average principal outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At fixed interest rates – Bond

 

$

250,000

 

 

$

250,000

 

 

$

250,000

 

 

$

218,750

 

 

$

 

 

$

250,000

 

 

$

255,938

 

At fixed interest rates – Term Loans

 

 

58,994

 

 

 

50,674

 

 

 

40,604

 

 

 

30,533

 

 

 

20,462

 

 

 

62,280

 

 

 

62,817

 

At variable interest rates

 

 

100,000

 

 

 

100,000

 

 

 

100,000

 

 

 

20,833

 

 

 

 

 

 

100,000

 

 

 

100,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

412,280

 

 

$

418,755

 

Weighted-average interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On fixed rate debt – Bond

 

 

5.375

%

 

 

5.375

%

 

 

5.375

%

 

 

5.375

%

 

 

5.375

%

 

 

 

 

 

 

 

 

On fixed rate debt – Term Loans

 

 

1.89

%

 

 

1.89

%

 

 

1.88

%

 

 

1.86

%

 

 

1.82

%

 

 

 

 

 

 

 

 

On variable rate debt

 

 

2.43

%

 

 

2.43

%

 

 

2.43

%

 

 

2.43

%

 

 

2.43

%

 

 

 

 

 

 

 

 

 

 

The table above presents the average principal outstanding and related interest rates for the next five years for debt outstanding as of March 31, 2017. Fair values included herein have been determined based upon rates currently available to us for debt with similar terms and remaining maturities.

Our market risk exposure primarily results from changes in interest rates and currency exchange rates. At March 31, 2017, we had $409.9 million of long-term debt, net of unamortized debt issuance costs, of which 24.4% was at variable interest rates. Variable-rate debt outstanding represents borrowings under our revolving credit agreement that accrues interest based on LIBOR plus a margin. At March 31, 2017, the interest rate paid was approximately 2.43%. A hypothetical 100 basis point increase or decrease in the interest rate on variable rate debt would increase or decrease annual interest expense by $1.0 million.

As part of our overall risk management practices, we enter into financial derivatives primarily designed to either i) hedge foreign currency risks associated with forecasted transactions – “cash flow hedges” or ii) mitigate the impact that changes in currency exchange rates have on intercompany financing transactions and foreign currency denominated receivables and payables – “foreign currency hedges.” For a more complete discussion of this activity, refer to Item 1 – Financial Statements – Note 11.

We are subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. Dollar. On an annual basis, our euro denominated revenue exceeds euro expenses by approximately €125 million to €130 million. 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, particularly with respect to the euro, we are exposed to changes in currency exchange rates and such changes could be significant.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures Our chief executive officer and our principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2017, have concluded that, as of the evaluation date, our disclosure controls and procedures are effective.

Changes in Internal Controls There were no changes in our internal control over financial reporting during the three months ended March 31, 2017, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

 

 

 

 

- 29 -

GLATFELTER

03.31.17 Form 10-Q


 

PART II

ITEM 6. EXHIBITS

The following exhibits are filed herewith or incorporated by reference as indicated.

 

10.1

Summary of Non-Employee Director Compensation (effective May 4, 2017), filed herewith **

 

 

31.1

Certification of Dante C. Parrini, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, filed herewith

 

 

31.2

Certification of John P. Jacunski, Executive Vice President and Chief Financial Officer, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, filed herewith

 

 

32.1

Certification of Dante C. Parrini, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, furnished herewith

 

 

32.2

Certification of John P. Jacunski, Executive Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, furnished herewith

 

 

101.INS

XBRL Instance Document, filed herewith

 

 

101.SCH

XBRL Taxonomy Extension Schema, filed herewith

 

 

101.CAL

XBRL Extension Calculation Linkbase, filed herewith

 

 

101.DEF

XBRL Extension Definition Linkbase, filed herewith

 

 

101.LAB

XBRL Extension Label Linkbase, filed herewith

 

 

101.PRE

XBRL Extension Presentation Linkbase, filed herewith

 

 

 

 

**

Management compensatory contract

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

P. H. GLATFELTER COMPANY

(Registrant)

 

 

 

 

May 2, 2017

 

 

 

 

 

 

 

 

By

 

/s/ David C. Elder

 

 

 

     David C. Elder

 

 

 

     Vice President, Finance

 

- 30 -

GLATFELTER

03.31.17 Form 10-Q


 

EXHIBIT INDEX

 

10.1

Summary of Non-Employee Director Compensation (effective May 4, 2017), filed herewith **

 

 

31.1

Certification of Dante C. Parrini, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, filed herewith

 

 

31.2

Certification of John P. Jacunski, Executive Vice President and Chief Financial Officer, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, filed herewith

 

 

32.1

Certification of Dante C. Parrini, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, furnished herewith

 

 

32.2

Certification of John P. Jacunski, Executive Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, furnished herewith

 

 

101.INS

XBRL Instance Document, filed herewith

 

 

101.SCH

XBRL Taxonomy Extension Schema, filed herewith

 

 

101.CAL

XBRL Extension Calculation Linkbase, filed herewith

 

 

101.DEF

XBRL Extension Definition Linkbase, filed herewith

 

 

101.LAB

XBRL Extension Label Linkbase, filed herewith

 

 

101.PRE

XBRL Extension Presentation Linkbase, filed herewith

 

 

 

 

**

Management compensatory contract

 

 

- 31 -

GLATFELTER

03.31.17 Form 10-Q