Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended September 30, 2015

or

 

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

For the transition period from              to             

 

LOGO

96 South George Street, Suite 520

York, Pennsylvania 17401

(Address of principal executive offices)

(717) 225-4711

(Registrant’s telephone number, including area code)

 

Commission

file number

 

Exact name of registrant as
specified in its charter

 

IRS Employer

Identification No.

 

State or other jurisdiction of
incorporation or organization

1-03560   P. H. Glatfelter Company   23-0628360   Pennsylvania

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at the past 90 days.    Yes  þ    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  þ    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.        þ  Large accelerated filer        ¨   Accelerated filer        ¨  Non-accelerated filer        ¨  Small reporting company  (Do not check if a smaller reporting company).

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

Common Stock outstanding on October 30, 2015 totaled 43,406,546 shares.

 

 

 


Table of Contents

P. H. GLATFELTER COMPANY AND

SUBSIDIARIES

REPORT ON FORM 10-Q

For the QUARTERLY PERIOD ENDED

September 30, 2015

Table of Contents

 

         Page  

PART I – FINANCIAL INFORMATION

  

Item 1

 

Financial Statements

  
 

Condensed Consolidated Statements of Income for the three months and nine months ended September  30, 2015 and 2014 (unaudited)

     2   
 

Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2015 and 2014 (unaudited)

     3   
 

Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 (unaudited)

     4   
 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (unaudited)

     5   
 

Notes to Condensed Consolidated Financial Statements (unaudited)

     6   

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     29   

Item 3

 

Quantitative and Qualitative Disclosures About Market Risks

     39   

Item 4

 

Controls and Procedures

     39   

PART II – OTHER INFORMATION

  

Item 6

 

Exhibits

     40   

SIGNATURES

     40   


Table of Contents

PART I

Item  1 – Financial Statements

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

    

Three months ended

September 30

   

Nine months ended

September 30

 

In thousands, except per share

   2015     2014     2015     2014  

Net sales

   $ 419,960      $ 465,092      $ 1,248,232      $ 1,366,154   

Energy and related sales, net

     1,153        860        3,936        6,912   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     421,113        465,952        1,252,168        1,373,066   

Costs of products sold

     361,205        385,439        1,107,319        1,196,076   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     59,908        80,513        144,849        176,990   

Selling, general and administrative expenses

     39,792        37,886        100,201        103,751   

Gains on dispositions of plant, equipment and timberlands, net

     (123     (1,590     (2,888     (3,881
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     20,239        44,217        47,536        77,120   

Non-operating income (expense)

        

Interest expense

     (4,317     (4,671     (13,177     (14,245

Interest income

     90        30        232        143   

Other, net

     (220     (167     (192     105   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating expense

     (4,447     (4,808     (13,137     (13,997
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     15,792        39,409        34,399        63,123   

Income tax provision

     2,288        9,037        4,122        13,434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 13,504      $ 30,372      $ 30,277      $ 49,689   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

        

Basic

   $ 0.31      $ 0.71      $ 0.70      $ 1.15   

Diluted

     0.31        0.69        0.69        1.13   

Cash dividends declared per common share

   $ 0.12      $ 0.11      $ 0.36      $ 0.33   

Weighted average shares outstanding

        

Basic

     43,457        43,049        43,363        43,233   

Diluted

     43,865        43,841        43,949        44,111   

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

 

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GLATFELTER

9.30.15 Form 10-Q


Table of Contents

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

     Three months ended
September 30
    Nine months ended
September 30
 

In thousands

   2015     2014     2015     2014  

Net income

   $ 13,504      $ 30,372      $ 30,277      $ 49,689   

Foreign currency translation adjustments

     (3,262     (33,450     (27,895     (33,255

Net change in:

        

Deferred gains (losses) on cash flow hedges, net of taxes of $1,045, $(593), $938, and $(974), respectively

     (2,823     1,475        (2,558     2,476   

Unrecognized retirement obligations, net of taxes of $(1,895), $(1,463), $(5,675), and $(4,391), respectively

     3,083        2,398        9,253        7,193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

     (3,002     (29,577     (21,200     (23,586
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 10,502      $ 795      $ 9,077      $ 26,103   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

- 3 -

GLATFELTER

9.30.15 Form 10-Q


Table of Contents

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

     September 30     December 31  

In thousands

   2015     2014  
Assets     

Cash and cash equivalents

   $ 73,665      $ 99,837   

Accounts receivable, net

     177,917        163,760   

Inventories

     248,086        248,705   

Prepaid expenses and other current assets

     59,776        62,320   
  

 

 

   

 

 

 

Total current assets

     559,444        574,622   

Plant, equipment and timberlands, net

     697,324        697,608   

Goodwill

     78,126        84,137   

Intangible assets

     66,212        77,098   

Other assets

     136,641        128,039   
  

 

 

   

 

 

 

Total assets

   $ 1,537,747      $ 1,561,504   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity     

Current portion of long-term debt

   $ 7,580      $ 5,734   

Accounts payable

     151,751        157,070   

Dividends payable

     5,228        4,775   

Environmental liabilities

     16,022        1,075   

Other current liabilities

     111,769        111,077   
  

 

 

   

 

 

 

Total current liabilities

     292,350        279,731   

Long-term debt

     381,535        398,878   

Deferred income taxes

     101,207        104,016   

Other long-term liabilities

     116,539        129,770   
  

 

 

   

 

 

 

Total liabilities

     891,631        912,395   

Commitments and contingencies

     —          —     

Shareholders’ equity

    

Common stock

     544        544   

Capital in excess of par value

     52,852        54,342   

Retained earnings

     934,077        919,468   

Accumulated other comprehensive loss

     (176,070     (154,870
  

 

 

   

 

 

 
     811,403        819,484   

Less cost of common stock in treasury

     (165,287     (170,375
  

 

 

   

 

 

 

Total shareholders’ equity

     646,116        649,109   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,537,747      $ 1,561,504   
  

 

 

   

 

 

 

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

 

- 4 -

GLATFELTER

9.30.15 Form 10-Q


Table of Contents

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

     Nine months ended
September 30
 

In thousands

   2015     2014  

Operating activities

    

Net income

   $ 30,277      $ 49,689   

Adjustments to reconcile to net cash provided by operations:

    

Depreciation, depletion and amortization

     47,423        53,547   

Amortization of debt issue costs

     893        985   

Pension expense, net of unfunded benefits paid

     5,541        4,575   

Charge for impairment of intangible asset

     1,200        3,262   

Charge for environmental matter

     10,000        —     

Deferred income tax benefit

     (2,043     (4,434

Gains on dispositions of plant, equipment and timberlands, net

     (2,888     (3,881

Share-based compensation

     5,502        5,811   

Change in operating assets and liabilities

    

Accounts receivable

     (21,572     (35,528

Inventories

     (5,714     (19,982

Prepaid and other current assets

     420        (2,367

Accounts payable

     5,561        (25,576

Accruals and other current liabilities

     797        (6,214

Environmental matters

     (5,617     (39

Other

     743        1,532   
  

 

 

   

 

 

 

Net cash provided by operating activities

     70,523        21,380   

Investing activities

    

Expenditures for purchases of plant, equipment and timberlands

     (74,280     (47,036

Proceeds from disposals of plant, equipment and timberlands, net

     3,181        4,051   

Acquisition, net of cash acquired

     (224     —     

Other

     (1,600     (600
  

 

 

   

 

 

 

Net cash used by investing activities

     (72,923     (43,585

Financing activities

    

Net repayments of revolving credit facility

     —          (30,720

Payments of borrowing costs

     (1,329     —     

Repayment of term loans

     (3,387     —     

Proceeds from term loans

     —          12,592   

Repurchases of common stock

     —          (12,180

Payments of dividends

     (15,215     (13,935

Payments related to share-based compensation awards and other

     (2,015     (1,764
  

 

 

   

 

 

 

Net cash used by financing activities

     (21,946     (46,007

Effect of exchange rate changes on cash

     (1,826     (1,015
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (26,172     (69,227

Cash and cash equivalents at the beginning of period

     99,837        122,882   
  

 

 

   

 

 

 

Cash and cash equivalents at the end of period

   $ 73,665      $ 53,655   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Cash paid for:

    

Interest, net of amounts capitalized

   $ 8,943      $ 9,959   

Income taxes, net

     14,566        19,928   

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

 

- 5 -

GLATFELTER

9.30.15 Form 10-Q


Table of Contents

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. ORGANIZATION

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

 

2. ACCOUNTING POLICIES

Basis of Presentation The unaudited condensed consolidated financial statements (“financial statements”) include the accounts of Glatfelter and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

We prepared these financial statements in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements. In our opinion, the financial statements reflect all normal, recurring adjustments needed to present fairly our results for the interim periods. When preparing these financial statements, we have assumed that you have read the audited consolidated financial statements included in our 2014 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 May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 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 FASB deferred the effective date to provide adequate time to effectively implement the new revenue standard. The new standard is now required to be adopted for fiscal years beginning after December 15, 2017. We are in the process of evaluating the impact this standard may have, if any, on our reported results of operations or financial position.

 

3. ACQUISITION

On October 1, 2014, we completed the acquisition of all of the outstanding equity of Spezialpapierfabrik Oberschmitten GmbH (SPO) from FINSPO Beteiligungs-GmbH for $8.2 million. SPO has annual sales of approximately $33 million. SPO, located near Frankfurt, Germany, primarily produces highly technical papers for a wide range of capacitors used in consumer and industrial products; insulation papers for cables and transformers; and materials for industrial power inverters, electromagnetic current filters and electric rail traction. SPO also produces glassine products, which are used in cosmetics packaging, food packaging, and pharmaceutical dosage bags. SPO is operated as part of the Composite Fibers business unit, and complements other technical specialties.

 

4. GAINS ON DISPOSITIONS OF PLANT, EQUIPMENT AND TIMBERLANDS, NET

During the first nine months of 2015 and 2014, we completed sales of assets as summarized in the following table:

 

Dollars in thousands

   Acres      Proceeds      Gain  

2015

        

Timberlands

     1,398       $ 2,794       $ 2,704   

Other

     n/a         387         184   
     

 

 

    

 

 

 

Total

      $ 3,181       $ 2,888   
     

 

 

    

 

 

 

2014

        

Timberlands

     2,030       $ 4,041       $ 3,876   

Other

     n/a         10         5   
     

 

 

    

 

 

 

Total

      $ 4,051       $ 3,881   
     

 

 

    

 

 

 
 

 

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GLATFELTER

9.30.15 Form 10-Q


Table of Contents

On October 9, 2015, we completed the sale of 9,803 acres of timberlands for $17.0 million in cash. We expect to realize an after-tax gain on the transaction of approximately $9.1 million in the fourth quarter of 2015.

 

5. EARNINGS PER SHARE

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

 

     Three months ended
September 30
 

In thousands, except per share

   2015      2014  

Net income

   $ 13,504       $ 30,372   
  

 

 

    

 

 

 

Weighted average common shares outstanding used in basic EPS

     43,457         43,049   

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

     408         792   
  

 

 

    

 

 

 

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

     43,865         43,841   
  

 

 

    

 

 

 

Earnings per share

     

Basic

   $ 0.31       $ 0.71   

Diluted

     0.31         0.69   
  

 

 

    

 

 

 
     Nine months ended
September 30
 

In thousands, except per share

   2015      2014  

Net income

   $ 30,277       $ 49,689   
  

 

 

    

 

 

 

Weighted average common shares outstanding used in basic EPS

     43,363         43,233   

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

     586         878   
  

 

 

    

 

 

 

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

     43,949         44,111   
  

 

 

    

 

 

 

Earnings per share

     

Basic

   $ 0.70       $ 1.15   

Diluted

     0.69         1.13   
  

 

 

    

 

 

 

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

 

     September 30  
In thousands    2015      2014  

Three months ended

     696         282   

Nine months ended

     696         282   
 

 

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9.30.15 Form 10-Q


Table of Contents
6. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table sets forth details of the changes in accumulated other comprehensive income (losses) for the three months and nine months ended September 30, 2015 and 2014.

 

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 July 1, 2015

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

Other comprehensive income before reclassifications (net of tax)

     (3,262     (1,381     —          —          (4,643

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

     —          (1,442     3,090        (7     1,641   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     (3,262     (2,823     3,090        (7     (3,002
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

   $ (62,119   $ (202   $ (110,986   $ (2,763   $ (176,070
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at July 1, 2014

   $ 15,336      $ 60      $ (84,822   $ 60      $ (69,366

Other comprehensive income before reclassifications (net of tax)

     (33,450     1,379        —          —          (32,071

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

     —          96        2,363        35        2,494   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     (33,450     1,475        2,363        35        (29,577
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ (18,114   $ 1,535      $ (82,459   $ 95      $ (98,943
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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, 2015

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

Other comprehensive income before reclassifications (net of tax)

     (27,895     793        —          —          (27,102

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

     —          (3,351     9,274        (21     5,902   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     (27,895   $ (2,558     9,274        (21     (21,200
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

   $ (62,119   $ (202   $ (110,986   $ (2,763   $ (176,070
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2014

   $ 15,141      $ (941   $ (89,547   $ (10   $ (75,357

Other comprehensive income before reclassifications (net of tax)

     (33,255     1,594        —          —          (31,661

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

     —          882        7,088        105        8,075   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     (33,255     2,476        7,088        105        (23,586
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ (18,114   $ 1,535      $ (82,459   $ 95      $ (98,943
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Reclassifications out of accumulated other comprehensive income were as follows:

 

     Three months ended
September 30
    Nine months ended
September 30
     

In thousands

   2015     2014     2015     2014      
Description                            Line Item in Statements of Income

Cash flow hedges (Note 15)

          

(Gains) losses on cash flow hedges

   $ (1,972   $ 137      $ (4,595   $ 1,227      Costs of products sold

Tax (benefit) expense

     530        (41     1,244        (345   Income tax provision
  

 

 

   

 

 

   

 

 

   

 

 

   

Net of tax

     (1,442     96        (3,351     882     

Retirement plan obligations (Note 9)

          

Amortization of deferred benefit pension plan items

          

Prior service costs

     571        621        1,713        1,864      Costs of products sold
     189        206        568        618      Selling, general and administrative

Actuarial losses

     3,144        2,215        9,432        6,644      Costs of products sold
     1,082        762        3,247        2,287      Selling, general and administrative
  

 

 

   

 

 

   

 

 

   

 

 

   
     4,986        3,804        14,960        11,413     

Tax benefit

     (1,896     (1,441     (5,686     (4,325   Income tax provision
  

 

 

   

 

 

   

 

 

   

 

 

   

Net of tax

     3,090        2,363        9,274        7,088     

Amortization of deferred benefit other plan items

          

Prior service costs

     (58     (59     (173     (178   Costs of products sold
     (12     (13     (37     (38   Selling, general and administrative

Actuarial losses

     48        106        142        319      Costs of products sold
     10        23        31        68      Selling, general and administrative
  

 

 

   

 

 

   

 

 

   

 

 

   
     (12     57        (37     171     

Tax benefit

     5        (22     16        (66   Income tax provision
  

 

 

   

 

 

   

 

 

   

 

 

   

Net of tax

     (7     35        (21     105     
  

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications, net of tax

   $ 1,641      $ 2,494      $ 5,902      $ 8,075     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

7. 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 September 30, 2015 and December 31, 2014, we had $12.0 million and $14.9 million of gross unrecognized tax benefits. As of September 30, 2015, if such benefits were to be recognized, approximately $12.0 million would be recorded as a component of income tax expense, thereby affecting our effective tax rate. Gross unrecognized tax benefits reflected a net decrease of $2.9 million during the nine months ended September 30, 2015, primarily due to the completion of federal and state examinations during the second quarter.

 

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 - 2014         N/A   

State

     2010 - 2014         N/A   

Canada (1)

     2010 - 2014         N/A   

Germany (1)

     2012 - 2014         2007 - 2011   

France

     2013 - 2014         2011 - 2012   

United Kingdom

     2013 - 2014         N/A   

Philippines

     2012, 2014         2013   

 

(1) – includes provincial or similar local jurisdictions, as applicable
 

 

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GLATFELTER

9.30.15 Form 10-Q


Table of Contents

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

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

 

     Nine months ended
September 30
 

In millions

   2015      2014  

Interest expense

   $ —         $ 0.1   

Penalties

     —           —     
     September 30
2015
     December 31
2014
 

Accrued interest payable

   $ 0.6       $ 0.6   
8. STOCK-BASED COMPENSATION

The P. H. Glatfelter Amended and Restated Long Term Incentive Plan (the “LTIP”) provides for the issuance of Glatfelter common stock to eligible participants in the form of restricted stock units, restricted stock awards, non-qualified stock options, performance shares, incentive stock options and performance units.

Pursuant to terms of the LTIP, we have issued to eligible participants restricted stock units, performance share awards and stock only stock appreciation rights.

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

   2015     2014  

Balance at January 1,

     888,942        1,001,814   

Granted

     160,514        173,206   

Forfeited

     (87,567     (45,355

Shares delivered

     (286,857     (239,394
  

 

 

   

 

 

 

Balance at September 30,

     675,032        890,271   
  

 

 

   

 

 

 

The amount granted in 2015 and 2014 includes PSAs of 105,017 and 95,691 respectively, exclusive of reinvested dividends.

 

 

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Table of Contents

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

 

     September 30  

In thousands

   2015      2014  

Three months ended

   $ 395       $ 854   

Nine months ended

     1,214         1,874   

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.

 

     2015      2014  

SOSARS

   Shares     Wtd Avg
Exercise
Price
     Shares     Wtd Avg
Exercise
Price
 

Outstanding at January 1,

     1,864,707      $ 16.20         1,977,133      $ 13.91   

Granted

     423,590        24.62         281,881        29.22   

Exercised

     (70,347     14.12         (26,245     15.67   

Canceled / forfeited

     (17,559     25.24         (29,842     19.36   
  

 

 

      

 

 

   

Outstanding at September 30,

     2,200,391      $ 17.82         2,202,927      $ 15.77   

SOSAR Grants

                         

Weighted average grant date fair value per share

   $ 7.46         $ 9.81     

Aggregate grant date fair value (in thousands)

   $ 3,134         $ 2,764     

Black-Scholes assumptions

         

Dividend yield

     1.94        1.48  

Risk free rate of return

     1.64        1.74  

Volatility

     36.38        37.59  

Expected life

     6 yrs           6 yrs     

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

 

     September 30  

In thousands

   2015      2014  

Three months ended

   $ 671       $ 577   

Nine months ended

     1,940         1,585   
9. 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

September 30

 

In thousands

   2015     2014  

Pension Benefits

    

Service cost

   $ 2,850      $ 2,602   

Interest cost

     5,868        6,216   

Expected return on plan assets

     (11,498     (10,969

Amortization of prior service cost

     760        827   

Amortization of unrecognized loss

     4,226        2,977   
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 2,206      $ 1,653   
  

 

 

   

 

 

 

Other Benefits

    

Service cost

   $ 358      $ 614   

Interest cost

     499        597   

Amortization of prior service cost

     (70     (72

Amortization of unrecognized loss

     58        129   
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 845      $ 1,268   
  

 

 

   

 

 

 

 

    

Nine months ended

September 30

 

In thousands

   2015     2014  

Pension Benefits

    

Service cost

   $ 8,546      $ 7,810   

Interest cost

     17,606        18,696   

Expected return on plan assets

     (34,495     (32,907

Amortization of prior service cost

     2,281        2,482   

Amortization of unrecognized loss

     12,679        8,931   
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 6,617      $ 5,012   
  

 

 

   

 

 

 

Other Benefits

    

Service cost

   $ 1,074      $ 1,844   

Interest cost

     1,498        1,793   

Amortization of prior service cost

     (210     (216

Amortization of unrecognized loss

     173        387   
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 2,535      $ 3,808   
  

 

 

   

 

 

 
 

 

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Table of Contents
10. ASSET IMPAIRMENT CHARGE

During the third quarters of 2015 and 2014, in connection with our annual test of potential impairment of indefinite lived intangible assets, we recorded $1.2 million and $3.3 million, respectively, of non-cash asset impairment charges related to a trade name intangible asset acquired in connection with our Composite Fibers business unit’s 2013 Dresden acquisition. The charges were due to changes in the estimated fair value of the trade name, primarily driven by lower forecasted revenues associated with the business, an increase in discount rates related to Dresden’s business in Russia and Ukraine and this region’s political and economic instability. The charges are recorded in the accompanying condensed consolidated statements of income under the caption “Selling, general and administrative expenses.” The fair value of the asset was estimated using a discounted cash flow model, Level 3 fair value classification.

 

11. INVENTORIES

Inventories, net of reserves, were as follows:

 

     September 30      December 31  

In thousands

   2015      2014  

Raw materials

   $ 59,985       $ 61,266   

In-process and finished

     117,980         117,580   

Supplies

     70,121         69,859   
  

 

 

    

 

 

 

Total

   $ 248,086       $ 248,705   
  

 

 

    

 

 

 

 

12. LONG-TERM DEBT

Long-term debt is summarized as follows:

 

     September 30     December 31  

In thousands

   2015     2014  

Revolving credit facility, due Mar. 2020

   $ 83,464      $ —     

Revolving credit facility, due Nov. 2016

     —          90,555   

5.375% Notes, due Oct. 2020

     250,000        250,000   

2.40% Term Loan, due Jun. 2022

     10,803        12,155   

2.05% Term Loan, due Mar. 2023

     44,848        51,902   
  

 

 

   

 

 

 

Total long-term debt

     389,115        404,612   

Less current portion

     (7,580     (5,734
  

 

 

   

 

 

 

Long-term debt, net of current portion

   $ 381,535      $ 398,878   
  

 

 

   

 

 

 

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

For all US dollar denominated borrowings under the Revolving Credit Facility, the borrowing rate is, at our option, either, (a) the bank’s base rate which is equal to the greater of i) the prime rate; ii) the federal funds rate plus 50 basis points; or iii) the daily Euro-rate plus 100 basis points plus an applicable spread over either i), ii) or iii) ranging from 12.5 basis points to 100 basis points based on the Company’s leverage ratio and its corporate credit ratings determined by Standard & Poor’s Rating Services and Moody’s Investor Service, Inc. (the “Corporate Credit Rating”); or (b) the daily Euro-rate plus an applicable margin ranging from 112.5 basis points to 200 basis points based on the Company’s leverage ratio and the Corporate Credit Rating. For non-US dollar denominated borrowings, interest is based on (b) above.

The Revolving Credit Facility contains a number of customary covenants for financings of this type that, among other things, restrict our ability to dispose of or create liens on assets, incur additional indebtedness, repay other indebtedness, limits certain intercompany financing arrangements, make acquisitions and engage in mergers or consolidations. We are also required to comply with specified financial tests and ratios including: i) maximum net debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio (the “leverage ratio”); and ii) a consolidated EBITDA to interest expense ratio. The most restrictive of our covenants is a maximum leverage ratio of 3.5x. As of September 30, 2015, the leverage ratio, as calculated in accordance with the definition in our credit agreement, was 2.2x which is within the limits set forth in our credit agreement. 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 are fully and unconditionally guaranteed, jointly and severally, by PHG Tea Leaves, Inc., Mollanvick, Inc., and Glatfelter Holdings, LLC (the “Guarantors”). Interest on the 5.375% Notes is payable semiannually in arrears on April 15 and October 15.

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

 

 

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Table of Contents

The 5.375% Notes contain various covenants customary to indebtedness of this nature including limitations on i) the amount of indebtedness that may be incurred; ii) certain restricted payments including common stock dividends; iii) distributions from certain subsidiaries; iv) sales of assets; v) transactions amongst subsidiaries; and vi) incurrence of liens on assets. In addition, the 5.375% Notes contain cross default provisions that could result in all such notes becoming due and payable in the event of a failure to repay debt outstanding under the Revolving Credit Agreement at maturity or a default under the Revolving Credit Agreement that accelerates the debt outstanding thereunder. As of September 30, 2015, we met all of the requirements of our debt covenants.

Glatfelter Gernsbach GmbH & Co. KG (“Gernsbach”), a wholly-owned subsidiary of ours, has two separate agreements with IKB Deutsche Industriebank AG, Düsseldorf (“IKB”). Pursuant to the first agreement, dated April 11, 2013, Gernsbach borrowed €42.7 million (or $57.6 million) aggregate principal amount (the “2013 IKB Loan”). The 2013 IKB Loan is repayable in 32 quarterly installments beginning on June 30, 2015 and ending on March 31, 2023 and bears interest at a rate of 2.05% per annum.

Pursuant to the second agreement with IKB dated September 4, 2014, Gernsbach borrowed €10.0 million (or $12.6 million) aggregate principal amount (the “2014 IKB Loan”). The 2014 IKB Loan is repayable in 27 quarterly installments beginning on September 30, 2015 and ending on June 30, 2022 and bears interest at a rate of 2.40% per annum. Interest on the IKB Loan or portion thereof is payable quarterly.

The IKB loans 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, will be calculated by reference to our Revolving Credit Agreement.

Aggregated unamortized deferred debt issuance costs incurred in connection with all of our outstanding debt totaled $5.6 million at September 30, 2015 and are reported under the caption “Other assets” in the accompanying condensed consolidated balance sheets. The deferred costs are being amortized on a straight line basis over the life of the underlying instruments.

P. H. Glatfelter Company guarantees all debt obligations of its subsidiaries, including each of the IKB loans. All such obligations are recorded in these condensed consolidated financial statements.

As of September 30, 2015 and December 31, 2014, we had $5.3 million of letters of credit issued to us by certain financial institutions. 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.

 

13. ASSET RETIREMENT OBLIGATION

During 2008, we recorded $11.5 million, net present value, of asset retirement obligations related to the legal requirement to close several lagoons at the Spring Grove, PA facility. Historically, lagoons were used to dispose of residual waste material. Closure of the lagoons is expected to be completed in 2016 and will be accomplished by filling the lagoons, installing a non-permeable liner which will be covered with soil to construct the required cap over the lagoons. The retirement obligation was accrued with a corresponding increase in the carrying value of the property, equipment and timberlands caption on the consolidated balance sheet. The amount capitalized is being amortized as a charge to operations on the straight-line basis in relation to the expected closure period. Following is a summary of activity recorded during the first nine months of 2015 and 2014:

 

In thousands

   2015     2014  

Balance at January 1,

   $ 4,114      $ 5,032   

Accretion

     59        115   

Payments

     (2,384     (767

Downward revision

     (1,000     —     

Gain

     (359     (128
  

 

 

   

 

 

 

Balance at September 30,

   $ 430      $ 4,252   
  

 

 

   

 

 

 

During the second quarter of 2015 we recorded a downward revision to our estimated cost of closing the lagoons. The revision was recorded as an adjustment to both the carrying value of the associated property, equipment and timberlands as well as the asset retirement obligation.

The following table summarizes the line items in the accompanying condensed consolidated balance sheets where the asset retirement obligations are recorded:

 

     September 30      December 31  

In thousands

   2015      2014  

Other current liabilities

   $ 430       $ 2,855   

Other long-term liabilities

     —           1,259   
  

 

 

    

 

 

 

Total

   $ 430       $ 4,114   
  

 

 

    

 

 

 
 

 

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Table of Contents
14. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

 

     September 30, 2015      December 31, 2014  

In thousands

   Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Variable rate debt

   $ 83,464       $ 83,464       $ 90,555       $ 90,555   

Fixed-rate bonds

     250,000         253,908         250,000         255,470   

2.40% Term loan

     10,803         10,729         12,155         12,626   

2.05% Term loan

     44,848         43,611         51,902         53,106   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 389,115       $ 391,712       $ 404,612       $ 411,757   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2015, and December 31, 2014, 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 15.

 

15. 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 expected to be incurred over a twelve month to eighteen month period of time. Currency forward contracts involve fixing the exchange rate for delivery of a specified amount of foreign currency on a specified date.

We designate certain currency forward contracts as cash flow hedges of forecasted raw material purchases or certain production costs 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 and is subsequently reclassified into costs of products sold in the period that inventory produced using the hedged transaction affects earnings. 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

   September 30
2015
     December 31
2014
 

Derivative

     

Sell/Buy - sell notional

     

Euro / British Pound

     9,189         4,592   

Sell/Buy - buy notional

     

Euro / Philippine Peso

     661,453         523,313   

British Pound / Philippine Peso

     471,607         260,535   

Euro / U.S. Dollar

     47,751         32,527   

U.S. Dollar / Canadian Dollar

     19,205         10,036   

These contracts have maturities of between twelve months and eighteen months from the date originally entered into.

Derivatives Not Designated as Hedging Instruments—Foreign Currency Hedges We also enter into forward foreign exchange contracts to mitigate the impact changes in currency exchange rates have on balance sheet monetary assets and liabilities. None of these contracts are designated as hedges for financial accounting purposes and, accordingly, changes in value of the foreign exchange forward contracts and in the offsetting underlying on-balance-sheet transactions are reflected in the accompanying condensed consolidated statements of income under the caption “Other, net.”

 

 

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Table of Contents

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

   September 30
2015
     December 31
2014
 

Derivative

     

Sell/Buy - sell notional

     

U.S. Dollar / Euro

     —           4,000   

U.S. Dollar / British Pound

     7,000         9,000   

Euro / British Pound

     —           2,000   

British Pound / Euro

     2,000         —     

Sell/Buy - buy notional

     

Euro / U.S. Dollar

     7,000         —     

British Pound / Euro

     15,500         3,000   

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   September 30
2015
    December 31
2014
    September 30
2015
    December 31
2014
 

Balance sheet caption

  Prepaid Expenses and
Other Current Assets
    Other
Current Liabilities
 

Designated as hedging:

       

Forward foreign currency exchange contracts

  $ 693      $ 3,106      $ 1,676      $ 394   

Not designated as hedging:

       

Forward foreign currency exchange contracts

  $ 91.0      $ 70      $ 0      $ 161   

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
September 30
    Nine months ended
September 30
 

In thousands

   2015     2014     2015      2014  

Designated as hedging:

         

Forward foreign currency exchange contracts:

         

Effective portion – cost of products sold

   $ 1,972      $ (137   $ 4,595       $ (1,227

Ineffective portion – other – net

     (184     81        104         181   

Not designated as hedging:

         

Forward foreign currency exchange contracts:

         

Other – net

   $ 621      $ 595      $ 1,028       $ 1,792   

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

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The fair values of the foreign exchange forward contracts are considered to be Level 2. Foreign currency forward contracts are valued using foreign currency forward and interest rate curves. The fair value of each contract is determined by comparing the contract rate to the forward rate and discounting to present value. Contracts in a gain position are recorded in the condensed consolidated balance sheets under the caption “Prepaid expenses and other current assets” and the value of contracts in a loss position is recorded under the caption “Other current liabilities.”

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

 

In thousands

   2015     2014  

Balance at January 1,

   $ 3,282      $ (1,296

Deferred gains on cash flow hedges

     1,100        2,223   

Reclassified to earnings

     (4,595     1,227   
  

 

 

   

 

 

 

Balance at September 30,

   $ (213   $ 2,154   
  

 

 

   

 

 

 

We expect substantially all of the amounts recorded as a component of accumulated other comprehensive income will be realized in results of operations within the next twelve 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.

 

 

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Table of Contents

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.

 

16. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS

Fox River—Neenah, Wisconsin

Background. We have significant uncertainties associated with environmental claims arising out of the presence of polychlorinated biphenyls (“PCBs”) in sediments in the lower Fox River, on which our former Neenah facility was located, and in the Bay of Green Bay Wisconsin (collectively, the “Site”). Since the early 1990s, the United States, the State of Wisconsin and two Indian tribes (collectively, the “Governments”) have pursued a cleanup of a 39-mile stretch of river from Little Lake Butte des Morts into Green Bay and natural resource damages (“NRDs”).

The United States notified the following parties (“PRPs”) of their potential responsibility to implement response actions, to pay response costs, and to compensate for NRDs at this site: Appvion, Inc. (formerly known as Appleton Papers Inc.), CBC Coating, Inc. (formerly known as Riverside Paper Corporation), Georgia-Pacific Consumer Products, L.P. (“Georgia-Pacific”, formerly known as Fort James Operating Company), Menasha Corporation, NCR Corporation (“NCR”), U.S. Paper Mills Corp., and WTM I Company. As described below, many other parties have been joined in litigation. After giving effect to settlements reached with the Governments, the remaining PRPs exposed to continuing obligations to implement the remainder of the cleanup consist of us, Georgia-Pacific and NCR.

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

The United States Environmental Protection Agency (“EPA”) has divided the Site into five “operable units”, including the most upstream portion of the Site on which our facility was located (“OU1”) and four downstream reaches of the river and bay (“OU2-5”).

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

For OU2-5, work has proceeded primarily under a Unilateral Administrative Order (“UAO”) issued in November 2007 by the EPA to us and seven other respondents. The remedial actions from 2007 through 2014 were funded primarily by NCR and its indemnitors, including Appvion, Inc. In late June 2015, we began placing sand covers and certain other covering and capping in OU4b as a response to the Government’s demands. We expect the cost of the remediation we will perform in 2015 to be approximately $10 million. Georgia Pacific and NCR are funding work in 2015 pursuant to a proposed consent decree. Work is scheduled to continue in OU2-5 through 2017; although work may be required into 2018 to complete the project, with monitoring and maintenance to follow.

Although we have not contributed significant funds towards remedial actions other than in OU1 until 2015, as more fully discussed below, significant uncertainties exist pertaining to the ultimate allocation of OU2-5 remediation costs as well as the shorter term funding of the remedial actions for OU2-5.

Cost estimates. Estimates of the Site remediation change over time as we, or others, gain additional data and experience at the Site. In addition, disagreement exists over the likely costs for some of this work. On October 14, 2014, the Governments represented to the United States District Court in Green Bay that $1.1 billion provided an “upper end estimate of total past and future response costs” including a $100 million “uncertainty premium for future response costs.” Based upon estimates made by the Governments and independent estimates commissioned by various potentially responsible parties, we have no reason to disagree with the Governments’ assertion. Much of that amount has already been incurred, including approximately $100 million for OU1 and what we believe to be approximately $500 million for OU2-5 prior to the 2015 remediation season.

In previous years, the Governments indicated their expectation was to have work in OU2-5 completed at a rate estimated to cost at least $70 million annually in 2015 and 2016, and at lower rates thereafter. However, the Governments have revised their estimate per year and the cost for the 2015 dredging season was increased to be approximately $100 million.

As the result of a partial settlement, Georgia-Pacific has no obligation to pay for work upstream of a line near

 

 

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Georgia-Pacific’s Green Bay West Mill located in OU4. We believe substantially all in-water work upstream of this line had been completed as of the end of the 2014 dredging season.

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

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

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

In addition, we take the position that the “single site” theory on which the courts held us responsible for cleaning up parts of the Site far downstream of our former mill should, if applied to NCR, make it liable for costs incurred in OU1. The district court agreed with us in an order dated March 3, 2015. On March 31, 2015, NCR sought review of that order by the court of appeals which review was denied on May 1, 2015. However, on May 15, 2015, the district court issued an opinion in the Government Action, described below, containing a sentence suggesting that NCR would not be liable for

OU1. Also as described below, on October 19, 2015, the district court reconsidered its May 15 opinion and ruled against NCR generally, although with no specific reference to OU1.

Appvion and NCR have had a cost-sharing agreement since at least 1998. The court of appeals held if Appvion incurred any recoverable costs because the Governments had named Appvion as a potentially responsible party, then Appvion may have a right to recover those costs under CERCLA. We and Appvion disagree over the proper treatment of amounts that Appvion incurred while a PRP that were also subject to a cost-sharing agreement with NCR; we contend Appvion may not recover costs it was contractually obligated to incur, that it has no other costs, and if it did, we would have a right to contribution of any recovery against NCR and others. However, Appvion takes a contrary position and claims in excess of $170 million.

The district court has established a schedule for the Whiting Litigation under which it would hold a trial in July 2016 on remaining issues.

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

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

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

 

 

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NCR had failed to prove that liability for OU2-5 could be apportioned, directing the lower court to consider issues it had not considered initially.

On remand, the district court issued an opinion on May 15, 2015, (“May 15 Decision”) in which it held that the existing trial record allowed it to apportion NCR’s liability for OU4 at 28% of the total OU4 costs. The district court did not apportion liability for OU2 or OU3. The court’s opinion contains a sentence stating that NCR would not be liable for OU1 because the facilities formerly owned by NCR discharged downstream. We moved for reconsideration of the May 15 Decision, as did the United States, Georgia-Pacific, and certain other parties. On October 19, 2015, the district court reconsidered its May 15 Decision and held that NCR had not shown a reasonable basis for apportionment of its liability for the site.

We do not know the Governments’ intentions concerning further litigation of the Government Action, nor do we know the schedule for any further proceedings. We cannot now predict when it will be resolved.

Interim Funding of Ongoing Work. As described above, the court of appeals vacated the allocation judgment in the Whiting Litigation on September 25, 2014, but neither court has since replaced that allocation with any other. The 2007 UAO requires the PRPs to submit annual remediation work plans. For 2015, the EPA approved the 2015 Work Plan for $100 million of remediation activities. NCR, GP, and we were not able to reach agreement on a division of the costs of that work on an interim basis, subject to reallocation in the Whiting Litigation. NCR and GP have entered into a proposed consent decree with the United States under which they will fund certain work estimated to cost approximately $67 million in 2015, and they will not be responsible for completing the remainder of the work in 2015, estimated to cost approximately $33 million. The United States has not moved to enter that consent decree. Through the issuance of the 2015 Work Plan the EPA assigned to us those remaining tasks. Under the proposed consent decree, all parties would remain jointly and severally liable for work in the 2015 Work Plan not completed in 2015, except for a small amount of work upstream of the area for which GP is responsible. We contracted for remediation work in OU4, estimated to total approximately $10 million, an amount less than the amount assigned to us in the 2015 Work Plan.

We anticipate that $10 million of work in 2015 would satisfy our share of the obligation if NCR and GP perform the work assigned to them in the 2015 Work Plan. The United States disagrees. We cannot predict the outcome of these disagreements or any possible resulting litigation.

With respect to the 2015 Work Plan, we disagree with the United States over i) whether the work purportedly assigned to

us could be completed in the specified timeframe; ii) whether the EPA has the legal authority to assign remedial tasks as it purports to have done under the terms of the UAO; iii) whether we have available to us avenues for relief from the purported obligation to perform the assigned work in 2015; iv) whether we have any other responses of which we may avail our self; v) whether an arbitrary per capita allocation of one-third can be imposed on us in light of the multiple rulings by the courts since 2009 that appear inconsistent with a per capita allocation; and vi) whether the 2015 Work Plan affects the Company’s ultimate liability for this Site.

In September 2015, the U.S. Department of Justice notified us that we, along with Georgia - Pacific, should be prepared to participate in the remediation activities during 2016. In addition, we understand NCR has submitted a draft 2016 Work Plan. Although we do not have an estimate of the costs of completing the work NCR proposes be completed in 2016, we expect the cost could approximate $100 million. The draft does not assign work to particular parties.

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

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

However, on October 14, 2014, the Governments represented to the district court that if certain settlements providing $45.9 million toward compensation of NRDs were approved, the total NRD recovery would amount to $105 million. The Governments stated they would consider those recoveries adequate and they would withdraw their claims against us and NCR for additional compensation of NRDs. On October 19, 2015, the district court granted the Governments leave to withdraw their

 

 

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NRD claims against us without prejudice to re-filing them at some later time. Some of the settling parties, including all of the settling parties contributing the $45.9 million, have waived their rights to seek contribution from us of the settlement amounts. We previously paid a portion of the earlier settlements that the Governments value at $59 million and that we contend may be somewhat more.

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

 

In thousands

   2015     2014  

Balance at January 1,

   $ 16,223      $ 16,276   

Payments

     (5,617     (39

Accruals

     10,000        —     
  

 

 

   

 

 

 

Balance at September 30,

   $ 20,606      $ 16,237   
  

 

 

   

 

 

 

The payments set forth above represent cash paid towards completion of remediation activities in connection with the 2015 Work Plan, of which approximately $4.5 million will be paid during the fourth quarter of 2015. In addition, in the third quarter of 2015 we increased our reserve by $10.0 million to reflect our estimate of costs to be incurred related to the 2016 Work Plan. The charge is recorded in the accompanying condensed consolidated financial statements under the caption “Selling, general and administrative expenses.” If we are unsuccessful in the allocation litigation or in the enforcement litigation described above, we may be required to record additional charges and such charges could be significant.

Of our total reserve for the Fox River, $16.0 million is recorded in the accompanying September 30, 2015 condensed consolidated balance sheet under the caption “Environmental liabilities” and the remainder is recorded under the caption “Other long term liabilities.”

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

statements do not include reserves for any future defense costs, which could be significant, related to our involvement at the Site.

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

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

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

 

 

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Range of Reasonably Possible Outcomes. Based on our analysis of all available information, including but not limited to decisions of the courts, official documents such as records of decision, as well as discussions with legal counsel and cost estimates for work to be performed at the Site, and substantially dependent on the resolution of the allocation issues discussed above, we believe it is reasonably possible that our costs associated with the Fox River matter could exceed the aggregate amounts accrued for the Fox River matter by amounts ranging from insignificant to $175 million. We believe the likelihood of an outcome in the upper end of the monetary range is less than other possible outcomes within the range and the possibility of an outcome in excess of the upper end of the monetary range is remote.

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

Summary. Our current assessment is we will be able to manage this environmental matter without a long-term, material adverse impact on the Company. This matter could, however, at any particular time or for any particular year or years, have a material adverse effect on our consolidated financial position, liquidity and/or results of operations or could result in a default under our debt covenants. Moreover, there can be no assurance our reserves will be adequate to provide for future obligations related to this matter, or our share of costs and/or damages will not exceed our available resources, or those obligations will not have a long-term, material adverse effect on our consolidated financial position, liquidity or results of operations. Should a court grant the United States or the State of Wisconsin relief requiring us individually either to perform directly or to contribute significant amounts towards remedial action downstream of Little Lake Butte des Morts those developments could have a material adverse effect on our consolidated financial position, liquidity and results of operations and might result in a default under our loan covenants.

 

 

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17. SEGMENT INFORMATION

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

 

Three months ended September 30

Dollars in millions

   Composite Fibers      Advanced Airlaid
Materials
     Specialty Papers      Other and Unallocated     Total  
     2015      2014      2015      2014      2015      2014      2015     2014     2015     2014  

Net sales

   $ 133.9       $ 154.5       $ 63.2       $ 74.4       $ 222.8       $ 236.2       $ —        $ —        $ 420.0      $ 465.1   

Energy and related sales, net

     —           —           —           —           1.2         0.9         —          —          1.2        0.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     133.9         154.5         63.2         74.4         224.0         237.1         —          —          421.1        466.0   

Cost of products sold

     108.4         123.7         54.6         64.7         196.1         195.2         2.1        1.8        361.2        385.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     25.5         30.8         8.6         9.7         27.9         41.9         (2.1     (1.8     59.9        80.5   

SG&A

     11.5         12.6         1.8         2.2         10.4         14.1         16.2        9.0        39.8        37.9   

Gains on dispositions of plant, equipment and timberlands, net

     —           —           —           —           —           —           (0.1     (1.6     (0.1     (1.6
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (loss)

     14.0         18.1         6.8         7.5         17.5         27.8         (18.2     (9.2     20.2        44.2   

Non-operating expense

     —           —           —           —           —           —           (4.4     (4.8     (4.4     (4.8
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ 14.0       $ 18.1       $ 6.8       $ 7.5       $ 17.5       $ 27.8       $ (22.6   $ (14.0   $ 15.8      $ 39.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Supplementary Data

                          

Net tons sold (thousands)

     38.9         40.1         24.8         26.3         203.6         208.4         —          —          267.2        274.7   

Depreciation, depletion and amortization

   $ 6.7       $ 7.4       $ 2.2       $ 2.3       $ 6.4       $ 6.5       $ 0.5      $ 0.5      $ 15.8      $ 16.7   

Capital expenditures

     5.8         5.4         1.8         1.3         22.1         9.7         —          0.5        29.7        16.9   

Nine months ended September 30

Dollars in millions

   Composite Fibers      Advanced Airlaid
Materials
     Specialty Papers      Other and Unallocated     Total  
     2015      2014      2015      2014      2015      2014      2015     2014     2015     2014  

Net sales

   $ 409.6       $ 470.1       $ 183.0       $ 216.2       $ 655.6       $ 679.9       $ —        $ —        $ 1,248.2      $ 1,366.2   

Energy and related sales, net

     —           —           —           —           3.9         6.9         —          —          3.9        6.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     409.6         470.1         183.0         216.2         659.5         686.8         —          —          1,252.2        1,373.1   

Cost of products sold

     329.8         376.7         162.0         189.9         608.4         624.3         7.1        5.2        1,107.3        1,196.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     79.8         93.4         21.0         26.3         51.1         62.5         (7.1     (5.2     144.8        177.0   

SG&A

     34.4         38.8         5.8         6.8         34.2         39.5         25.7        18.7        100.2        103.8   

Gains on dispositions of plant, equipment and timberlands, net

     —           —           —           —           —           —           (2.9     (3.9     (2.9     (3.9
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (loss)

     45.4         54.6         15.2         19.5         16.9         23.0         (29.9     (20.0     47.5        77.1   

Non-operating expense

     —           —           —           —           —           —           (13.1     (14.0     (13.1     (14.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ 45.4       $ 54.6       $ 15.2       $ 19.5       $ 16.9       $ 23.0       $ (43.0   $ (34.0   $ 34.4      $ 63.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Supplementary Data

                          

Net tons sold (thousands)

     116.2         119.5         71.4         76.0         593.6         601.3         —          —          781.2        796.8   

Depreciation, depletion and amortization

   $ 20.1       $ 22.7       $ 6.5       $ 6.9       $ 19.3       $ 22.6       $ 1.5      $ 1.3      $ 47.4      $ 53.5   

Capital expenditures

     17.3         16.7         4.6         4.1         51.0         24.5         1.4        1.7        74.3        47.0   

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

 

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18. 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 Advanced Materials N.A., Inc. (“GAMNA”), and Glatfelter Holdings, LLC. The guarantees are subject to certain customary release provisions including i) the designation of such subsidiary as an unrestricted or excluded subsidiary; (ii) in connection with any sale or disposition of the capital stock of the subsidiary guarantor; and (iii) upon our exercise of our legal defeasance option or our covenant defeasance option, all of which are more fully described in the Indenture dated as of October 3, 2012 and the First Supplemental Indenture dated as of October 27, 2015, among us, the Guarantors and US Bank National Association, as Trustee, relating to the 5.375% Notes.

The following presents the condensed consolidating statements of income, including comprehensive income for the three months and nine months ended September 30, 2015 and 2014, the condensed consolidating balance sheets as of September 30, 2015 and December 31, 2014 and the condensed consolidating cash flows for the nine months ended September 30, 2015 and 2014. These financial statements reflect the Parent, the guarantor subsidiaries (on a combined basis), the non-guarantor subsidiaries (on a combined basis) and elimination entries necessary to combine such entities on a consolidated basis. The condensed consolidating financial statements set forth below include the addition of CFNA and GAMNA as guarantors effective September 30, 2015 and all prior periods have been restated to retroactively effect this change. In addition, our presentation of the Guarantors’ statement of income for the three months and nine months ended September 30, 2014 has been restated to correctly apply the equity method of accounting to reflect the Guarantors’ equity interests in certain Non Guarantors. Such changes are reflected under the caption “Equity in earnings of subsidiaries” in the accompanying condensed consolidating statements of income. The correction had no impact on any financial information of the Parent Company, the Non Guarantors or on the condensed consolidating balance sheet or the statement of cash flows.

Condensed Consolidating Statement of Income for the

three months ended September 30, 2015

 

In thousands

   Parent
Company
    Guarantors     Non
Guarantors
    Adjustments/
Eliminations
    Consolidated  

Net sales

   $ 222,803      $ 19,005      $ 197,589      $ (19,437   $ 419,960   

Energy and related sales, net

     1,153        —          —          —          1,153   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     223,956        19,005        197,589        (19,437     421,113   

Costs of products sold

     197,906        17,299        165,437        (19,437     361,205   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     26,050        1,706        32,152        —          59,908   

Selling, general and administrative expenses

     24,764        (8     15,036        —          39,792   

Gains on dispositions of plant, equipment and timberlands, net

     (4     —          (119     —          (123
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,290        1,714        17,235        —          20,239   

Other non-operating income (expense)

          

Interest expense

     (4,346     —          (23,201     23,230        (4,317

Interest income

     181        23,129        11        (23,231     90   

Equity in earnings of subsidiaries

     14,173        (9,366     —          (4,808     —     

Other, net

     (961     23        718        —          (220
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other non-operating income (expense)

     9,047        13,786        (22,472     (4,809     (4,447
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     10,337        15,500        (5,237     (4,809     15,792   

Income tax provision (benefit)

     (3,167     1,270        4,185        —          2,288   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     13,504        14,230        (9,422     (4,809     13,504   

Other comprehensive income (loss)

     (3,002     (5,954     (7,752     13,706        (3,002
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 10,502      $ 8,276      $ (17,174   $ 8,897      $ 10,502   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 22 -

GLATFELTER

9.30.15 Form 10-Q


Table of Contents

Condensed Consolidating Statement of Income for the

three months ended September 30, 2014

 

In thousands

   Parent
Company
    Guarantors     Non
Guarantors
    Adjustments/
Eliminations
    Consolidated  

Net sales

   $ 236,182      $ 17,735      $ 228,699      $ (17,524   $ 465,092   

Energy and related sales, net

     860        —          —          —          860   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     237,042        17,735        228,699        (17,524     465,952   

Costs of products sold

     197,182        17,019        188,762        (17,524     385,439   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     39,860        716        39,937        —          80,513   

Selling, general and administrative expenses

     19,352        589        17,946        —          37,886   

Gains on dispositions of plant, equipment and timberlands, net

     (1,590     —          —          —          (1,590
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     22,098        127        21,991        —          44,217   

Other non-operating income (expense)

          

Interest expense

     (4,790     —          (90,098     90,217        (4,671

Interest income

     152        89,951        145        (90,218     30   

Equity in earnings of subsidiaries

     14,935        (74,502     —          59,566        —     

Other, net

     (383     9        202        5        (167
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other non-operating income (expense)

     9,914        15,458        (89,751     59,570        (4,808
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     32,012        15,585        (67,760     59,570        39,409   

Income tax provision (benefit)

     1,640        1,091        6,306        —          9,037   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     30,372        14,494        (74,066     59,570        30,372   

Other comprehensive income (loss)

     (29,577     (25,843     16,924        8,919        (29,577
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 795      $ (11,349   $ (57,142   $ 68,489      $ 795   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 23 -

GLATFELTER

9.30.15 Form 10-Q


Table of Contents

Condensed Consolidating Statement of Income for the

nine months ended September 30, 2015

 

In thousands

   Parent
Company
    Guarantors     Non
Guarantors
    Adjustments/
Eliminations
    Consolidated  

Net sales

   $ 655,599      $ 61,822      $ 590,466      $ (59,655   $ 1,248,232   

Energy and related sales, net

     3,936        —          —          —          3,936   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     659,535        61,822        590,466        (59,655     1,252,168   

Costs of products sold

     614,060        58,554        494,360        (59,655     1,107,319   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     45,475        3,268        96,106        —          144,849   

Selling, general and administrative expenses

     57,607        947        41,647        —          100,201   

Gains on dispositions of plant, equipment and timberlands, net

     (1,526     (1,183     (179     —          (2,888
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (10,606     3,504        54,638        —          47,536   

Other non-operating income (expense)

          

Interest expense

     (13,771     —          (35,965     36,559        (13,177

Interest income

     513        36,226        52        (36,559     232   

Equity in earnings of subsidiaries

     48,775        11,879        —          (60,654     —     

Other, net

     (2,423     (136     2,367        —          (192
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other non-operating income (expense)

     33,094        47,969        (33,546     (60,654     (13,137
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     22,488        51,473        21,092        (60,654     34,399   

Income tax provision (benefit)

     (7,789     2,586        9,325        —          4,122   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     30,277        48,887        11,767        (60,654     30,277   

Other comprehensive income (loss)

     (21,200     (30,607     21,156        9,451        (21,200
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 9,077      $ 18,280      $ 32,923      $ (51,203   $ 9,077   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 24 -

GLATFELTER

9.30.15 Form 10-Q


Table of Contents

Condensed Consolidating Statement of Income for the

nine months ended September 30, 2014

 

In thousands

   Parent
Company
    Guarantors     Non
Guarantors
    Adjustments/
Eliminations
    Consolidated  

Net sales

   $ 679,877      $ 56,138      $ 685,350      $ (55,211   $ 1,366,154   

Energy and related sales, net

     6,912        —          —          —          6,912   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     686,789        56,138        685,350        (55,211     1,373,066   

Costs of products sold

     629,984        53,491        567,812        (55,211     1,196,076   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     56,805        2,647        117,538        —          176,990   

Selling, general and administrative expenses

     53,699        1,431        48,622        —          103,751   

Gains on dispositions of plant, equipment and timberlands, net

     (2,565     (1,316     —          —          (3,881
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     5,671        2,532        68,916        —          77,120   

Other non-operating income (expense)

          

Interest expense

     (14,284     —          (95,643     95,682        (14,245

Interest income

     468        95,165        193        (95,683     143   

Equity in earnings of subsidiaries

     56,784        (38,229     —          (18,555     —     

Other, net

     (1,603     30        1,673        5        105   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other non-operating income (expense)

     41,365        56,966        (93,777     (18,551     (13,997
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     47,036        59,498        (24,861     (18,551     63,123   

Income tax provision (benefit)

     (2,653     2,719        13,368        —          13,434   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     49,689        56,779        (38,229     (18,551     49,689   

Other comprehensive income (loss)

     (23,586     (26,392     18,907        7,485        (23,586
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 26,103      $ 30,387      $ (19,322   $ (11,066   $ 26,103   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 25 -

GLATFELTER

9.30.15 Form 10-Q


Table of Contents

Condensed Consolidating Balance Sheet as of

September 30, 2015

 

In thousands

   Parent
Company
     Guarantors     Non
Guarantors
     Adjustments/
Eliminations
    Consolidated  
Assets             

Cash and cash equivalents

   $ 28,626       $ 297      $ 44,742       $ —        $ 73,665   

Other current assets

     232,486         260,054        261,431         (268,192     485,779   

Plant, equipment and timberlands, net

     283,712         1,005        412,607         —          697,324   

Investments in subsidiaries

     734,303         504,783        —           (1,239,086     —     

Other assets

     132,732         —          148,732         (485     280,979   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,411,859       $ 766,139      $ 867,512       $ (1,507,763   $ 1,537,747   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
Liabilities and Shareholders’ Equity             

Current liabilities

   $ 368,220       $ 31,720      $ 163,984       $ (271,574   $ 292,350   

Long-term debt

     250,000         —          131,535         —          381,535   

Deferred income taxes

     48,226         (505     50,110         3,376        101,207   

Other long-term liabilities

     99,297         33        17,209         —          116,539   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     765,743         31,248        362,838         (268,198     891,631   

Shareholders’ equity

     646,116         734,891        504,674         (1,239,565     646,116   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,411,859       $ 766,139      $ 867,512       $ (1,507,763   $ 1,537,747   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Condensed Consolidating Balance Sheet as of

December 31, 2014

 

In thousands

   Parent
Company
     Guarantors     Non
Guarantors
    Adjustments/
Eliminations
    Consolidated  
Assets            

Cash and cash equivalents

   $ 42,208       $ 509      $ 57,120      $ —        $ 99,837   

Other current assets

     216,940         439,910        254,911        (436,976     474,785   

Plant, equipment and timberlands, net

     255,255         996        441,357        —          697,608   

Investments in subsidiaries

     826,084         401,540        —          (1,227,624     —     

Other assets

     121,125         —          186,128        (17,979     289,274   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,461,612       $ 842,955      $ 939,516      $ (1,682,579   $ 1,561,504   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
Liabilities and Shareholders’ Equity            

Current liabilities

     403,662         13,143        307,184        (444,258     279,731   

Long-term debt

     250,000         —          721,457        (572,579     398,878   

Deferred income taxes

     46,483         (506     70,328        (12,289     104,016   

Other long-term liabilities

     112,358         24        11,608        5,780        129,770   

Total liabilities

     812,503         12,661        1,110,577        (1,023,346     912,395   

Shareholders’ equity

     649,109         830,294        (171,061     (659,233     649,109   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,461,612       $ 842,955      $ 939,516      $ (1,682,579   $ 1,561,504   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

- 26 -

GLATFELTER

9.30.15 Form 10-Q


Table of Contents

Condensed Consolidating Statement of Cash Flows for the

nine months ended September 30, 2015

 

In thousands

   Parent
Company
    Guarantors     Non
Guarantors
    Adjustments/
Eliminations
    Consolidated  

Net cash provided (used) by

          

Operating activities

   $ 9,927      $ 152      $ 60,444      $ —        $ 70,523   

Investing activities

          

Expenditures for purchases of plant, equipment and timberlands

     (52,331     (42     (21,907     —          (74,280

Proceeds from disposal plant, equipment and timberlands, net

     1,584        1,213        384        —          3,181   

Repayments from intercompany loans

     1,465        53,855        —          (55,320     —     

Advances of intercompany loans

     —          (44,590     —          44,590        —     

Intercompany capital (contributed) returned

     10,500        (300     —          (10,200     —     

Acquisitions, net of cash acquired

     —          —          (224     —          (224

Other

     (1,600     —          —          —          (1,600
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investing activities

     (40,382     10,136        (21,747     (20,930     (72,923

Financing activities

          

Net repayments of indebtedness

     —          —          (3,387     —          (3,387

Payments of borrowing costs

     (1,329     —          —          —          (1,329

Payment of dividends to shareholders

     (15,215     —          —          —          (15,215

Repayments of intercompany loans

     (9,158     —          (46,162     55,320        —     

Borrowings of intercompany loans

     44,590        —          —          (44,590     —     

Intercompany capital received (returned)

     —          (10,500     300        10,200        —     

Payments related to share-based compensation awards and other

     (2,015     —          —          —          (2,015
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financing activities

     16,873        (10,500     (49,249     20,930        (21,946

Effect of exchange rate on cash

     —          —          (1,826     —          (1,826
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash

     (13,582     (212     (12,378     —          (26,172

Cash at the beginning of period

     42,208        509        57,120        —          99,837   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at the end of period

   $ 28,626      $ 297      $ 44,742      $ —        $ 73,665   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 27 -

GLATFELTER

9.30.15 Form 10-Q


Table of Contents

Condensed Consolidating Statement of Cash Flows for the

nine months ended September 30, 2014

 

In thousands

   Parent
Company
    Guarantors     Non
Guarantors
    Adjustments/
Eliminations
    Consolidated  

Net cash provided (used) by

          

Operating activities

   $ 712      $ 3,371      $ 17,297      $ —        $ 21,380   

Investing activities

          

Expenditures for purchases of plant, equipment and timberlands

     (26,368     —          (20,668     —          (47,036

Proceeds from disposal plant, equipment and timberlands, net

     2,687        1,355        9        —          4,051   

Repayments from intercompany loans

     —          10,409        —          (10,409     —     

Advances of intercompany loans

     —          (15,540     —          15,540        —     

Other

     (600     —          —          —          (600
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investing activities

     (24,281     (3,776     (20,659     5,131        (43,585

Financing activities

          

Net proceeds from indebtedness

     —          —          (18,128     —          (18,128

Payment of dividends to shareholders

     (13,935     —          —          —          (13,935

Repurchases of common stock

     (12,180     —          —          —          (12,180

Borrowings of intercompany loans

     15,540        —          —          (15,540     —     

Repayments of intercompany loans

     —          —          (10,409     10,409        —     

Payments related to share-based compensation awards and other

     (1,764     —          —          —          (1,764
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financing activities

     (12,339     —          (28,537     (5,131     (46,007

Effect of exchange rate on cash

     —          —          (1,015     —          (1,015
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash

     (35,908     (405     (32,914     —          (69,227

Cash at the beginning of period

     56,216        495        66,171        —          122,882 &nb