glt-10k_20181231.htm

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2018

or

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

For the transition period from                  to

 

96 South George Street, Suite 520

York, Pennsylvania 17401

(Address of principal executive offices)

(717) 225-4711

(Registrant's telephone number, including area code)

 

Commission file number

 

Exact name of registrant as

     specified in its charter     

 

IRS Employer

Identification No.

 

State or other jurisdiction of

incorporation or organization

1-03560

 

P. H. Glatfelter Company

 

23-0628360

 

Pennsylvania

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of Each Class

 

Name of Each Exchange on which

                   registered                   

Common Stock, par value $.01 per share

 

New York Stock Exchange

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ☐    No   .

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ☐    No  .

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes      No  ☐.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

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

Based on the closing price as of June 30, 2018, the aggregate market value of the Common Stock of the Registrant held by non‑affiliates was $834.8 million.

Emerging growth company  ☐

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

Common Stock outstanding on February 20, 2019 totaled 44,014,253 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference in this Annual Report on Form 10‑K:

Portions of the registrant’s Proxy Statement to be dated on or about March 29, 2019 are incorporated by reference to Part III.

 

 

 

 

 


P. H. GLATFELTER COMPANY

ANNUAL REPORT ON FORM 10-K

For the Year Ended

DECEMBER 31, 2018

Table of Contents

 

 

 

Page

PART I

 

Item 1

 

Business

1

Item 1A

 

Risk Factors

5

Item 1B

 

Unresolved Staff Comments

9

Item 2

 

Properties

9

Item 3

 

Legal Proceedings

9

 

 

Executive Officers

10

Item 4

 

Mine Safety Disclosures

11

 

 

 

 

PART II

 

Item 5

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

11

 

 

Stock Performance Graph

11

Item 6

 

Selected Financial Data

12

Item 7

 

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

13

 

 

Results of Operations

14

 

 

Liquidity and Capital Resources

21

 

 

Critical Accounting Policies and Estimates

23

Item 7A

 

Quantitative and Qualitative Disclosures about Market Risk

24

Item 8

 

Financial Statements and Supplementary Data

25

 

 

Report of Independent Registered Public Accountants

26

 

 

Statements of Income (Loss)

28

 

 

Statements of Comprehensive Income (Loss)

29

 

 

Balance Sheets

30

 

 

Statements of Cash Flows

31

 

 

Statements of Shareholders’ Equity

32

 

 

Notes to Consolidated Financial   Statements

 

 

 

1.    Organization

33

 

 

2.    Accounting Policies

33

 

 

3.    Acquisition

36

 

 

4.    Discontinued Operations

37

 

 

5.    Gain on Dispositions of Plant, Equipment and Timberlands

38

 

 

6.    Revenue

39

 

 

7.    Earnings Per Share

39

 

 

8.    Accumulated Other Comprehensive Income

40

 

 

9.    Income Taxes

41

 

 

 

 

Page

 

 

10.  Stock-Based Compensation

44

 

 

11.  Retirement Plans and Other Post-Retirement Benefits

45

 

 

12.  Inventories

48

 

 

13.  Plant, Equipment and Timberlands

48

 

 

14.  Goodwill and Intangible Assets

49

 

 

15.  Other Long-Term Assets

49

 

 

16.  Other Current Liabilities

49

 

 

17.  Long-Term Debt

49

 

 

18.  Fair Value of Financial Instruments

51

 

 

19.  Financial Derivatives and Hedging Activities

51

 

 

20.  Shareholders’ Equity

52

 

 

21.  Commitments, Contingencies and Legal Proceedings

52

 

 

22.  Segment and Geographic Information

56

 

 

23.  Condensed Consolidating Financial Statements

58

 

 

24.  Quarterly Results (Unaudited)

63

 

 

 

 

Item 9

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosures

64

Item 9A

 

Controls and Procedures

64

Item 9B

 

Other Information

64

 

 

 

 

PART III

 

Item 10

 

Directors, Executive Officers and Corporate Governance

64

Item 11

 

Executive Compensation

64

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

64

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

64

Item 14

 

Principal Accountant Fees and Services

64

 

 

 

 

PART IV

 

Item 15

 

Exhibits, Financial Statement Schedules

65

 

 

 

 

Signatures

67

 

 

 

 

Schedule II

68

 

 

 


PART I

P. H. Glatfelter Company makes regular filings with the Securities and Exchange Commission (“SEC”), including this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. These filings are available, free of charge, on our website, www.glatfelter.com, and the SEC’s website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request to Investor Relations at (717) 225-2719, ir@glatfelter.com, or by mail to Investor Relations, 96 South George Street, Suite 520, York, PA, 17401. In this filing, unless the context indicates otherwise, the terms “we,” “our,” “us,” “the Company,” or “Glatfelter” refer to P. H. Glatfelter Company and subsidiaries.

ITEM 1

BUSINESS

Overview   Glatfelter began operations in 1864, and over the past few years a key component of our strategy has been a focus on growing our engineered materials businesses. In connection with this strategy, in 2018 we divested the former Specialty Papers business unit, acquired Georgia Pacific’s European nonwovens business based in Steinfurt, Germany (“Steinfurt”) and completed the start-up of our new airlaid production facility in Fort Smith, Arkansas. As a leading global supplier of engineered materials for consumer and industrial applications, we maintain leading positions in key segments serving markets that are growing commensurate with or in excess of gross domestic product (“GDP”). We are headquartered in York, Pennsylvania, and our net sales approximate $950 million annually with customers in over 100 countries. Operations include eleven manufacturing facilities located in the United States, Canada, Germany, France, the United Kingdom and the Philippines. Our business is managed as two separate business units: Composite Fibers and Advanced Airlaid Materials.

We partner with leading consumer product companies and other market leaders to provide innovative solutions delivering outstanding performance to meet market requirements. Over the past several years, we have made investments to increase production capacity and improve our technical capabilities to ensure we are best positioned to serve the market demands and grow our revenue. We are committed to growing in our key markets and will make appropriate investments to support our customers and satisfy market demands.

In the first quarter of 2018, we produced and delivered our first commercial shipment of Airlaid product from our new $90 million facility in Arkansas. This 20,000 metric-ton facility was built to meet the growing demands of the North American market. Throughout 2018, this facility continued to ramp up production and shipments of wipes and table top products. This investment together with the Steinfurt acquisition

increases our total global airlaid materials capacity to approximately 150,000 metric tons.

Our high-quality, innovative and customizable solutions are found in health and hygiene products, tea and single-serve coffee filtration, and other home, building, electrical, and industrial applications. Our goal is to be the global supplier of choice for innovation and solutions designed to meet the demands of our customers and the markets they serve.

Our goals are to maintain and grow our leading market positions, expand product margins, partner with customers to provide innovative solutions for new markets, and generate strong free cash flows. We are committed to ensuring our cost structure is competitive driven by delivering on cost reduction and continuous improvement initiatives to maintain our leading market positions.

Recent Developments On October 1, 2018, we acquired Georgia-Pacific’s European nonwovens business for $181 million.  The acquisition consisted of Georgia-Pacific’s operations located in Steinfurt, Germany, along with sales offices located in France and Italy. Steinfurt is a state-of-the-art, 32,000-metric-ton-capacity manufacturing facility that employs approximately 220 people.

On October 31, 2018, we completed the sale of the Specialty Papers Business Unit to Pixelle Specialty Solutions LLC, an affiliate of Lindsay Goldberg, for $360 million. For financial reporting purposes, Specialty Papers is presented as a discontinued operation.

Business Units  Consolidated net sales and the relative net sales contribution of each of our two business units for the past three years are summarized below:

 

Dollars in thousands

2018

 

 

 

2017

 

 

2016

 

 

Net sales

$

866,286

 

 

 

$

800,362

 

 

$

761,216

 

 

Business unit

   contribution

 

 

 

 

 

 

 

 

 

 

 

 

 

Composite Fibers

 

64.1

%

 

 

 

68.0

%

 

 

67.9

%

 

Advanced Airlaid

   Materials

 

35.9

 

 

 

 

32.0

 

 

 

32.1

 

 

Total

 

100.0

%

 

 

 

100.0

%

 

 

100.0

%

 

 

Net tons sold by each business unit for the past three years were as follows:

 

Metric tons

2018

 

 

 

2017

 

 

2016

 

 

Composite Fibers

 

143,777

 

 

 

 

150,388

 

 

 

137,680

 

 

Advanced Airlaid

   Materials

 

104,774

 

 

 

 

92,633

 

 

 

89,847

 

 

Total

 

248,551

 

 

 

 

243,021

 

 

 

227,527

 

 

 

 

 

GLATFELTER 2018 FORM 10-K

1

 


COMPOSITE FIBERS   Our Composite Fibers business unit (“Composite Fibers” or “CFBU”) serves customers globally and focuses on higher value-added products in the following markets:

 

Food & Beverage filtration paper primarily used for single-serve coffee and tea products;

 

Wallcover base materials used by the world’s largest wallpaper manufacturers;

 

Technical Specialties a diverse line of special paper products used in applications such as electrical energy storage, transport and transmission, wipes, and other highly-engineered fiber-based applications;

 

Composite Laminates paper used in production of decorative laminates, furniture, and flooring applications; and

 

Metallized products used in labels, packaging liners, gift wrap, and other consumer product applications.

We believe Composite Fibers maintains a market leadership position in the single-serve coffee and tea filtration markets, wallcover base material and many other products it produces. We believe many of the markets served by Composite Fibers present attractive growth opportunities due to evolving consumer preferences, new or emerging geographic markets, new product innovation and increased market share through superior products and quality.

This business unit’s revenue composition by market consisted of the following for the years indicated:

 

In thousands

2018

 

 

 

2017

 

 

2016

 

 

Food & beverage

$

279,515

 

 

 

$

268,474

 

 

$

258,463

 

 

Wallcovering

 

103,686

 

 

 

 

103,011

 

 

 

90,767

 

 

Technical specialties

 

81,281

 

 

 

 

76,991

 

 

 

71,558

 

 

Metallized

 

52,174

 

 

 

 

57,088

 

 

 

61,059

 

 

Composite laminates

 

38,213

 

 

 

 

38,696

 

 

 

35,107

 

 

Total

$

554,869

 

 

 

$

544,260

 

 

$

516,954

 

 

A significant portion of this business unit’s revenue is transacted in currencies other than the U.S. dollar and therefore the comparison from period to period reflects the impact of changes in currency exchange rates. Changes in exchange rates favorably affected the comparison of 2018 to 2017 by $18.9 million and by $2.0 million in the comparison of 2017 to 2016.

Composite Fibers business unit is comprised of five paper making facilities (Germany, France and England), two metallizing operations (Wales and Germany) and a

pulp mill (the Philippines). The combined attributes of the facilities are summarized as follows (in metric tons):

 

Production

Capacity

 

Principal Raw

Material

(“PRM”)

 

Estimated Annual

Quantity of PRM

 

 

142,000 lightweight

   and other paper

 

Abaca pulp

 

 

15,800

 

 

 

 

Wood pulp

 

 

99,000

 

 

 

 

Synthetic fiber

 

 

24,400

 

 

21,600 metallized

 

Base stock

 

 

24,000

 

 

15,000 abaca pulp

 

Abaca fiber

 

 

23,400

 

 

 

Composite Fibers’ lightweight products are produced using highly specialized inclined wire paper machine technology.

The primary raw materials used in the production of our lightweight papers are softwood pulps, abaca pulp, and other specialty fibers. Sufficient quantities of abaca pulp and its source, abaca fiber, are important to support growth in this business unit. Abaca pulp, a specialized pulp with limited sources of availability, is produced by our Philippine mill, providing a unique advantage to our Composite Fibers business unit. In the event the supply of abaca fiber becomes constrained or when production demands exceed the capacity of the Philippines mill, alternative sources and/or substitute fibers are used to meet customer demands.

In addition to critical raw materials, Composite Fibers’ production cost is influenced by the price of electricity and natural gas. The business unit generates all of its steam needed for production by burning natural gas. However, in 2018 it purchased approximately 75% of its electricity needs the cost of which is influenced by the natural gas markets.

In Composite Fibers’ markets, competition is product line specific as the necessity for technical expertise and specialized manufacturing equipment limits the number of companies offering multiple product lines. The following chart summarizes key competitors by market segment:

 

Market segment

Competitor

 

Single serve coffee & tea

Ahlstrom, Purico, Miquel y

   Costas and Zhejiang Kan

 

Wallcovering

Technocell, Neu Kaliss, Goznak,

    Kämmerer and Ahlstrom

 

Technical specialties

Nippon Kodoshi Corp ("NKK"),

   Kan Kyo Technology, Burrows

   and Suominen Oyj

 

Composite laminates

Schweitzer-Maudit, Purico,

   Miquel y Costas and Oi Feng

 

Metallized

AR Metallizing, Torras Papel Novelis, Vaassen, Galileo Nanotech, and Wenzhou Protec Vacuum Metallizing Co.

 

 

2


Our strategy in Composite Fibers is focused on:

 

optimizing our product portfolio and capitalizing on growing global markets in beverage filtration, and building, electrical and consumer products;

 

making targeted investments to create incremental capacity to serve growth markets;

 

leveraging innovation resources to drive new product and new business development;

 

maximize continuous improvement methodologies to increase productivity, reduce costs and expand capacity; and

 

ensuring readily available access to specialized raw material requirements or suitable alternatives to support projected growth.

 

ADVANCED AIRLAID MATERIALS   Our Advanced Airlaid Materials business unit (“Advanced Airlaid” or “AMBU”) is a leading global supplier of highly absorbent and very thin profile cellulose-based airlaid nonwoven materials primarily used to manufacture consumer products for growing global end-user markets. The markets served by Advanced Airlaid include:

 

feminine hygiene;

 

specialty wipes;

 

table top;

 

adult incontinence;

 

home care; and

 

other consumer products.

AMBU’s customers are industry leading consumer product companies as well as private label converters. We believe this business unit holds leading market share positions in the majority of the markets it serves. Advanced Airlaid has developed long-term customer relationships through superior quality, customer service, and a reputation for quickly bringing product and process innovations to market.

Advanced Airlaid Materials’ revenue composition by market consisted of the following for the years indicated:

 

In thousands

2018

 

 

 

2017

 

 

2016

 

 

Feminine hygiene

$

195,686

 

 

 

$

179,671

 

 

$

173,902

 

 

Specialty wipes

 

45,375

 

 

 

 

29,519

 

 

 

25,206

 

 

Table top

 

21,600

 

 

 

 

6,707

 

 

 

6,718

 

 

Adult incontinence

 

19,734

 

 

 

 

14,425

 

 

 

12,281

 

 

Home care

 

16,010

 

 

 

 

13,029

 

 

 

12,630

 

 

Other

 

13,012

 

 

 

 

12,751

 

 

 

13,525

 

 

Total

$

311,417

 

 

 

$

256,102

 

 

$

244,262

 

 

 

A significant portion of this business unit’s revenue is transacted in currencies other than the U.S. dollar and therefore the comparison from period to period reflects

the impact of changes in currency exchange rates. Changes in exchange rates favorably affected the comparison of 2018 to 2017 by $6.5 million and by $2.8 million.

The feminine hygiene category accounted for 63% and 70% of Advanced Airlaid Material’s revenue in 2018 and 2017, respectively, reflecting the Steinfurt acquisition, and growth in sales of wipes and table top products from additional capacity at the Fort Smith facility. Most feminine hygiene sales are to a small group of large, leading global consumer products companies. These markets are considered to be more growth oriented due to population growth in certain geographic regions and changing consumer preferences. In developing regions, demand is also influenced by increases in disposable income and cultural preferences.

AMBU operates state-of-the-art facilities in Falkenhagen and Steinfurt, Germany, Gatineau, Canada and Fort Smith, Arkansas. During 2018, this business unit’s capacity increased by a combined 52,000 metric tons from the Steinfurt acquisition and from the new Fort Smith facility.

On October 1, 2018, we completed the Steinfurt acquisition for $181 million. The Steinfurt facility produces high-quality airlaid products for the table-top, wipes, hygiene, food pad, and other nonwoven materials markets, competing in the marketplace with nonwoven technologies and substrates, as well as other materials focused primarily on consumer based end-use applications.  The state-of-the art facility has 32,000-metric-ton-capacity and in 2017, net sales totaled $99 million.

The business unit’s four facilities operate with the following combined attributes (in metric tons):

 

Airlaid Production

Capacity

 

 

Principal Raw Material (“PRM”)

 

Estimated Annual

Quantity of PRM

 

 

 

150,000

 

 

Fluff pulp

 

 

113,200

 

 

 

Key raw material inputs other than fluff pulp include synthetic fibers, super absorbent polymers and latex. The cost to produce is influenced by the cost of critical raw materials and by energy prices. Advanced Airlaid purchases substantially all the electricity and natural gas used in its operations. Approximately 72% of this business unit’s revenue is earned under contracts with pass-through provisions directly related to the cost of key raw materials.

Advanced Airlaid continues to be a technology and product innovation leader in technically demanding segments of the airlaid market. This business unit’s airlaid material production employs multi-bonded and thermal-bonded airlaid technologies as opposed to other methods such as hydrogen-bonding. We believe that its facilities are among the most modern and flexible airlaid facilities in the

 

GLATFELTER 2018 FORM 10-K

3

 


world, allowing it to produce at industry leading operating rates. Its proprietary single-lane festooning technology provides converting and product packaging which supports efficiency optimization by the customers converting processes. This business unit’s in-house technical expertise combined with significant capital investment requirements and rigorous customer expectations creates large barriers to entry for new competitors.

The following summarizes this business unit’s key competitors:

 

Market segment

Competitor

 

Hygiene and other absorbent

   products

Fitesa, McAirlaid's GmbH,

   Domtar, Georgia-Pacific

 

Table top

Georgia-Pacific, SharpCell,

   Duni AB, Ascutec

 

Wipes

Jacob Holmes, Suominen Oyj,

   Georgia-Pacific, Kimberly Clark

 

 

The global markets served by this business unit are characterized by attractive growth opportunities. To take advantage of this, our strategy is focused on:

 

maintaining and expanding relationships with customers that are market-leading consumer product companies as well as companies distributing through private label arrangements;

 

capitalizing on our product and process innovation capabilities;

 

expanding geographic reach of markets served;

 

optimizing the use of existing production capacity; and

 

employing continuous improvement methodologies and initiatives to reduce costs, improve efficiencies and create additional capacity.

Additional financial information for each of our business units, including geographic revenue and amounts of long-lived asset, is included in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 8 – Financial Statements and Supplementary Data, Note 22.

Concentration of Customers   Approximately 16% of our consolidated net revenue in each of the past three years was from sales to Procter & Gamble Company, a customer of the Advanced Airlaid Materials business unit.

Capital Expenditures   Our business requires expenditures for equipment enhancements to support growth strategies, research and development initiatives, and for normal upgrades or replacements. During the past three years, we incurred significant expenditures for Advanced Airlaid Materials’ capacity expansion project. Capital expenditures totaled $42.1 million, $80.8 million and $61.2 million in 2018, 2017 and 2016, respectively. Capital expenditures in 2019 are estimated to total between approximately $23 million and $28 million.

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

We are a party in the Fox River environmental site, a complex and significant matter. For a more complete discussion of this matter and our exposure to potential additional costs, see Item 8 – Financial Statements and Supplementary Data – Note 21.

Employees   As of December 31, 2018, we employed approximately 2,600 people worldwide, of whom approximately 60% are represented by labor works councils. We consider the overall relationship with our employees to be satisfactory.

Other Available Information  The Corporate Governance page of our website includes the Company’s Governance Principles, Code of Business Conduct, and biographies of our Board of Directors and Executive Officers. In addition, the website includes charters of the Audit, Compensation, and Nominating and Corporate Governance Committees of the Board of Directors. The Corporate Governance page also includes the Code of Business Ethics for the CEO and Senior Financial Officers of Glatfelter, our “whistle-blower” policy and other related material. We satisfy the disclosure requirement for any future amendments to, or waivers from, our Code of Business Conduct or Code of Business Ethics for the CEO and Senior Financial Officers by posting such information on our website. We will provide a copy of the Code of Business Conduct or Code of Business Ethics for the CEO and Senior Financial Officers, without charge, to any person who requests one, by contacting Investor Relations at (717) 225-2719, ir@glatfelter.com or by mail to 96 South George Street, Suite 520, York, PA, 17401.

 

 

4


ITEM 1A

RISK FACTORS

Our business and financial performance may be adversely affected by a weak global economic environment or downturns in the target markets that we serve.

Adverse global economic conditions could impact our target markets resulting in decreased demand for our products. Our results could be adversely affected if economic conditions weaken. In the event of significant currency weakening in the countries into which our products are sold, demand for or pricing of our products could be adversely impacted. Also, there may be periods during which demand for our products is insufficient to enable us to operate our production facilities in an economical manner. As a result, we may be forced to take machine downtime to curtail production to match demand. The economic environment may also cause customer insolvencies which may result in their inability to satisfy their financial obligations to us. These conditions are beyond our control and may have a significant impact on our sales and results of operations.

Approximately $88 million of our net sales in 2018 was earned from customers located in Ukraine, Russia and members of the Commonwealth of Independent States (also known as “CIS”). Uncertain geo-political conditions, this region’s economic environment and volatile currencies may cause demand for our products to be volatile and cause abrupt changes in our customers buying patterns.

Approximately 58% of our net sales in 2018 were shipped to customers in Europe, the demand for which is dependent on economic conditions in this area, or to the extent such customers do business outside of Europe, in other regions of the world. Uncertain economic conditions in this region may cause weakness in demand for our products as well as volatility in our customers buying patterns.

Foreign currency exchange rate fluctuations could adversely affect our results of operations.

A significant proportion of our revenue and earnings is generated from operations outside of the United States. In addition, we own and operate manufacturing facilities in Canada, Germany, France, the United Kingdom and the Philippines. A significant portion of our business is transacted in currencies other than the U.S. dollar including the euro, British pound, Canadian dollar and Philippine peso, among others. Our euro denominated revenue exceeds euro expenses by an estimated €160 million. With respect to the British pound, Canadian dollar and Philippine peso, we have greater outflows than inflows of these currencies, although to a lesser degree than the euro. As a result, we are exposed to changes in currency exchange rates and such changes could be significant.

In the event that one or more European countries were to replace the euro with another currency, business may be adversely affected until stable exchange rates are established.

Our ability to maintain our products' price competitiveness is reliant, in part, on the relative strength of the currency in which the product is denominated compared to the currency of the market into which it is sold and the functional currency of our competitors. Changes in the rate of exchange of foreign currencies in relation to the U.S. dollar, and other currencies, may adversely impact our results of operations and our ability to offer products in certain markets at acceptable prices. For example, approximately $88 million of our revenue in 2018 was earned from shipments to customers located in Ukraine, Russia and members of the CIS. Although these sales are denominated in euros, a significant weakening of the customers’ local currencies may adversely affect our revenue, our customers’ credit risk and our results of operation.

The cost of raw materials and energy used to manufacture our products could increase or the availability of certain raw materials could become constrained.

We require access to sufficient, and reasonably priced, quantities of pulps, pulp substitutes, abaca fiber, synthetic fibers, and certain other raw materials, as well as access to reliable and abundant supplies of water to support many of our production facilities. We require significant quantities of wood pulps and, therefore, the volatility of wood pulp prices can have a significant impact on our results of operations.

Our Philippine mill purchases abaca fiber to produce abaca pulp, a key material used to manufacture paper for single-serve coffee, tea and technical specialty products at Composite Fibers’ facilities. At certain times, the supply of abaca fiber has been constrained or the quality diminished due to factors such as weather-related damage to the source crop as well as decisions by land owners to produce alternative crops in lieu of those used to produce abaca fiber. These factors have contributed to volatility in fiber prices or limited available supply.

Advanced Airlaid requires access to sufficient quantities of fluff pulp, the supply of which is subject to availability of certain softwoods.

The cost of many of our production materials, including petroleum-based chemicals and freight charges, are influenced by the cost of oil. Natural gas is the principal source of fuel for each of our facilities worldwide and has historically been more volatile than other fuels. More recently, Europe has experienced a sharp rise in the price of electricity.

 

GLATFELTER 2018 FORM 10-K

5

 


Government rules, regulations and policies have an impact on the cost of certain energy sources, particularly for our European operations. In Europe, we currently benefit from a number of government-sponsored programs related to, among others, green energy or renewable energy initiatives designed to mitigate the cost of electricity to larger industrial consumers of power. Any reduction in the extent of government sponsored incentives may adversely affect the cost ultimately borne by our operations. Furthermore, the European Commission is investigating certain energy programs in Germany from which we benefit as to whether the programs comply with European Union rules on state aid. The outcome of these investigations could require us to return certain benefits previously earned or reduce such benefits in the future and could impact our results of operations.

Although we have contractual arrangements with certain Advanced Airlaid customers pursuant to which our product’s selling price is adjusted for changes in the cost of certain raw materials, we may not be able to fully pass increased raw materials or energy costs on to all customers if the market will not bear the higher price or if existing agreements limit price increases. If price adjustments significantly trail increases in raw materials or energy prices, our operating results could be adversely affected.

Our industry is highly competitive and increased competition could reduce our sales and profitability.

The global markets in which we compete, although growing, are served by a variety of competitors. As a result, our ability to compete is sensitive to, and may be adversely impacted by, the following:

 

the entry of new competitors into the markets we serve;

 

the aggressiveness of our competitors’ pricing strategies, which could force us to decrease prices in order to maintain market share;

 

our failure to anticipate and respond to changing customer preferences; and

 

technological advances or changes that impact production or cost competitiveness of our products.

The impact of any significant changes may result in our inability to effectively compete in the markets in which we operate, and as a result our sales and operating results would be adversely affected.

We may not be able to develop new products acceptable to our existing or potential customers.

Our business strategy is market focused and includes investments in developing new products to meet the changing needs of our customers, serve new customers and to maintain our market share. Our success will depend, in part, on our ability to develop and introduce new and enhanced products that keep pace with introductions by our competitors and changing customer preferences. If we fail to anticipate or respond adequately to these factors, we may lose opportunities for business with both current and potential customers. The success of our new product offerings will depend on several factors, including our ability to:

 

anticipate and properly identify our customers' needs and industry trends;

 

develop and commercialize new products and applications in a timely manner;

 

price our products competitively;

 

differentiate our products from our competitors' products; and

 

invest efficiently in research and development activities.

Our inability to develop new products or new business opportunities could adversely impact our business and ultimately harm our profitability.

6


We are subject to substantial costs and potential liability for environmental matters.

We are subject to various environmental laws and regulations that govern our operations, including discharges into the environment, and the handling and disposal of hazardous substances and wastes. We are also subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances. To comply with environmental laws and regulations, we have incurred, and will continue to incur, substantial capital and operating expenditures.

We may incur obligations to remove or mitigate any adverse effects on the environment, such as air and water quality, resulting from mills we operate or have operated. Potential obligations include compensation for the restoration of natural resources, personal injury and property damages.

We have exposure to potential liability for remediation and other costs related to the presence of polychlorinated biphenyls (PCBs) in the lower Fox River on which our former Neenah, Wisconsin mill was located. As more fully discussed in Item 8 – Financial Statements and Supplementary Data – Note 21, this is a complex matter and has involved several years of litigation. In January 2019, we entered into a consent decree with government agencies which we believe resolves our liability for the site.

Advanced Airlaid generates a substantial portion of its revenue from one customer serving the hygiene products market, the loss of which could have a material adverse effect on our results of operations.

The majority of Advanced Airlaid Materials’ sales of hygiene products are to one customer. In addition, sales to the feminine hygiene market accounted for 63% of Advanced Airlaid Materials’ net sales in 2018 and sales are concentrated within a small group of large customers. The loss of the large customer or a decline in sales of hygiene products could have a material adverse effect on this business’s operating results. Our ability to effectively compete could be affected by technological production alternatives which could provide substitute products into this market segment. Customers in the airlaid nonwoven fabric material market, including the hygiene market, may also switch to less expensive products, change preferences or otherwise reduce demand for Advanced Airlaid Materials’ products, thus reducing the size of the markets in which it currently sells its products. Any of the foregoing could have a material adverse effect on our financial performance and business prospects.

Our operations may be impaired and we may be exposed to potential losses and liability as a result of natural disasters, acts of terrorism or sabotage or similar events.

If we have a catastrophic loss or unforeseen operational problem at any of our facilities, we could suffer significant lost production which could impair our ability to satisfy customer demands.

Natural disasters, such as earthquakes, hurricanes, typhoons, flooding or fire, and acts of terrorism or sabotage affecting our operating activities and major facilities could materially and adversely affect our operations, operating results and financial condition.

In addition, many of our operations require a reliable and abundant supply of water. Such mills rely on a local water body or water source for their water needs and, therefore, are particularly sensitive to drought conditions or other natural or manmade interruptions to water supplies. At various times and for differing periods, we have had to modify operations at certain of our mills due to water shortages, water clarity, or low flow conditions in its principal water supplies. Any interruption or curtailment of operations at any of our production facilities due to drought or low flow conditions at the principal water source or another cause could materially and adversely affect our operating results and financial condition.

Our pulp mill in Lanao del Norte on the Island of Mindanao in the Republic of the Philippines is located along the Pacific Rim, one of the world’s hazard belts. By virtue of its geographic location, this mill is subject to similar types of natural disasters discussed above, cyclones, typhoons, and volcanic activity. Moreover, the area of Lanao del Norte has been a target of suspected terrorist activities. Our pulp mill in Mindanao is located in a rural portion of the island and is susceptible to attacks and/or power interruptions. The Mindanao mill supplies the abaca pulp used by our Composite Fibers business unit to manufacture paper for single serve coffee and tea products and certain technical specialties products. Any interruption, loss or extended curtailment of operations at our Mindanao mill could affect our ability to meet customer demands for our products and materially affect our operating results and financial condition.

 

GLATFELTER 2018 FORM 10-K

7

 


We have operations in a potentially politically and economically unstable location.

Our pulp mill in the Philippines is located in a region that is unstable and subject to political unrest. As discussed above, our Philippine pulp mill produces abaca pulp, a significant raw material used by our Composite Fibers business unit and is currently our main provider of abaca pulp. There are limited suitable alternative sources of readily available abaca pulp in the world. In the event of a disruption in supply from our Philippine mill, there is no guarantee that we could obtain adequate amounts of abaca pulp, if at all, from alternative sources at a reasonable price. Further, there is no assurance the performance of such alternative materials will satisfy customer performance requirements. As a consequence, any civil disturbance, unrest, political instability or other event that causes a disruption in supply could limit the availability of abaca pulp and would increase our cost of obtaining abaca pulp. Such occurrences could adversely impact our sales volumes, revenues and operating results.

Our international operations pose certain risks that may adversely impact sales and earnings.

We have significant operations and assets located in Canada, Germany, France, the United Kingdom, and the Philippines. Our international sales and operations are subject to a number of unique risks, in addition to the risks in our domestic sales and operations, including, but not limited to, economic and trade disruptions resulting from geopolitical developments such as “Brexit,” differing protections of intellectual property, trade barriers, labor unrest, exchange controls, regional economic uncertainty, differing (and possibly more stringent) labor regulation, risk of governmental expropriation, domestic and foreign customs and tariffs, differing regulatory environments, difficulty in managing widespread operations and political instability. These factors may adversely affect our future profits. Also, in some foreign jurisdictions, we may be subject to laws limiting the right and ability of entities organized or operating therein to pay dividends or remit earnings to affiliated companies unless specified conditions are met. Any such limitations would restrict our flexibility in using funds generated in those jurisdictions.

We are subject to cyber-security risks related to unauthorized or malicious access to sensitive customer, vendor, company or employee information as well as to the technology that supports our operations and other business processes.

Our business operations rely upon secure systems for mill operations, and data capture, processing, storage and reporting. Although we maintain appropriate data security and controls, our information technology systems, and those of our third-party providers, could become subject to cyberattacks. Systems such as ours are inherently exposed to cyber-security risks and potential attacks. The result of such attacks could result in a breach of data security and controls. Such a breach of our network, systems, applications or data could result in operational disruptions or damage or information misappropriation including, but not limited to, interruption to systems availability, denial of access to and misuse of applications required by our customers to conduct business with us, denial of access to the applications we use to plan our operations, procure materials, manufacture and ship products and account for orders, theft of intellectual knowhow and trade secrets, and inappropriate disclosure of confidential company, employee, customer or vendor information, could stem from such incidents.

Any of these operational disruptions and/or misappropriation of information could adversely affect our results of operations, create negative publicity and could have a material effect on our business.

We operate in and are subject to taxation from numerous U.S. and foreign jurisdictions.

The multinational nature of our business subjects us to taxation in the U.S and numerous foreign jurisdictions. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. Our effective tax rates could be affected by changes in tax laws or their interpretation or changes in the mix of earnings in jurisdictions with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities. For example, the European Commission has opened formal investigations to examine whether decisions by the tax authorities in certain European countries comply with European Union rules on state aid. The outcome of the European Commission’s investigations could require changes to existing tax rulings that, in turn, could have an impact on our income taxes and results of operations.

8


In the event any of the above risk factors impact our business in a material way or in combination during the same period, we may be unable to generate sufficient cash flow to simultaneously fund our operations, finance capital expenditures, satisfy obligations and make dividend payments on our common stock.

In addition to debt service obligations, our business requires expenditures to support growth strategies, research and development initiatives, and for normal upgrades or replacements. We expect to meet all of our near and long-term cash needs from a combination of operating cash flow, cash and cash equivalents, availability under our credit facility or other long-term debt. If we are unable to generate sufficient cash flow from these sources, we could be unable to fund our operations, finance capital expenditures, satisfy our near and long-term cash needs or make dividend payments.

 

ITEM 1B

UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2

PROPERTIES

We own substantially all of the land and buildings comprising our manufacturing facilities located in Arkansas; Canada; the United Kingdom; Germany; France; and the Philippines; as well as substantially all of the equipment used in our manufacturing and related operations. Certain of our operations are under lease arrangements including our metallized paper production facility located in Caerphilly, Wales, office and warehouse space in the United States, Moscow, Russia, Souzou, China and our corporate offices in York, Pennsylvania. All our properties, other than those that are leased, are free from any material liens or encumbrances. We consider all our buildings to be in good structural condition and well maintained and our properties to be suitable and adequate for present operations.

 

ITEM 3

LEGAL PROCEEDINGS

We are involved in various lawsuits that we consider to be ordinary and incidental to our business. The ultimate outcome of these lawsuits cannot be predicted with certainty; however, we do not expect such lawsuits, individually or in the aggregate, will have a material adverse effect on our consolidated financial position, liquidity or results of operations.

We are involved in litigation of a significant environmental matter relating to contamination in the Fox River and Bay of Green Bay in Wisconsin. For a discussion this matter, see Item 8 – Financial Statements and Supplementary Data – Note 21.

 

GLATFELTER 2018 FORM 10-K

9

 


EXECUTIVE OFFICERS

The following table sets forth certain information with respect to our executive officers and other senior management members of February 25, 2019

 

Name

Age

Office with the Company

Dante C. Parrini

54

Chairman and Chief Executive Officer

John P. Jacunski

53

Executive Vice President,

    Chief Financial Officer

Christopher W. Astley

46

Senior Vice President & Business Unit

    President, Advanced Airlaid

    Materials

Martin Rapp

59

Senior Vice President & Business Unit

    President, Composite Fibers

Eileen L. Beck

56

Vice President, Human Resources

David C. Elder

50

Vice President, Finance

Samuel L. Hillard

37

Vice President, Corporate Development & Strategy

Joseph J. Zakutney

56

Vice President, Chief Information Officer

 

Dante C. Parrini became Chief Executive Officer effective January 1, 2011 and Chairman of the Board in May 2011. Prior to this, he was Executive Vice President and Chief Operating Officer, a position he held since February 2005. Mr. Parrini joined us in 1997 and previously served as Senior Vice President and General Manager, a position he held beginning in January 2003 and prior to that as Vice President responsible for Sales and Marketing.

John P. Jacunski was promoted to Executive Vice President and Chief Financial Officer in February 2014. From April 2016 through January 2017, Mr. Jacunski also served as President of the Specialty Papers business unit. He joined us in October 2003 and served as Vice President and Corporate Controller. In July 2006 he was promoted to Senior Vice President and Chief Financial Officer. Mr. Jacunski was previously Vice President and Chief Financial Officer at WCI Steel, Inc. from June 1999 to October 2003. Prior to joining WCI, Mr. Jacunski was with KPMG, an international accounting and consulting firm, where he served in various capacities.

Christopher W. Astley was named Senior Vice President & Business Unit President, Advanced Airlaid Materials in January 2015. He joined us in August 2010 as Vice President, Corporate Strategy and was promoted to Senior Vice President in February 2014. Prior to joining us, he was an entrepreneur leading a privately held business from 2004 until 2010. Prior to that Mr. Astley held positions with Accenture, a global management consulting firm, and The Coca-Cola Company.

Martin Rapp serves as Senior Vice President & Business Unit President, Composite Fibers. Mr. Rapp joined us in August 2006 and has led the Composite Fibers business unit since that time. Prior to this, he was Vice President and General Manager of Avery Dennison’s Roll Materials Business in Central and Eastern Europe since August 2002.

Eileen L. Beck was promoted to Vice President Human Resources in April 2017. She joined us in 2012 as Director, Global Compensation and Benefits and was promoted to Vice President in September 2015. Ms. Beck previously held various Human Resources roles at Armstrong World Industries.

David C. Elder was named Vice President, Finance in December 2011 and serves as our chief accounting officer. Prior to his promotion, he was our Vice President, Corporate Controller, a position held since joining Glatfelter in January 2006. Mr. Elder was previously Corporate Controller for YORK International Corporation.

Samuel L. Hillard joined us in March 2016 as Vice President, Corporate Development & Strategy. Prior to joining us, Mr. Hillard was Vice President – Business Development for Dover Corporation from July 2014 until 2016 where he was responsible for strategy and mergers & acquisitions within the Fluids Business Segment. From February 2011 to 2014, he served as Vice President – Business Development for SPX Corporation where he was responsible for all M&A related strategy activity within the Flow Technology Segment. Additionally, he previously worked for Blackstone in their M&A group.

Joseph J. Zakutney joined us in September 2015 as Vice President and Chief Information Officer. Prior to joining Glatfelter, he spent 17 years with The Hershey Company where he held a broad spectrum of IT roles including Vice President and CIO.

 

 

10


ITEM 4

MINE SAFETY DISCLOSURES

Not Applicable

 

 

 

PART II

ITEM 5

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the New York Stock Exchange under the symbol “GLT”

 

 

Our Board of Directors declared quarterly cash dividends of $0.13 per common share in each of the four quarters of both 2018 and 2017.

 

As of February 20, 2019, we had 951 shareholders of record.

 

STOCK PERFORMANCE GRAPH

The following stock performance graph compares the cumulative 5-year total return of our common stock with the cumulative total returns of both a broad market index and a peer group. We compare our stock performance to the S&P Small Cap 600 index and to the S&P Small Cap 600 Paper Products index comprised of us, Clearwater Paper Corp., Neenah Paper Inc., and Schweitzer-Mauduit International.

 

 

 

 

We previously charted our stock compared to the Russell 2000; however, in 2018 we changed the comparison to the S&P Small Cap 600 index to be consistent with certain executive compensation performance metrics. The following graph assumes that the value of the investment in our common stock, in each index, and in the peer group (including reinvestment of dividends) was $100 on December 31, 2013 and charts it through December 31, 2018.

 

 

 

 

GLATFELTER 2018 FORM 10-K

11

 


ITEM 6

SELECTED FINANCIAL DATA

 

As of or for the year ended December 31

Dollars in thousands, except per share

2018

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

Net sales

$

866,286

 

 

 

$

800,362

 

 

$

761,216

 

 

$

786,058

 

 

$

899,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

(448

)

 

 

 

(5,612

)

 

 

(14,177

)

 

 

30,406

 

 

 

12,924

 

 

Income (loss) from discontinued operations

 

(177,156

)

 

 

 

13,526

 

 

 

35,731

 

 

 

34,170

 

 

 

56,322

 

 

Net income (loss)

 

(177,604

)

 

 

 

7,914

 

 

 

21,554

 

 

 

64,576

 

 

 

69,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

$

(0.01

)

 

 

$

(0.13

)

 

$

(0.33

)

 

$

0.70

 

 

$

0.30

 

 

   Diluted

 

(0.01

)

 

 

 

(0.13

)

 

 

(0.33

)

 

 

0.69

 

 

 

0.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

1,339,754

 

 

 

$

1,730,795

 

 

$

1,521,259

 

 

$

1,500,416

 

 

$

1,561,504

 

 

Total debt

 

411,747

 

 

 

 

481,396

 

 

 

372,608

 

 

 

360,662

 

 

 

404,612

 

 

Shareholders’ equity

 

538,898

 

 

 

 

708,928

 

 

 

653,826

 

 

 

663,247

 

 

 

649,109

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common

   share

 

0.52

 

 

 

 

0.52

 

 

 

0.50

 

 

 

0.48

 

 

 

0.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, depletion  and

   amortization

 

47,525

 

 

 

 

42,078

 

 

 

39,287

 

 

 

37,284

 

 

 

40,655

 

 

Capital expenditures

 

42,129

 

 

 

 

80,783

 

 

 

61,162

 

 

 

36,387

 

 

 

33,946

 

 

Net tons sold

 

248,551

 

 

 

 

243,021

 

 

 

227,527

 

 

 

226,546

 

 

 

233,152

 

 

Number of employees

 

2,600

 

 

 

 

2,360

 

 

 

2,355

 

 

 

2,345

 

 

 

2,410

 

 

 

 

 

 

12


ITEM 7

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements    This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future consolidated financial position or results of operations, made in this Report on Form 10-K are forward looking. We use words such as “anticipates”, “believes”, “expects”, “future”, “intends” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from such expectations. The following discussion includes forward-looking statements regarding expectations of, among others, environmental costs, capital expenditures and liquidity, all of which are inherently difficult to predict. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Accordingly, we identify the following important factors, among others, which could cause our results to differ from any results that might be projected, forecasted or estimated in any such forward-looking statements:

i.

variations in demand for our products including variations in product pricing, or product substitution or the impact of unplanned market-related downtime;

ii.

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

iii.

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

iv.

geopolitical events, including Russia, Ukraine and Philippines;

v.

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

vi.

changes in the price or availability of raw materials we use, particularly pulp, pulp substitutes, synthetic pulp, specialty fibers and abaca fiber;

vii.

changes in energy-related prices and the price of commodity raw materials with an energy component;

viii.

the impact of unplanned production interruptions at our facilities or at any of our key suppliers;

ix.

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

x.

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

xi.

unfavorable outcomes from any unforeseen challenges to our pending consent decree with government agencies relating to the Fox River environmental matter;

xii.

the impact of war and terrorism;

xiii.

the impact of unfavorable outcomes of audits by various state, federal or international tax authorities or changes in pre-tax income and its impact on the valuation of deferred tax assets;

xiv.

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

xv.

our ability to finance, consummate and integrate future acquisitions.

 

Introduction  We manufacture a wide array of engineered materials and manage our company along two business units:

Composite Fibers with revenue from the sale of single-serve tea and coffee filtration papers, wallcovering base materials, composite laminate papers, technical specialties including substrates for electrical applications, and metallized products; and

Advanced Airlaid Materials with revenue from the sale of airlaid nonwoven fabric-like materials used in feminine hygiene, adult incontinence products, table top, specialty wipes, home care products and other airlaid applications.

Specialty Papers’ results of operations and financial condition are reported as discontinued operations. Following is a discussion and analysis primarily of the financial results of operations and financial condition of our continuing operations.

 

 

 

 

GLATFELTER 2018 FORM 10-K

13

 


RESULTS OF OPERATIONS

2018 versus 2017

Overview For the year ended December 31, 2018 we reported a net loss of $177.6 million, or $4.06 per share compared with net income of $7.9 million, or $0.18 per diluted share in 2017. As part of our strategic transformation to becoming a leading global supplier of engineered materials, on October 31, 2018, we completed the sale of the Specialty Papers business unit. Accordingly, Specialty Papers’ results are classified as discontinued operations for all periods presented including the recognition of an impairment charge of $144.1 million, in connection with the sale of the business unit. In addition, on October 1, 2018, we completed our acquisition of Georgia-Pacific’s European nonwovens business based in Steinfurt, Germany (“Steinfurt”), with annual revenues of approximately $99 million.

The results in accordance with generally accepted accounting principles in the United States (“GAAP”) reflect the impact of significant unusual and non-recurring items including, among others, the results of Specialty Papers, a discontinued operation, costs of strategic initiatives, capacity expansion, cost optimization actions and, timberland sales. Our results in 2017 reflect the impact of the Tax Cuts and Jobs Act (the “TCJA”) signed into law on December 22, 2017.

Excluding these items from reported results, adjusted earnings, a non-GAAP measure, was $9.2 million, or $0.21 per diluted share for 2018, compared with $26.4 million, or $0.59 per diluted share, a year ago.

We used $6.0 million of cash from operations in 2018 compared with $53.2 million generated a year ago. During 2018 and 2017, capital expenditures totaled $42.1 million and $80.8 million, respectively, reflecting the completion in early 2018 of the airlaid capacity expansion project.

The following table sets forth summarized consolidated results of operations:

 

 

Year ended

December 31

 

 

In thousands, except per share

2018

 

 

 

2017

 

 

Net sales

$

866,286

 

 

 

$

800,362

 

 

Gross profit

 

130,407

 

 

 

 

143,589

 

 

Operating income

 

21,942

 

 

 

 

33,252

 

 

Continuing operations

 

 

 

 

 

 

 

 

 

Loss

 

(448

)

 

 

 

(5,612

)

 

Loss per share

 

(0.01

)

 

 

 

(0.13

)

 

Discontinued operations

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

(177,156

)

 

 

 

13,526

 

 

Earnings (loss) per share

 

(4.05

)

 

 

 

0.31

 

 

Net income (loss)

 

(177,604

)

 

 

 

7,914

 

 

Earnings (loss) per share

$

(4.06

)

 

 

$

0.18

 

 

 

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

Discontinued Operations. In connection with the sale of the Specialty Papers business unit, its results of operations, including the loss recorded in connection with the sale, are reported as discontinued operations for all periods presented. This adjustment reflects the net results of this discontinued operation.

Strategic initiatives. These adjustments primarily reflect one-time professional and legal fees incurred directly related to evaluating and executing certain strategic initiatives, acquisition transaction costs and a currency translation gain on acquisition financing.

Airlaid capacity expansion costs. This adjustment reflects non-capitalized, one-time costs incurred related to the start-up of a new airlaid production facility in Fort Smith, Arkansas and the implementation of a new business system.

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

Timberland sales and related costs. This adjustment excludes gains from the sales of timberlands as these items are not considered to be part of our core business, ongoing results of operations or cash flows.

U.S. Tax Reform. This adjustment reflects amounts recorded estimating the impact of the TCJA which was signed into law on December 22, 2017. The TCJA includes, among many provisions, a tax on the mandatory repatriation of earnings of the Company’s non-U.S. subsidiaries and a change in the corporate tax rate from 35% to 21%.

 

 

 

 

 

 

 

 

14


These adjustments are each unique and not considered to be on-going in nature. The transactions are irregular in timing and amount and may significantly impact our operating performance. As such, these items may not be indicative of our past or future performance and therefore are excluded for comparability purposes.

Adjusted earnings and adjusted earnings per diluted share are considered measures not calculated in accordance with GAAP, and therefore are non-GAAP measures. The non-GAAP financial information should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with GAAP. The following table sets forth the reconciliation of net income to adjusted earnings for the years ended December 31, 2018 and 2017 :

 

 

 

 

Year ended December 31

 

 

 

2018

 

 

2017

 

In thousands, except per share

 

Amount

 

 

EPS

 

 

Amount

 

 

EPS

 

Net income

 

$

(177,604

)

 

$

(4.06

)

 

 

7,914

 

 

$

0.18

 

Exclude: Net loss (income) from discontinued operations

 

 

177,156

 

 

 

4.05

 

 

 

(13,526

)

 

 

(0.30

)

Loss from continuing operations

 

 

(448

)

 

 

(0.01

)

 

 

(5,612

)

 

 

(0.13

)

Adjustments (pre-tax)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Strategic initiatives

 

 

5,898

 

 

 

 

 

 

 

 

 

 

 

 

Airlaid capacity expansion costs

 

 

7,072

 

 

 

 

 

 

 

10,854

 

 

 

 

 

Cost optimization actions

 

 

440

 

 

 

 

 

 

 

2,592

 

 

 

 

 

Timberland sales and related costs

 

 

(3,225

)

 

 

 

 

 

 

(188

)

 

 

 

 

Total adjustments (pre-tax)

 

 

10,185

 

 

 

 

 

 

 

13,258

 

 

 

 

 

Income taxes (1)

 

 

6

 

 

 

 

 

 

 

(2,152

)

 

 

 

 

U.S. Tax Reform

 

 

(545

)

 

 

 

 

 

 

20,922

 

 

 

 

 

Total after-tax adjustments

 

 

9,646

 

 

 

0.22

 

 

 

32,028

 

 

 

0.72

 

Adjusted earnings

 

$

9,198

 

 

$

0.21

 

 

$

26,416

 

 

$

0.59

 

 

(1)

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

 

Business Unit Performance

 

Year ended December 31

 

 

 

Advanced Airlaid

 

 

Other and

 

 

 

 

Dollars in millions

Composite Fibers

 

 

Materials

 

 

Unallocated

 

 

Total

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales

$

554.9

 

 

$

544.3

 

 

$

311.4

 

 

$

256.1

 

 

$

 

 

$

 

 

$

866.3

 

 

$

800.4

 

Cost of products sold

 

462.3

 

 

 

437.6

 

 

 

269.3

 

 

 

216.7

 

 

 

4.3

 

 

 

2.5

 

 

 

735.9

 

 

 

656.8

 

Gross profit (loss)

 

92.6

 

 

 

106.7

 

 

 

42.1

 

 

 

39.4

 

 

 

(4.3

)

 

 

(2.5

)

 

 

130.4

 

 

 

143.6

 

SG&A

 

44.2

 

 

 

44.4

 

 

 

12.2

 

 

 

9.3

 

 

 

55.3

 

 

 

56.8

 

 

 

111.7

 

 

 

110.5

 

(Gains) losses on dispositions of plant,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

equipment and timberlands, net

 

 

 

 

 

 

 

 

 

 

 

 

 

(3.3

)

 

 

(0.2

)

 

 

(3.3

)

 

 

(0.2

)

Total operating income (loss)

 

48.4

 

 

 

62.3

 

 

 

29.9

 

 

 

30.1

 

 

 

(56.3

)

 

 

(59.1

)

 

 

21.9

 

 

 

33.3

 

Non-operating expense

 

 

 

 

 

 

 

 

 

 

 

 

 

(14.7

)

 

 

(13.8

)

 

 

(14.7

)

 

 

(13.8

)

Income (loss) before income taxes

$

48.4

 

 

$

62.3

 

 

$

29.9

 

 

$

30.1

 

 

$

(71.0

)

 

$

(72.9

)

 

$

7.3

 

 

$

19.5

 

Supplementary Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net tons sold (thousands)

 

143.8

 

 

 

150.4

 

 

 

104.8

 

 

 

92.6

 

 

 

 

 

 

 

 

 

248.6

 

 

 

243.0

 

Depreciation, depletion and

   amortization

$

28.3

 

 

$

28.3

 

 

$

14.9

 

 

$

9.6

 

 

$

4.3

 

 

$

4.2

 

 

$

47.5

 

 

$

42.1

 

Capital expenditures

 

15.7

 

 

 

15.9

 

 

 

21.6

 

 

 

50.6

 

 

 

4.8

 

 

 

14.3

 

 

 

42.1

 

 

 

80.8

 

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

 

Business Units Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and

businesses change. The costs incurred by support areas not directly aligned with the business unit are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the Business Unit Performance table.

Management evaluates results of operations of the business units before certain corporate level costs and the effects of certain gains or losses not considered to be related to the core business operations. Management believes that this is a more meaningful representation of the operating performance of its core businesses, the profitability of business units and the extent of cash flow generated from these core operations. Such amounts are

 

GLATFELTER 2018 FORM 10-K

15

 


presented under the caption “Other and Unallocated.” In the evaluation of business unit results, management does not use any measures of total assets. This presentation is aligned with the management and operating structure of our company. It is also on this basis that the Company’s performance is evaluated internally and by the Company’s Board of Directors.

Sales and Costs of Products Sold

 

 

Year ended

December 31

 

 

 

 

 

In thousands

2018

 

 

 

2017

 

 

Change

 

Net sales

$

866,286

 

 

 

$

800,362

 

 

$

65,924

 

Costs of products sold

 

735,879

 

 

 

 

656,773

 

 

 

79,106

 

Gross profit

$

130,407

 

 

 

$

143,589

 

 

$

(13,182

)

Gross profit as a percent

   of Net sales

 

15.1

%

 

 

 

17.9

%

 

 

 

 

 

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

 

 

Year ended

December 31

 

 

Percent of Total

2018

 

 

 

2017

 

 

Business Unit

 

 

 

 

 

 

 

 

 

Composite Fibers

 

64.1

%

 

 

 

68.0

%

 

Advanced Airlaid Material

 

35.9

 

 

 

 

32.0

 

 

Total

 

100.0

%

 

 

 

100.0

%

 

 

Net sales on a consolidated basis totaled $866.3 million and $800.4 million in 2018 and 2017, respectively. The $65.9 million increase was primarily driven by $25.4 million of favorable currency translation, $23.1 million from the Steinfurt acquisition and $11.7 million of higher selling prices. Shipping volumes increased 2.3%.

Composite Fibers’ net sales increased $10.6 million, or 1.9%, and totaled $554.9 million in 2018. The increase was primarily due to $18.9 million from favorable currency translation and $5.5 million of higher average selling prices. Shipping volumes in this business unit decreased 4.4%.

Composite Fibers’ operating income for the year ended December 31, 2018 decreased $13.9 million to $48.4 million compared to a year ago primarily due to significantly higher raw material and energy prices particularly wood pulp, which outpaced higher selling

prices. The primary drivers are summarized in the following chart (in millions):

Advanced Airlaid Materials’ net sales totaled $311.4 million in 2018. Net sales increased $55.3 million in the year-over-year comparison primarily due higher shipping volumes which increased 13.2% reflecting organic growth of 5.6% and the Steinfurt acquisition. Favorable currency translation accounted for $6.5 million and higher selling prices contributed $6.2 million.

Advanced Airlaid Materials’ operating income totaled $29.9 million, a decrease of $0.2 million, or 0.7% compared to a year ago. The primary drivers are summarized in the following chart (in millions):

  

16


Other and Unallocated The amount of net operating expenses not allocated to a business unit and reported as “Other and Unallocated” in our table of Business Unit Performance, totaled $56.3 million for 2018 compared with $59.1 million in 2017. The amounts presented in this category include costs of strategic initiatives, airlaid capacity expansion, and cost optimization actions, all of which are presented previously in the reconciliation of GAAP results to Adjusted earnings. These charges are not allocated to a business unit and are recorded in the accompanying consolidated statements of income (loss) under the caption “Selling, general and administrative expenses.”  Corporate shared services costs of $23.1 million and $26.7 million for 2018 and 2017, respectively, were previously included in Specialty Papers’ results and, in accordance with generally accepted accounting principles are required to be included in income from continuing operations.

Gain on Sales of Plant, Equipment and Timberlands, net    During each of the past three years, we completed the following sales of assets:

 

Dollars in thousands

 

Acres

 

 

Proceeds

 

 

Gain (loss)

 

 

2018