UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| ☒ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the quarterly period ended March 31, 2022
or
| ☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the transition period from to
4350 Congress Street, Suite 600
Charlotte, North Carolina 28209
(Address of principal executive offices)
(704) 885-2555
(Registrant's telephone number, including area code)
Commission file number | Exact name of registrant as specified in its charter | IRS Employer Identification No. | State or other jurisdiction of incorporation or organization | |||||||||||||||||||||||
| 1-03560 | Glatfelter Corporation | 23-0628360 | Pennsylvania | |||||||||||||||||||||||
(N/A)
Former name or former address, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock | GLT | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at the past 90 days. Yes ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☒ | Accelerated filer | ☐ | ||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||||||||
| Emerging growth company | ☐ | ||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | ||||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒.
Common Stock outstanding on May 4, 2022 totaled 44,720,442 shares.
GLATFELTER CORPORATION AND SUBSIDIARIES
REPORT ON FORM 10-Q
For the Quarterly Period Ended
March 31, 2022
Table of Contents
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Condensed Consolidated Statements of Income for the three months ended March 31, 2022 and 2021 (unaudited) | ||||||||||||||
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and 2021 (unaudited) | ||||||||||||||
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 (unaudited) | ||||||||||||||
Statements of Shareholders’ Equity for the three months ended March 31, 2022 and 2021 (unaudited) | ||||||||||||||
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| Item 1A | ||||||||||||||
PART I
Item 1 – Financial Statements
GLATFELTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
| Three months ended March 31, | ||||||||||||||
| In thousands, except per share | 2022 | 2021 | ||||||||||||
| Net sales | $ | 381,680 | $ | 225,674 | ||||||||||
| Costs of products sold | 350,015 | 186,378 | ||||||||||||
| Gross profit | 31,665 | 39,296 | ||||||||||||
| Selling, general and administrative expenses | 33,166 | 22,827 | ||||||||||||
| Goodwill and other asset impairment charges | 117,349 | — | ||||||||||||
| Gains on dispositions of plant, equipment and timberlands, net | (2,961) | (850) | ||||||||||||
| Operating income (loss) | (115,889) | 17,319 | ||||||||||||
| Non-operating income (expense) | ||||||||||||||
| Interest expense | (7,862) | (1,531) | ||||||||||||
| Interest income | 17 | 20 | ||||||||||||
| Other, net | (1,340) | (224) | ||||||||||||
| Total non-operating expense | (9,185) | (1,735) | ||||||||||||
| Income (loss) from continuing operations before income taxes | (125,074) | 15,584 | ||||||||||||
| Income tax provision (benefit) | (16,784) | 7,190 | ||||||||||||
| Income (loss) from continuing operations | (108,290) | 8,394 | ||||||||||||
| Discontinued operations: | ||||||||||||||
| Loss before income taxes | (37) | — | ||||||||||||
| Income tax provision | — | — | ||||||||||||
| Loss from discontinued operations | (37) | — | ||||||||||||
| Net income (loss) | $ | (108,327) | $ | 8,394 | ||||||||||
| Basic earnings per share | ||||||||||||||
| Income from continuing operations | $ | (2.42) | $ | 0.19 | ||||||||||
| Loss from discontinued operations | — | — | ||||||||||||
| Basic earnings per share | $ | (2.42) | $ | 0.19 | ||||||||||
| Diluted earnings per share | ||||||||||||||
| Income from continuing operations | $ | (2.42) | $ | 0.19 | ||||||||||
| Loss from discontinued operations | — | — | ||||||||||||
| Diluted earnings per share | $ | (2.42) | $ | 0.19 | ||||||||||
| Weighted average shares outstanding | ||||||||||||||
| Basic | 44,709 | 44,450 | ||||||||||||
| Diluted | 44,709 | 44,869 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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GLATFELTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
| Three months ended March 31, | ||||||||||||||
| In thousands | 2022 | 2021 | ||||||||||||
| Net income (loss) | $ | (108,327) | $ | 8,394 | ||||||||||
| Foreign currency translation adjustments | (10,915) | (13,193) | ||||||||||||
| Net change in: | ||||||||||||||
Deferred gains (losses) on derivatives, net of taxes of $(600) and $(1,301), respectively | (357) | 3,261 | ||||||||||||
Unrecognized retirement obligations, net of taxes of $(160) and $(73), respectively | 152 | 92 | ||||||||||||
| Other comprehensive loss | (11,120) | (9,840) | ||||||||||||
| Comprehensive loss | $ | (119,447) | $ | (1,446) | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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GLATFELTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| In thousands | March 31, 2022 | December 31, 2021 | |||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 80,452 | $ | 138,436 | |||||||
| Accounts receivable, net | 221,228 | 170,212 | |||||||||
| Inventories | 292,096 | 279,520 | |||||||||
| Prepaid expenses and other current assets | 55,069 | 48,398 | |||||||||
| Total current assets | 648,845 | 636,566 | |||||||||
| Plant, equipment and timberlands, net | 716,567 | 758,812 | |||||||||
| Goodwill | 177,063 | 236,165 | |||||||||
| Intangible assets, net | 116,722 | 156,304 | |||||||||
| Other assets | 89,841 | 92,760 | |||||||||
| Total assets | $ | 1,749,038 | $ | 1,880,607 | |||||||
| Liabilities and Shareholders' Equity | |||||||||||
| Current portion of long-term debt | $ | 25,516 | $ | 26,437 | |||||||
| Short-term debt | 25,448 | 22,843 | |||||||||
| Accounts payable | 210,514 | 214,015 | |||||||||
| Dividends payable | 6,261 | 6,237 | |||||||||
| Environmental liabilities | 2,400 | 2,200 | |||||||||
| Other current liabilities | 98,044 | 99,438 | |||||||||
| Total current liabilities | 368,183 | 371,170 | |||||||||
| Long-term debt | 758,263 | 738,075 | |||||||||
| Deferred income taxes | 64,925 | 87,285 | |||||||||
| Other long-term liabilities | 140,934 | 141,315 | |||||||||
| Total liabilities | 1,332,305 | 1,337,845 | |||||||||
| Commitments and contingencies | — | — | |||||||||
| Shareholders’ equity | |||||||||||
| Common stock | 544 | 544 | |||||||||
| Capital in excess of par value | 61,873 | 64,779 | |||||||||
| Retained earnings | 591,012 | 705,600 | |||||||||
| Accumulated other comprehensive loss | (91,424) | (80,304) | |||||||||
| 562,005 | 690,619 | ||||||||||
| Less cost of common stock in treasury | (145,272) | (147,857) | |||||||||
| Total shareholders’ equity | 416,733 | 542,762 | |||||||||
| Total liabilities and shareholders’ equity | $ | 1,749,038 | $ | 1,880,607 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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GLATFELTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Three months ended March 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| Operating activities | |||||||||||
| Net income (loss) | $ | (108,327) | $ | 8,394 | |||||||
| Loss from discontinued operations, net of taxes | 37 | — | |||||||||
| Adjustments to reconcile to net cash provided by continuing operations: | |||||||||||
| Depreciation, depletion and amortization | 18,484 | 13,733 | |||||||||
| Amortization of debt issue costs and original issue discount | 452 | 153 | |||||||||
| Goodwill and other asset impairment charges | 117,349 | — | |||||||||
| Inventory and accounts receivable charges | 3,948 | — | |||||||||
| Deferred income tax benefit | (21,227) | (410) | |||||||||
| Gains on dispositions of plant, equipment and timberlands, net | (2,961) | (850) | |||||||||
| Share-based compensation | 909 | 1,208 | |||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable | (53,318) | (7,002) | |||||||||
| Inventories | (17,699) | (13,248) | |||||||||
| Prepaid and other current assets | (5,946) | 167 | |||||||||
| Accounts payable | 1,776 | (7,460) | |||||||||
| Accruals and other current liabilities | 949 | (3,447) | |||||||||
| Other | (666) | 2,716 | |||||||||
| Net cash used by operating activities from continuing operations | (66,240) | (6,046) | |||||||||
| Investing activities | |||||||||||
| Expenditures for purchases of plant, equipment and timberlands | (12,349) | (5,379) | |||||||||
| Proceeds from disposals of plant, equipment and timberlands, net | 3,160 | 876 | |||||||||
| Acquisition, net of cash acquired | 1,413 | — | |||||||||
| Other | (25) | (100) | |||||||||
| Net cash used by investing activities from continuing operations | (7,801) | (4,603) | |||||||||
| Financing activities | |||||||||||
| Proceeds from term loans | — | 11,725 | |||||||||
| Repayment of term loans | (6,712) | (6,136) | |||||||||
| Net borrowings under revolving credit facility | 31,019 | 1,151 | |||||||||
| Payments of borrowing costs | (559) | (35) | |||||||||
| Payments of dividends | (6,237) | (5,990) | |||||||||
| Payments related to share-based compensation awards and other | (1,230) | (536) | |||||||||
| Net cash provided by financing activities from continuing operations | 16,281 | 179 | |||||||||
| Effect of exchange rate changes on cash | (748) | (2,213) | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | (58,508) | (12,683) | |||||||||
| Decrease in cash, cash equivalents and restricted cash from discontinued operations | (108) | (78) | |||||||||
| Cash, cash equivalents and restricted cash at the beginning of period | 148,814 | 111,665 | |||||||||
| Cash, cash equivalents and restricted cash at the end of period | 90,198 | 98,904 | |||||||||
| Less: restricted cash in Prepaid expenses and other current assets | (2,000) | (2,000) | |||||||||
| Less: restricted cash in Other assets | (7,746) | (9,538) | |||||||||
| Cash and cash equivalents at the end of period | $ | 80,452 | $ | 87,366 | |||||||
| Supplemental cash flow information | |||||||||||
| Cash paid for: | |||||||||||
| Interest | $ | 1,494 | $ | 1,408 | |||||||
| Income taxes, net | 8,245 | 3,493 | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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GLATFELTER CORPORATION AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS’ EQUITY
(unaudited)
| In thousands | Common stock | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders’ Equity | |||||||||||||||||||||||||||||
Balance at January 1, 2022 | $ | 544 | $ | 64,779 | $ | 705,600 | $ | (80,304) | $ | (147,857) | $ | 542,762 | |||||||||||||||||||||||
| Net loss | (108,327) | (108,327) | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | (11,120) | (11,120) | |||||||||||||||||||||||||||||||||
| Comprehensive loss | (119,447) | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.14 per share) | (6,261) | (6,261) | |||||||||||||||||||||||||||||||||
| Share-based compensation expense | 909 | 909 | |||||||||||||||||||||||||||||||||
| Delivery of treasury shares | |||||||||||||||||||||||||||||||||||
| RSUs and PSAs | (3,815) | 2,585 | (1,230) | ||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | $ | 544 | $ | 61,873 | $ | 591,012 | $ | (91,424) | $ | (145,272) | $ | 416,733 | |||||||||||||||||||||||
Balance at January 1, 2021 | $ | 544 | $ | 63,261 | $ | 723,365 | $ | (58,653) | $ | (150,585) | $ | 577,932 | |||||||||||||||||||||||
| Net income | 8,394 | 8,394 | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | (9,840) | (9,840) | |||||||||||||||||||||||||||||||||
| Comprehensive loss | (1,446) | ||||||||||||||||||||||||||||||||||
Cash dividends declared $0.135 per share) | (6,003) | (6,003) | |||||||||||||||||||||||||||||||||
| Share-based compensation expense | 1,208 | 1,208 | |||||||||||||||||||||||||||||||||
| Delivery of treasury shares | |||||||||||||||||||||||||||||||||||
| RSUs and PSAs | (1,893) | 1,263 | (630) | ||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | $ | 544 | $ | 62,576 | $ | 725,756 | $ | (68,493) | $ | (149,322) | $ | 571,061 | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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GLATFELTER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.ORGANIZATION
Glatfelter Corporation and subsidiaries ("Glatfelter") is a leading global supplier of engineered materials with a strong focus on innovation and sustainability. Glatfelter's high quality, technology-driven, innovative, and customizable nonwovens solutions can be found in products that are Enhancing Everyday Life®. These include personal care and hygiene products, food and beverage filtration, critical cleaning products, medical and personal protection, packaging products, as well as home improvement and industrial applications. Headquartered in Charlotte, NC, the Company’s 2021 net sales were $1.1 billion with approximately 3,250 employees worldwide. Glatfelter’s operations utilize a variety of manufacturing technologies including airlaid, wetlaid and spunlace with sixteen manufacturing sites located in the United States, Canada, Germany, the United Kingdom, France, Spain, and the Philippines. The Company has sales offices in all major geographies serving customers under the Glatfelter and Sontara brands. Additional information about Glatfelter may be found at www.glatfelter.com. The terms “we,” “us,” “our,” “the Company,” or “Glatfelter,” refer to Glatfelter Corporation and subsidiaries unless the context indicates otherwise.
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 you have read the audited consolidated financial statements included in our 2021 Annual Report on Form 10-K.
Discontinued Operations The results of operations and cash flows of our former Specialty Papers business have been classified as discontinued operations for all periods presented in the condensed consolidated statements of income.
Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Management believes the estimates and assumptions used in the preparation of these financial statements are reasonable, based upon currently available facts and known circumstances, but recognizes actual results may differ from those estimates and assumptions.
Inventories Our inventories are stated at the lower of cost or net realizable value. Raw materials, in-process and finished goods inventories are valued principally using the average-cost method.
3.ACQUISITION
On May 13, 2021, we completed the acquisition of all the outstanding equity interests in Georgia-Pacific Mt. Holly LLC, Georgia-Pacific's U.S. nonwovens business ("Mount Holly") for $170.9 million. Mount Holly’s results are reported prospectively from the acquisition date as part of our Airlaid Materials segment.
On October 29, 2021, we completed the acquisition of PMM Holding (Luxembourg) AG, the owner of all of the equity interest in Jacob Holm, a global leading manufacturer of premium quality spunlace nonwoven fabrics for critical cleaning, high-performance materials, personal care, hygiene and medical applications, for approximately $304.0 million for all outstanding shares and the extinguishment of Jacob Holm’s debt.
For the quarter ended March 31, 2022, there were no changes to the preliminary purchase price allocation related to the Jacob Holm acquisition.
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The following table sets forth information related to amounts of net sales and operating income (loss) of the acquired businesses included in our results of operations in the first quarter of 2022:
| Three months ended March 31, | ||||||||
| In thousands | 2022 | |||||||
| Mount Holly | ||||||||
| Net sales | $ | 27,304 | ||||||
| Operating income | 2,723 | |||||||
| Jacob Holm | ||||||||
| Net sales | 96,387 | |||||||
| Operating loss | (1,572) | |||||||
The following table summarizes annual unaudited pro forma financial information as if the acquisition occurred as of January 1, 2021:
| (unaudited) | Three months ended March 31, | |||||||||||||
| In thousands, except per share | 0 | 2021 | ||||||||||||
| Pro forma | ||||||||||||||
| Net sales | $ | 342,553 | ||||||||||||
| Operating income | 23,438 | |||||||||||||
The pro forma financial information set forth above for the three months ended March 31, 2021 includes $0.6 million of one-time costs directly related to the Mount Holly transaction. Such costs are presented under the caption “Selling, general and administrative expenses” in the accompanying condensed consolidated statements of income.
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4.REVENUE
The following tables set forth disaggregated information pertaining to our net sales:
| Three months ended March 31, | ||||||||||||||
| In thousands | 2022 | 2021 | ||||||||||||
| Revenue by product category | ||||||||||||||
| Composite Fibers | ||||||||||||||
| Food & beverage | $ | 75,223 | $ | 76,953 | ||||||||||
| Wallcovering | 15,831 | 22,629 | ||||||||||||
| Technical specialties | 23,136 | 23,495 | ||||||||||||
| Composite laminates | 11,297 | 9,809 | ||||||||||||
| Metallized | 10,342 | 8,363 | ||||||||||||
| 135,829 | 141,249 | |||||||||||||
| Airlaid Materials | ||||||||||||||
| Feminine hygiene | 59,312 | 47,641 | ||||||||||||
| Specialty wipes | 37,095 | 15,916 | ||||||||||||
| Tabletop | 30,747 | 6,863 | ||||||||||||
| Food pads | 3,476 | 2,357 | ||||||||||||
| Home care | 6,285 | 3,923 | ||||||||||||
| Adult incontinence | 6,729 | 4,678 | ||||||||||||
| Other | 5,820 | 3,047 | ||||||||||||
| 149,464 | 84,425 | |||||||||||||
| Spunlace | ||||||||||||||
| Consumer wipes | 46,157 | — | ||||||||||||
| Critical cleaning | 24,278 | — | ||||||||||||
| Health care | 13,605 | — | ||||||||||||
| Hygiene | 5,913 | — | ||||||||||||
| High performance | 4,112 | — | ||||||||||||
| Beauty care | 2,322 | — | ||||||||||||
| 96,387 | — | |||||||||||||
| Total | $ | 381,680 | $ | 225,674 | ||||||||||
| Revenue by geography | ||||||||||||||
| Composite Fibers | ||||||||||||||
| Europe, Middle East and Africa | $ | 73,604 | $ | 86,945 | ||||||||||
| Americas | 37,976 | 31,841 | ||||||||||||
| Asia Pacific | 24,249 | 22,463 | ||||||||||||
| 135,829 | 141,249 | |||||||||||||
| Airlaid Materials | ||||||||||||||
| Europe, Middle East and Africa | 63,136 | 45,072 | ||||||||||||
| Americas | 80,913 | 37,485 | ||||||||||||
| Asia Pacific | 5,415 | 1,868 | ||||||||||||
| 149,464 | 84,425 | |||||||||||||
| Spunlace | ||||||||||||||
| Europe, Middle East and Africa | 29,825 | — | ||||||||||||
| Americas | 55,484 | — | ||||||||||||
| Asia Pacific | 11,078 | — | ||||||||||||
| 96,387 | — | |||||||||||||
| Total | $ | 381,680 | $ | 225,674 | ||||||||||
5.GAINS ON DISPOSITION OF PLANT, EQUIPMENT AND TIMBERLANDS
The following table sets forth sales of timberlands and other assets completed during the first three months of 2022 and 2021:
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| Dollars in thousands | Acres | Proceeds | Gain (loss) | ||||||||||||||
| 2022 | |||||||||||||||||
| Timberlands | 790 | $ | 3,130 | $ | 2,962 | ||||||||||||
| Other | n/a | 30 | (1) | ||||||||||||||
| Total | $ | 3,160 | $ | 2,961 | |||||||||||||
| 2021 | |||||||||||||||||
| Timberlands | 358 | $ | 876 | $ | 850 | ||||||||||||
| Other | n/a | — | — | ||||||||||||||
| Total | $ | 876 | $ | 850 | |||||||||||||
6.GOODWILL AND OTHER ASSET IMPAIRMENT
During the first quarter of 2022, in connection with an assessment of potential impairment of long-lived and indefinite lived intangible assets stemming from the compounding impacts resulting from the Russia/Ukraine military conflict and related sanctions, we recorded a $117.3 million non-cash asset impairment charge related to Composite Fibers' Dresden facility and an impairment of Composite Fibers' goodwill. Dresden is a single-line facility that produces wallcover base paper, the majority of which is sold into the Russian and Ukrainian markets. As a direct result of the economic impacts from the conflict, and the disruptions in the underlying financial systems and restrictions on our ability to export wallcover base paper to Russia due to related sanctions, management expects a significant reduction in wallcover revenues and associated cash flows for the foreseeable future. In addition, the conflict is expected to also impact other Composite Fibers products that are also subject to export sanctions into this region, and is expected to continue to significantly impact energy prices. Accordingly, a charge was recorded to reduce the carrying value of the Dresden fixed assets and intangible assets (technological know-how, customer relationships, and an indefinite-lived trade name), along with Composite Fibers’ goodwill to fair value. The following table summarizes the impairment charge recorded in the accompanying condensed consolidated statements of income under the caption “Goodwill and other asset impairment charges:”
| In thousands | Three months ended March 31, 2022 | |||||||
| Machinery and equipment | $ | 27,619 | ||||||
| Technological know-how | 18,443 | |||||||
| Customer relationships | 11,695 | |||||||
| Tradename | 3,530 | |||||||
| Goodwill | 56,062 | |||||||
| Total | $ | 117,349 | ||||||
The fair value of the underlying assets was estimated using discounted cash flow models, independent appraisals and similar methods, all of which are Level 3 fair value classification.
In addition, as a result of economic sanctions and disruptions to the financial markets, certain customers are not able to satisfy outstanding accounts receivables. As such, during the first quarter of 2022, we recognized bad debt expense of approximately $2.9 million directly related to Russian and Ukrainian customers. Furthermore, during the quarter, we increased inventory reserves by approximately $1.0 million, primarily related to wallcover products.
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7.DISCONTINUED OPERATIONS
The following table sets forth a summary of cash flows from discontinued operations which is included in the condensed consolidated statements of cash flows:
| Three months ended March 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| Net cash used by operating activities | $ | (108) | $ | (78) | |||||||
| Net cash used by investing activities | — | — | |||||||||
| Net cash provided by financing activities | — | — | |||||||||
| Change in cash and cash equivalents from discontinued operations | $ | (108) | $ | (78) | |||||||
8.EARNINGS PER SHARE
The following table sets forth the details of basic and diluted earnings per share (“EPS”) from continuing operations:
| Three months ended March 31, | ||||||||||||||
| In thousands, except per share | 2022 | 2021 | ||||||||||||
| Income (loss) from continuing operations | $ | (108,290) | $ | 8,394 | ||||||||||
| Weighted average common shares outstanding used in basic EPS | 44,709 | 44,450 | ||||||||||||
Common shares issuable upon exercise of dilutive stock options and PSAs / RSUs | — | 419 | ||||||||||||
Weighted average common shares outstanding and common share equivalents used in diluted EPS | 44,709 | 44,869 | ||||||||||||
| Earnings (loss) per share from continuing operations | ||||||||||||||
| Basic | $ | (2.42) | $ | 0.19 | ||||||||||
| Diluted | (2.42) | 0.19 | ||||||||||||
The following table sets forth potential common shares outstanding that were not included in the computation of diluted EPS for the periods indicated, because their effect would be anti-dilutive:
| Three months ended March 31, | ||||||||||||||
| In thousands | 2022 | 2021 | ||||||||||||
| Potential common shares | 934 | 1,082 | ||||||||||||
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9.ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table sets forth details of the changes in accumulated other comprehensive income (losses) for the three months ended March 31, 2022 and 2021.
| In thousands | Currency translation adjustments | Unrealized gain (loss) on derivatives | Change in pensions | Change in other postretirement defined benefit plans | Total | ||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | (69,757) | $ | 1,988 | $ | (11,482) | $ | (1,053) | $ | (80,304) | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications (net of tax) | (10,915) | 383 | — | — | (10,532) | ||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income (net of tax) | — | (740) | 126 | 26 | (588) | ||||||||||||||||||||||||
| Net current period other comprehensive income (loss) | (10,915) | (357) | 126 | 26 | (11,120) | ||||||||||||||||||||||||
Balance at March 31, 2022 | $ | (80,672) | $ | 1,631 | $ | (11,356) | $ | (1,027) | $ | (91,424) | |||||||||||||||||||
| Balance at January 1, 2021 | $ | (42,525) | $ | (2,496) | $ | (12,844) | $ | (788) | $ | (58,653) | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications (net of tax) | (13,193) | 3,274 | — | — | (9,919) | ||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income (net of tax) | — | (13) | 138 | (46) | 79 | ||||||||||||||||||||||||
| Net current period other comprehensive income (loss) | (13,193) | 3,261 | 138 | (46) | (9,840) | ||||||||||||||||||||||||
Balance at March 31, 2021 | $ | (55,718) | $ | 765 | $ | (12,706) | $ | (834) | $ | (68,493) | |||||||||||||||||||
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Reclassifications out of accumulated other comprehensive income and into the condensed consolidated statements of income were as follows:
| Three months ended March 31, | ||||||||||||||||||||
| In thousands | 2022 | 2021 | ||||||||||||||||||
| Description | Line Item in Statements of Income | |||||||||||||||||||
| Cash flow hedges (Note 18) | ||||||||||||||||||||
| Gains on cash flow hedges | $ | (1,072) | $ | 24 | Costs of products sold | |||||||||||||||
| Tax expense (benefit) | 312 | (51) | Income tax provision | |||||||||||||||||
| Net of tax | (760) | (27) | ||||||||||||||||||
| Loss on interest rate swaps | 20 | 21 | Interest expense | |||||||||||||||||
| Tax benefit | — | (7) | Income tax provision | |||||||||||||||||
| Net of tax | 20 | 14 | ||||||||||||||||||
| Total cash flow hedges | (740) | (13) | ||||||||||||||||||
| Retirement plan obligations (Note 11) | ||||||||||||||||||||
| Amortization of deferred benefit pension plans | ||||||||||||||||||||
| Prior service costs | 11 | 12 | Other, net | |||||||||||||||||
| Actuarial losses | 167 | 199 | Other, net | |||||||||||||||||
| 178 | 211 | |||||||||||||||||||
| Tax benefit | (52) | (73) | Income tax provision | |||||||||||||||||
| Net of tax | 126 | 138 | ||||||||||||||||||
| Amortization of deferred benefit other plans | ||||||||||||||||||||
| Prior service credits | 26 | (58) | Other, net | |||||||||||||||||
| Actuarial losses (gains) | — | 12 | Other, net | |||||||||||||||||
| 26 | (46) | |||||||||||||||||||
| Tax expense | — | — | Income tax provision | |||||||||||||||||
| Net of tax | 26 | (46) | ||||||||||||||||||
| Total reclassifications, net of tax | $ | (588) | $ | 79 | ||||||||||||||||
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10.STOCK-BASED COMPENSATION
The P. H. Glatfelter Amended and Restated Long-Term Incentive Plan (the “LTIP”) provides for the issuance of Glatfelter common stock to eligible participants in the form of restricted stock units, restricted stock awards, non-qualified stock options, performance shares, incentive stock options and performance units.
Pursuant to terms of the LTIP, we have issued to eligible participants restricted stock units (“RSUs”), performance share awards (“PSAs”) and stock-only stock appreciation rights.
In 2022, we issued awards of RSUs and PSAs under our LTIP. In 2022, 40% of fair value of the awards granted were RSUs, which vest based on the passage of time, generally over a graded three-year period or, in certain instances, the RSUs were cliff vesting after one or three years. In addition, some awards vest over one year or less depending upon the retirement eligibility of the grantees in the LTIP. The remaining 60% of the fair value of the awards granted in 2022 were PSAs. The PSAs awarded in 2022 vest based on either the achievement of a cumulative financial performance target covering a two-year period followed by an additional one-year service period or based on the three-year total shareholder return relative to a broad market index. The performance measures include a minimum, target and maximum performance level providing the grantees an opportunity to receive more or less shares than targeted depending on actual financial performance. For RSUs, the grant date fair value of the awards, or the closing price per common share on the date of the award, is used to determine the amount of expense to be recognized over the applicable service period. For PSAs, the grant date fair value is estimated using a lattice model. The significant inputs include the stock price, volatility, dividend yield, and risk-free rate of return. Settlement of RSUs and PSAs will be made in shares of our common stock currently held in treasury.
The following table summarizes RSU and PSA activity during periods indicated:
| Units | 2022 | 2021 | |||||||||
| Balance at January 1, | 1,111,382 | 1,071,652 | |||||||||
| Granted | 528,011 | 287,805 | |||||||||
| Forfeited | (92,569) | (90,355) | |||||||||
| Shares delivered | (250,301) | (123,038) | |||||||||
Balance at March 31, | 1,296,523 | 1,146,064 | |||||||||
The amount granted in 2022 and 2021 includes 299,993 and 161,453, respectively, of PSAs exclusive of reinvested dividends.
The following table sets forth aggregate RSU and PSA compensation expense included in continuing operations for the periods indicated:
| Three months ended March 31, | ||||||||||||||
| In thousands | 2022 | 2021 | ||||||||||||
| Share-based compensation expense | $ | 909 | $ | 1,208 | ||||||||||
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. All SOSARs are vested and have a term of ten years. No SOSARs were awarded since 2016.
The following table sets forth information related to outstanding SOSARs:
| 2022 | 2021 | ||||||||||||||||||||||
| Shares | Wtd Avg Exercise Price | Shares | Wtd Avg Exercise Price | ||||||||||||||||||||
| Outstanding at January 1, | 1,079,113 | $ | 20.42 | 1,082,413 | $ | 20.40 | |||||||||||||||||
| Granted | — | — | — | — | |||||||||||||||||||
| Exercised | — | — | — | — | |||||||||||||||||||
| Canceled / forfeited | (145,440) | 15.61 | — | — | |||||||||||||||||||
Outstanding at March 31, | 933,673 | $ | 21.17 | 1,082,413 | $ | 20.40 | |||||||||||||||||
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11.RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS
The following tables provide information with respect to the net periodic costs of our pension and post-retirement medical benefit plans included in continuing operations.
| Three months ended March 31, | ||||||||||||||
| In thousands | 2022 | 2021 | ||||||||||||
| Pension Benefits | ||||||||||||||
| Service cost | $ | — | $ | — | ||||||||||
| Interest cost | 235 | 250 | ||||||||||||
| Amortization of prior service cost | 11 | 12 | ||||||||||||
| Amortization of actuarial loss | 167 | 199 | ||||||||||||
| Total net periodic benefit expense | $ | 413 | $ | 461 | ||||||||||
| Other Benefits | ||||||||||||||
| Service cost | $ | — | $ | 7 | ||||||||||
| Interest cost | 33 | 32 | ||||||||||||
| Amortization of prior service cost (credit) | 26 | (58) | ||||||||||||
| Amortization of actuarial loss | — | 12 | ||||||||||||
| Total net periodic benefit expense (income) | $ | 59 | $ | (7) | ||||||||||
12.INCOME TAXES
Income taxes are recognized for the amount of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our condensed consolidated financial statements or tax returns. The effects of income taxes are measured based on enacted tax laws and rates.
For the three months ended March 31, 2022, we had pretax loss from continuing operations of $125.1 million and income tax benefit of $16.8 million. The income tax benefit includes $19.2 million of deferred tax benefit associated with the asset impairment charge and related bad debt and inventory reserves (refer to Note 6). Absent these charges, the Company had pre-tax loss of $3.8 million and income tax expense of $2.4 million, which was unfavorably impacted by the jurisdictional mix of pretax results among the Company and its subsidiaries, primarily by the pretax losses in the U.S. which generated no tax benefit.
For the three months ended March 31, 2022, we recorded an increase in our federal valuation allowance of $2.6 million against our net deferred tax assets. In assessing the need for a valuation allowance, management considers all available positive and negative evidence in its analysis. Based on this analysis, we recorded a valuation allowance for the portion of deferred tax assets where the weight of the evidence indicated it is more likely than not that the deferred assets will not be realized.
As of March 31, 2022 and December 31, 2021, we had $56.5 million and $55.7 million, respectively, of gross unrecognized tax benefits. As of March 31, 2022, if such benefits were to be recognized, approximately $52.6 million would be recorded as a component of income tax expense, thereby affecting our effective tax rate.
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. We recognize interest and penalties related to uncertain tax positions as income tax expense.
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The following table summarizes information included in continuing operations related to interest on uncertain tax positions:
| Three months ended March 31, | |||||||||||
| In millions | 2022 | 2021 | |||||||||
| Interest expense | $ | 0.4 | $ | 0.2 | |||||||
| March 31, 2022 | December 31, 2021 | ||||||||||
| Accrued interest payable | $ | 4.3 | $ | 3.9 | |||||||
| Accrued penalties | 3.0 | 3.0 | |||||||||
13.INVENTORIES
Inventories, net of reserves, were as follows:
| In thousands | March 31, 2022 | December 31, 2021 | |||||||||
| Raw materials | $ | 88,684 | $ | 87,448 | |||||||
| In-process and finished | 149,444 | 139,058 | |||||||||
| Supplies | 53,968 | 53,014 | |||||||||
| Total | $ | 292,096 | $ | 279,520 | |||||||
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14.GOODWILL AND OTHER INTANGIBLE ASSETS
The following table sets forth changes in the amounts of goodwill and other intangible assets recorded by each of our segments during the periods indicated:
| In thousands | December 31, 2021 | Impairment | Amortization | Translation | March 31, 2022 | ||||||||||||||||||||||||
| Goodwill | |||||||||||||||||||||||||||||
| Composite Fibers | $ | 78,438 | $ | (56,062) | $ | — | $ | (1,969) | $ | 20,407 | |||||||||||||||||||
| Airlaid Materials | 109,486 | — | — | (1,463) | 108,023 | ||||||||||||||||||||||||
| Spunlace | 48,241 | — | — | 392 | 48,633 | ||||||||||||||||||||||||
| Total | $ | 236,165 | $ | (56,062) | $ | — | $ | (3,040) | $ | 177,063 | |||||||||||||||||||
| Other Intangible Assets | |||||||||||||||||||||||||||||
| Composite Fibers | |||||||||||||||||||||||||||||
| Tradename - non-amortizing | $ | 3,601 | $ | (3,530) | $ | — | $ | (71) | $ | — | |||||||||||||||||||
| Technology and related | 38,614 | — | — | (791) | 37,823 | ||||||||||||||||||||||||
| Accumulated amortization | (19,224) | (18,443) | (424) | 268 | (37,823) | ||||||||||||||||||||||||
| Net | 19,390 | (18,443) | (424) | (523) | — | ||||||||||||||||||||||||
| Customer relationships and related | 34,739 | — | — | (693) | 34,046 | ||||||||||||||||||||||||
| Accumulated amortization | (22,104) | (11,695) | (587) | 340 | (34,046) | ||||||||||||||||||||||||
| Net | 12,635 | (11,695) | (587) | (353) | — | ||||||||||||||||||||||||
| Airlaid Materials | |||||||||||||||||||||||||||||
| Tradename | 4,485 | — | — | (903) | 3,582 | ||||||||||||||||||||||||
| Accumulated amortization | (603) | — | (45) | 13 | (635) | ||||||||||||||||||||||||
| Net | 3,882 | — | (45) | (890) | 2,947 | ||||||||||||||||||||||||
| Technology and related | 17,825 | — | — | 377 | 18,202 | ||||||||||||||||||||||||
| Accumulated amortization | (4,552) | — | (301) | 87 | (4,766) | ||||||||||||||||||||||||
| Net | 13,273 | — | (301) | 464 | 13,436 | ||||||||||||||||||||||||
| Customer relationships and related | 44,585 | — | — | (489) | 44,096 | ||||||||||||||||||||||||
| Accumulated amortization | (10,512) | — | (944) | 253 | (11,203) | ||||||||||||||||||||||||
| Net | 34,073 | — | (944) | (236) | 32,893 | ||||||||||||||||||||||||
| Spunlace | |||||||||||||||||||||||||||||
| Products and Tradenames | 27,623 | — | — | (383) | 27,240 | ||||||||||||||||||||||||
| Accumulated amortization | (253) | — | (361) | 4 | (610) | ||||||||||||||||||||||||
| Net | 27,370 | — | (361) | (379) | 26,630 | ||||||||||||||||||||||||
| Technology and related | 14,547 | — | — | (202) | 14,345 | ||||||||||||||||||||||||
| Accumulated amortization | (202) | — | (297) | 3 | (496) | ||||||||||||||||||||||||
| Net | 14,345 | — | (297) | (199) | 13,849 | ||||||||||||||||||||||||
| Customer relationships and related | 28,003 | — | — | (388) | 27,615 | ||||||||||||||||||||||||
| Accumulated amortization | (268) | — | (384) | 4 | (648) | ||||||||||||||||||||||||
| Net | 27,735 | — | (384) | (384) | 26,967 | ||||||||||||||||||||||||
| Total intangibles | 214,022 | (3,530) | — | (3,543) | 206,949 | ||||||||||||||||||||||||
| Total accumulated amortization | (57,718) | (30,138) | (3,343) | 972 | (90,227) | ||||||||||||||||||||||||
| Net intangibles | $ | 156,304 | $ | (33,668) | $ | (3,343) | $ | (2,571) | $ | 116,722 | |||||||||||||||||||
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15.LEASES
We enter into a variety of arrangements in which we are the lessee for the use of automobiles, forklifts and other production equipment, production facilities, warehouses, office space and land. We determine if an arrangement contains a lease at inception. All our lease arrangements are operating leases and are recorded in the condensed consolidated balance sheet under the caption “Other assets” and the lease obligation is under “Other current liabilities” and “Other long-term liabilities.” We do not have any finance leases.
Operating lease right of use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. We use our incremental borrowing rate based on information available at the commencement date in determining the lease liabilities as our leases generally do not provide an implicit rate. For purposes of recording the lease arrangement, the term of lease may include options to extend or terminate when we are reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term.
The following table sets forth information related to our leases as of the periods indicated.
| Dollars in thousands | March 31, 2022 | December 31, 2021 | |||||||||
| Right of use asset | $ | 25,232 | $ | 27,186 | |||||||
| Weighted average discount rate | 2.95 | % | 3.31 | % | |||||||
Weighted average remaining maturity (years) | 20.3 | 26.0 | |||||||||
The following table sets forth operating lease expense for the periods indicated:
| Three months ended March 31, | ||||||||||||||
| In thousands | 2022 | 2021 | ||||||||||||
| Lease expense | $ | 1,421 | $ | 1,347 | ||||||||||
The following table sets forth required remaining future minimum lease payments during the years indicated:
| In thousands | |||||
| 2022 | $ | 4,635 | |||
| 2023 | 3,690 | ||||
| 2024 | 2,805 | ||||
| 2025 | 2,387 | ||||
| 2026 | 2,301 | ||||
| Thereafter | 22,504 | ||||
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16.LONG-TERM DEBT
Long-term debt is summarized as follows:
| In thousands | March 31, 2022 | December 31, 2021 | |||||||||
Revolving credit facility, due Sep 2026 | $ | 41,101 | $ | 10,000 | |||||||
4.750% Senior Notes, due Oct 2029 | 500,000 | 500,000 | |||||||||
Term loan, due Feb 2024 | 210,641 | 218,026 | |||||||||
2.40% Term Loan, due Jun 2022 | 396 | 809 | |||||||||
2.05% Term Loan, due Mar 2023 | 5,925 | 7,556 | |||||||||
1.30% Term Loan, due Jun 2023 | 1,982 | 2,427 | |||||||||
1.55% Term Loan, due Sep 2025 | 4,761 | 5,204 | |||||||||
1.10% Term Loan, due Mar 2024 | 8,073 | 9,267 | |||||||||
0.57% Term Loan, due Jul 2023 | 22,202 | 22,652 | |||||||||
| Total long-term debt | 795,081 | 775,941 | |||||||||
| Less current portion | (25,516) | (26,437) | |||||||||
| Unamortized deferred issuance costs | (11,302) | (11,429) | |||||||||
| Long-term debt, net of current portion | $ | 758,263 | $ | 738,075 | |||||||
On September 2, 2021, we entered into a restatement agreement as part of a Fourth Amended and Restated $400 million Revolving Credit Facility and a €220.0 million Term Loan (collectively, the “Credit Agreement”) which matures September 6, 2026 and February 8, 2024, respectively.
The Credit Agreement contains a number of customary covenants for financings of this type that, among other things, restrict our ability to dispose of or create liens on assets, incur additional indebtedness, limits certain intercompany financing arrangements, make acquisitions and engage in mergers or consolidations. The Credit Agreement also specifies a maximum ratio of consolidated total net debt to consolidated adjusted EBITDA, also known as the leverage ratio. Subsequent to the Jacob Holm acquisition, we must maintain a maximum leverage ratio of no more than 5.25 to 1.00, which steps down to 4.00 to 1.00 after 24 months of the Jacob Holm acquisition. The Credit Agreement also contains covenants requiring a minimum interest coverage ratio and provisions limiting our ability to, among other things, (i) incur debt and guaranty obligations, (ii) incur liens, (iii) make loans, advances, investments and acquisitions, (iv) merge or liquidate, or (v) sell or transfer assets. In addition, the Credit Agreement provides that if, and for so long as, the Debt Rating (as defined in the Credit Agreement) is below “BB” by Standard & Poor’s or below “Ba2” by Moody’s, obligations under the Credit Agreement will be secured by substantially all domestic assets of the Company and the guarantors, subject to certain exceptions and limitations.
As of March 31, 2022, the leverage ratio calculated in accordance with the definition in our Credit Agreement was 4.8x. A breach of these requirements would give rise to certain remedies under the Revolving Credit Agreement, among which are the termination of the agreement and the repayment of the outstanding borrowings plus accrued and unpaid interest under the Credit Agreement.
As discussed in Note 21 - “Subsequent Event,” on May 9, 2022, we amended our Credit Agreement to increase the maximum leverage ratio to 6.75 to 1.0 until the quarter ended December 31, 2023, after which the maximum ratio will step down to 4.0x.
Glatfelter Corporation guarantees all debt obligations of its subsidiaries. All such obligations are recorded in these condensed consolidated financial statements.
Letters of credit issued to us by certain financial institutions totaled $6.7 million as of March 31, 2022 and December 31, 2021. The letters of credit, which reduce amounts available under our Revolving Credit Facility, primarily provide financial assurances for the benefit of certain state workers compensation insurance agencies in conjunction with our self-insurance program and for performance of certain remediation activity related to the Fox River matter. We bear the credit risk on this amount to the extent that we do not comply with the provisions of certain agreements. No amounts are outstanding under the letters of credit.
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17.FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts reported on the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximate their respective fair value. The following table sets forth carrying value and fair value of long-term debt:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| In thousands | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
| Variable rate debt | $ | 41,101 | $ | 41,101 | $ | 10,000 | $ | 10,000 | |||||||||||||||
4.750% Senior Notes, due Oct. 2029 | 500,000 | 426,875 | 500,000 | 516,875 | |||||||||||||||||||
| Term loan, due Feb. 2024 | 210,641 | 210,641 | 218,026 | 218,026 | |||||||||||||||||||
2.40% Term Loan | 396 | 398 | 809 | 813 | |||||||||||||||||||
2.05% Term Loan | 5,925 | 5,953 | 7,556 | 7,616 | |||||||||||||||||||
1.30% Term Loan | 1,982 | 1,981 | 2,427 | 2,433 | |||||||||||||||||||
1.55% Term Loan | 4,761 | 4,717 | 5,204 | 5,234 | |||||||||||||||||||
1.10% Term Loan | 8,073 | 8,010 | 9,267 | 9,252 | |||||||||||||||||||
0.57% Term Loan | 22,202 | 22,046 | 22,652 | 22,657 | |||||||||||||||||||
| Total | $ | 795,081 | $ | 721,722 | $ | 775,941 | $ | 792,906 | |||||||||||||||
The values set forth above are based on observable inputs and other relevant market data (Level 2). The fair value of financial derivatives is set forth below in Note 18.
18.FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES
As part of our overall risk management practices, we enter into financial derivatives primarily designed to either i) hedge foreign currency risks associated with forecasted transactions (“cash flow hedges”); ii) mitigate the impact that changes in currency exchange rates have on intercompany financing transactions and foreign currency denominated receivables and payables (“foreign currency hedges”); or iii) convert variable-interest-rate debt to fixed rates.
Derivatives Designated as Hedging Instruments - Cash Flow Hedges We use currency forward contracts as cash flow hedges to manage our exposure to fluctuations in the currency exchange rates on certain forecasted production costs. Currency forward contracts involve fixing the exchange for delivery of a specified amount of foreign currency on a specified date. As of March 31, 2022, the maturity of currency forward contracts ranged from one month to 18 months.
We designate certain currency forward contracts as cash flow hedges of forecasted raw material purchases, certain production costs or capital expenditures with exposure to changes in foreign currency exchange rates. Changes in the fair value of derivatives designated and that qualify as cash flow hedges of foreign exchange risk is deferred as a component of accumulated other comprehensive income in the accompanying condensed consolidated balance sheets. With respect to hedges of forecasted raw material purchases or production costs, the amount deferred is subsequently reclassified into costs of products sold in the period that, inventory produced using the hedged transaction, affects earnings. For hedged capital expenditures, deferred gains or losses are reclassified and included in the historical cost of the capital asset and subsequently affect earnings as depreciation is recognized.
- 20 -
We had the following outstanding derivatives that were used to hedge foreign exchange risks associated with forecasted transactions and designated as hedging instruments:
| In thousands | March 31, 2022 | December 31, 2021 | |||||||||
| Derivative | |||||||||||
| Sell/Buy - sell notional | |||||||||||
| Euro / British Pound | 21,233 | 18,823 | |||||||||
| U.S. Dollar / British Pound | 27,727 | 16,205 | |||||||||
| U.S. Dollar / Euro | 2,722 | 658 | |||||||||
| Sell/Buy - buy notional | |||||||||||
| Euro / Philippine Peso | 965,142 | 896,291 | |||||||||
| British Pound / Philippine Peso | 1,262,480 | 1,121,183 | |||||||||
| Euro / U.S. Dollar | 111,467 | 108,467 | |||||||||
| U.S. Dollar / Canadian Dollar | 36,517 | 36,904 | |||||||||
In October 2019, we entered into a €180 million notional value floating-to-fixed interest rate swap agreement with certain financial institutions. Under the terms of the swap, we will pay a fixed interest rate of the applicable margin plus 0.0395% on €180 million of the underlying variable rate term loan. We will receive the greater of 0.00% or EURIBOR.
Derivatives Designated as Hedging Instruments – Net Investment Hedge The €220 million Term Loan discussed in Note 16 – “Long-Term Debt” is designated as a net investment hedge of our Euro functional currency foreign subsidiaries. During the first quarter of 2022, we recognized a pre-tax gain of $2.4 million and in the same period of 2021 a pre-tax gain of $11.0 million on the remeasurement of the term loan from changes in currency exchange rates. Such amounts are recorded as a component of Other Comprehensive Income (Loss).
On March 3, 2022, we entered into cross-currency swaps with an aggregate notional value of $150.0 million. Pursuant to the terms of the swaps, we agreed to receive 4.750% interest denominated in U.S. dollars and we agreed to pay 3.06% interest denominated in euros. Interest is paid semi-annually on May 15 and November 15 and the swaps mature on May 15, 2025. We designated the cross-currency swaps as a hedge of our net investment in certain euro functional currency subsidiaries.
Derivatives Not Designated as Hedging Instruments - Foreign Currency Hedges We also entered into forward foreign exchange contracts to mitigate the impact changes in currency exchange rates have on balance sheet monetary assets and liabilities. None of these contracts are designated as hedges for financial accounting purposes and, accordingly, changes in value of the foreign exchange forward contracts and in the offsetting underlying on-balance-sheet transactions are reflected in the accompanying condensed consolidated statements of income under the caption “Other, net.”
The following sets forth derivatives used to mitigate the impact changes in currency exchange rates have on balance sheet monetary assets and liabilities:
| In thousands | March 31, 2022 | December 31, 2021 | |||||||||
| Derivative | |||||||||||
| Sell/Buy - sell notional | |||||||||||
| U.S. Dollar / British Pound | 24,150 | 26,600 | |||||||||
| British Pound / Euro | 2,400 | 3,400 | |||||||||
| U.S. Dollar / Swiss Franc | 11,200 | 2,180 | |||||||||
| British Pound / Swiss Franc | 1,520 | 1,025 | |||||||||
| Euro / Swiss Franc | 4,480 | 2,750 | |||||||||
| Euro / U.S. Dollar | 3,800 | 11,000 | |||||||||
| Sell/Buy - buy notional | |||||||||||
| Euro / U.S. Dollar | 2,800 | 20,900 | |||||||||
| British Pound / Euro | 7,000 | 5,300 | |||||||||
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These contracts have maturities of one month from the date originally entered into.
Fair Value Measurements The following table summarizes the fair values of derivative instruments for the period indicated and the line items in the accompanying condensed consolidated balance sheets where the instruments are recorded:
| In thousands | March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | |||||||||||||||||||
| Balance sheet caption | Prepaid Expenses and Other Current Assets | Other Current Liabilities | |||||||||||||||||||||
| Designated as hedging: | |||||||||||||||||||||||
| Forward foreign currency exchange contracts | $ | 4,936 | $ | 3,197 | $ | 199 | $ | 288 | |||||||||||||||
| Interest rate swap | 18 | — | — | 44 | |||||||||||||||||||
| Not designated as hedging: | |||||||||||||||||||||||
| Forward foreign currency exchange contracts | $ | 408 | 701 | $ | 674 | $ | 116 | ||||||||||||||||
The amounts set forth in the table above represent the net asset or liability giving effect to rights of offset with each counterparty. The effect of netting the amounts presented above did not have a material effect on our consolidated financial position.
The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The fair values of the foreign exchange forward contracts are considered to be Level 2. Foreign currency forward contracts are valued using foreign currency forward and interest rate curves. The fair value of each contract is determined by comparing the contract rate to the forward rate and discounting to present value. Contracts in a gain position are recorded in the condensed consolidated balance sheets under the caption “Prepaid expenses and other current assets” and the value of contracts in a loss position is recorded under the caption “Other current liabilities.”
The following table summarizes the amount of income or (loss) from derivative instruments recognized in our results of operations for the periods indicated and the line items in the accompanying condensed consolidated statements of income where the results are recorded:
| Three months ended March 31, | ||||||||||||||
| In thousands | 2022 | 2021 | ||||||||||||
| Designated as hedging: | ||||||||||||||
| Forward foreign currency exchange contracts: | ||||||||||||||
| Cost of products sold | $ | (1,072) | $ | (24) | ||||||||||
| Interest expense | 20 | 21 | ||||||||||||
| Not designated as hedging: | ||||||||||||||
| Forward foreign currency exchange contracts: | ||||||||||||||
| Other – net | $ | 440 | $ | 270 | ||||||||||
The impact of activity not designated as hedging was substantially all offset by the remeasurement of the underlying on-balance-sheet item.
A rollforward of fair value amounts recorded as a component of accumulated other comprehensive income (loss), before taxes, is as follows:
| In thousands | 2022 | 2021 | |||||||||
| Balance at January 1, | $ | 2,889 | $ | (3,460) | |||||||
| Deferred gains on cash flow hedges | 1,076 | 4,558 | |||||||||
| Reclassified to earnings | 1,052 | 3 | |||||||||
Balance at March 31, | $ | 5,017 | $ | 1,101 | |||||||
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We expect substantially all of the amounts recorded as a component of accumulated other comprehensive income will be recorded in results of operations within the next 12 to 18 months and the amount ultimately recognized will vary depending on actual market rates.
Credit risk related to derivative activity arises in the event the counterparty fails to meet its obligations to us. This exposure is generally limited to the amounts, if any, by which the counterparty’s obligations exceed our obligation to them. Our policy is to enter into contracts only with financial institutions which meet certain minimum credit ratings.
19.COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
Fox River - Neenah, Wisconsin
Background We have previously reported that we face liabilities associated with environmental claims arising out of the presence of polychlorinated biphenyls (“PCBs”) in sediments in the lower Fox River, on which our former Neenah facility was located, and in the Bay of Green Bay, Wisconsin (collectively, the “Site”). Since the early 1990s, the United States, the State of Wisconsin and two Indian tribes (collectively, the “Governments”) have pursued a cleanup of a 39-mile stretch of river from Little Lake Butte des Morts into Green Bay and natural resource damages (“NRDs”). The United States originally notified several entities that they were potentially responsible parties (“PRPs”); however, after giving effect to settlements reached with the Governments, the remaining PRPs exposed to continuing obligations to implement the remainder of the cleanup consist of us, Georgia-Pacific Consumer Products, L.P. (“Georgia-Pacific”) and NCR Corporation. The United States Environmental Protection Agency (“EPA”) has divided the Site into five “operable units”, including the most upstream portion of the Site on which our facility was located (“OU1”) and four downstream reaches of the river and bay (“OU2-5”).
Over the past several years, we and certain other PRPs completed all remedial actions pursuant to applicable consent decrees or a Unilateral Administrative Order. In January 2019, we reached an agreement with the United States, the State of Wisconsin, and Georgia-Pacific to resolve all remaining claims among those parties. Under the Glatfelter consent decree, we are primarily responsible for long-term monitoring and maintenance in OU2-OU4a and for reimbursement of government oversight costs paid after October 2018. Finally, we remain responsible for our obligation to continue long-term monitoring and maintenance under our OU1 consent decree.
Cost estimates Our remaining obligations under the OU1 consent decree consist of long-term monitoring and maintenance. Furthermore, we are primarily responsible for long-term monitoring and maintenance in OU2-OU4a over a period of at least 30 years. The monitoring activities consist of, among others, testing fish tissue, sampling water quality and sediment, and inspections of the engineered caps. In 2018, we entered into a fixed-price, 30-year agreement with a third party for the performance of all of our monitoring and maintenance obligations in OU1 through OU4a with limited exceptions, such as, for extraordinary amounts of cap maintenance or replacement. Our obligation under this agreement is included in our total reserve for the Site. We are obligated to make the regular payments under that fixed-price contract until the remaining amount due is less than the OU1 escrow account balance. We are permitted to pay for this contract using the remaining balance of the escrow account established by us and WTM I Company (“WTM I”) another PRP, under the OU1 consent decree during any period that the balance in the escrow account exceeds the amount due under our fixed-price contract. As of March 31, 2022, the balance in the escrow is less than amounts due under the fixed-price contract by approximately $1.3 million. Our obligation to pay this difference is secured by a letter of credit.
At March 31, 2022, the escrow account balance totaled $8.7 million which is included in the condensed consolidated balance sheet under the caption “Other assets.”
Under the consent decree, we are responsible for reimbursement of government oversight costs paid from October 2018 and later over approximately the next 30 years. We anticipate that oversight costs will decline as activities at the site have transitioned from remediation to long-term monitoring and maintenance.
Reserves for the Site Our reserve for past and future government oversight costs and long-term monitoring and maintenance totaled $14.9 million at March 31, 2022, of which $2.4 million is recorded in the accompanying March 31, 2022 condensed consolidated balance sheet under the caption “Environmental liabilities” and the remaining $12.5 million is recorded under the caption “Other long-term liabilities.”
Range of Reasonably Possible Outcomes Based on our analysis of all available information, including but not limited to decisions of the courts, official documents such as records of decision, discussions with legal counsel, cost estimates for future monitoring and maintenance and other post-remediation costs to be performed at the Site, we do not believe that our costs associated with the Fox River matter could exceed the aggregate amounts accrued by a material amount.
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20.SEGMENT INFORMATION
The following tables set forth financial and other information by segment for the period indicated:
| Three months ended March 31, | ||||||||||||||
| Dollars in thousands | 2022 | 2021 | ||||||||||||
| Net Sales | ||||||||||||||
| Composite Fibers | $ | 135,829 | $ | 141,249 | ||||||||||
| Airlaid Material | 149,464 | 84,425 | ||||||||||||
| Spunlace | 96,387 | — | ||||||||||||
| Total | $ | 381,680 | $ | 225,674 | ||||||||||
| Operating income (loss) | ||||||||||||||
| Composite Fibers | $ | (335) | $ | 16,065 | ||||||||||
| Airlaid Material | 12,221 | 7,197 | ||||||||||||
| Spunlace | (1,572) | — | ||||||||||||
| Other and unallocated | (126,203) | (5,943) | ||||||||||||
| Total | $ | (115,889) | $ | 17,319 | ||||||||||
| Depreciation and amortization | ||||||||||||||
| Composite Fibers | $ | 6,519 | $ | 6,981 | ||||||||||
| Airlaid Material | 7,629 | 5,848 | ||||||||||||
| Spunlace | 2,914 | — | ||||||||||||
| Other and unallocated | 1,422 | 904 | ||||||||||||
| Total | $ | 18,484 | $ | 13,733 | ||||||||||
| Capital expenditures | ||||||||||||||
| Composite Fibers | $ | 6,127 | $ | 2,773 | ||||||||||
| Airlaid Material | 3,468 | 1,739 | ||||||||||||
| Spunlace | 2,085 | — | ||||||||||||
| Other and unallocated | 668 | 867 | ||||||||||||
| Total | $ | 12,348 | $ | 5,379 | ||||||||||
| Tons shipped (metric) | ||||||||||||||
| Composite Fibers | 28,211 | 34,140 | ||||||||||||
| Airlaid Material | 43,052 | 28,864 | ||||||||||||
| Spunlace | 20,736 | — | ||||||||||||
| Total | 91,999 | 63,004 | ||||||||||||
Segments Results of individual operating segments are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual segments are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the segments. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the segment are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the table set forth above.
Management evaluates results of operations of the operating segments before certain corporate level costs and the effects of certain gains or losses not considered to be related to the core business operations. Management believes that this is a more meaningful representation of the operating performance of its core businesses, the profitability of the segments
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and the extent of cash flow generated from these core operations. Such amounts are presented under the caption “Other and Unallocated.” In the evaluation of operating segments results, management does not use any measures of total assets. This presentation is aligned with the management and operating structure of our company. It is also on this basis that the Company’s performance is evaluated internally and by the Company’s Board of Directors.
21.SUBSEQUENT EVENT
On May 9, 2022, we entered into an amendment to the Fourth Amended and Restated Credit Agreement which provides for a $400 million Revolving Credit Facility and a €220 million Term Loan (collectively, the “Credit Agreement”). The amendment: i) increases the permitted maximum ratio of consolidated total net debt to consolidated adjusted EBITDA (“leverage ratio”); ii) increases the maximum interest rate borrowing margin to be applied to the applicable index by 25 basis points; and iii) pledges as collateral substantially all domestic assets to secure obligations owed under the Credit Agreement. As amended, we are obligated to maintain a maximum ratio of consolidated total net debt to consolidated adjusted EBITDA of 6.75 to 1.0 during the period ending December 31, 2023, after which the maximum leverage ratio steps down to 4.00 to 1.0.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Glatfelter’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 Annual Report on Form 10-K ("2021 Form 10-K").
Forward-Looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future consolidated financial position or results of operations, made in this Report on Form 10-Q are forward looking. We use words such as “anticipates”, “believes”, “expects”, “future”, “intends” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from such expectations. The following discussion includes forward-looking statements all of which are inherently difficult to predict. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Accordingly, we identify the following important factors, among others, which could cause our results to differ from any results that might be projected, forecasted or estimated in any such forward-looking statements:
i.risks related to the military conflict between Russia and Ukraine and the impact on our production, sales, cost/availability of energy and results of operation;
ii.risks associated with the impact of the COVID-19 pandemic, including global and regional economic conditions, changes in demand for our products, interruptions in our global supply chain, ability to continue production by our facilities, credit conditions of our customers or suppliers, or potential legal actions that could arise due to our operations during the pandemic;
iii.disruptions of our global supply chain, including the availability of key raw materials and transportation for the delivery of critical inputs and of products to customers, and the increase in the costs of transporting materials and products;
iv.variations in demand for our products, including the impact of unplanned market-related downtime, variations in product pricing, or product substitution;
v.the impact of competition, changes in industry production capacity, including the construction of new facilities or new machines, the closing of facilities and incremental changes due to capital expenditures or productivity increases;
vi.risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates;
vii.our ability to develop new, high value-added products;
viii.changes in the price or availability of raw materials we use, particularly woodpulp, pulp substitutes, synthetic pulp, other specialty fibers and abaca fiber;
ix.changes in energy-related prices and commodity raw materials with an energy component;
x.the impact of unplanned production interruption at our facilities or at any of our key suppliers;
xi.disruptions in production and/or increased costs due to labor disputes;
xii.the gain or loss of significant customers and/or on-going viability of such customers;
xiii.the impact of war and terrorism;
xiv.the impact of unfavorable outcomes of audits by various state, federal or international tax authorities or changes in pre-tax income and its impact on the valuation of deferred taxes;
xv.enactment of adverse state, federal or foreign tax or other legislation or changes in government legislation, policy or regulation; and
xvi.our ability to finance, consummate and integrate acquisitions, including our acquisitions of Mount Holly and Jacob Holm.
Introduction We manufacture a wide array of engineered materials and manage our company along three operating segments:
•Composite Fibers with sales of single-serve tea and coffee filtration papers, wallcovering base materials, composite laminate papers, technical specialties including substrates for electrical applications, and metallized products;
•Airlaid Materials with sales of airlaid nonwoven fabric-like materials used in feminine hygiene products, adult incontinence products, tabletop, specialty wipes, home care products and other airlaid applications; and
•Spunlace with sales of premium quality spunlace nonwovens for critical cleaning, high-performance materials, personal care, hygiene and medical applications.
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The former Specialty Papers business’ results of operations and financial condition are reported as discontinued operations. Following is a discussion and analysis primarily of the financial results of operations and financial condition of our continuing operations.
Acquisition As discussed in Item 1 - Financial Statements and Supplementary Data, Note 3 “Acquisitions,” we completed our acquisitions of Georgia-Pacific's U.S. nonwovens business (“Mount Holly”) on May 13, 2021 for $170.9 million and the acquisition of all outstanding equity of PMM Holdings (Luxembourg) AG ("Jacob Holm") on October 29, 2021 for $304.0 million. Refer to Note 3 - “Acquisitions"”for additional information about these transactions.
RESULTS OF OPERATIONS
Three months ended March 31, 2022 versus the three months ended March 31, 2021
Overview For the first three months of 2022, we reported loss from continuing operations of $108.3 million, or $2.42 per share compared with income of $8.4 million and $0.19 per diluted share in the year earlier period. The following table sets forth summarized consolidated results of operations:
| Three months ended March 31, | |||||||||||
| In thousands, except per share | 2022 | 2021 | |||||||||
| Net sales | $ | 381,680 | $ | 225,674 | |||||||
| Gross profit | 31,665 | 39,296 | |||||||||
| Operating income | (115,889) | 17,319 | |||||||||
| Continuing operations | |||||||||||
| Income | (108,290) | 8,394 | |||||||||
| Earnings per share | (2.42) | 0.19 | |||||||||
| Net income | (108,327) | 8,394 | |||||||||
| Earnings per share | (2.42) | 0.19 | |||||||||
The reported results are in accordance with generally accepted accounting principles in the United States (“GAAP”) and reflect the impact of a number of significant items including a goodwill and other asset impairment charge related to our Dresden operations and Composite Fibers segment, strategic initiatives, corporate headquarters relocation and cost optimization, among others. On an adjusted earnings basis, a non-GAAP measure, we had a loss from continuing operations of $6.2 million, or $0.14 per share for the first three months of 2022, compared with income of $8.5 million, or $0.19 per diluted share, a year ago.
Our first quarter of 2022, operating results reflect: i) the Russia/Ukraine military conflict commencing on February 24, 2022 and the compounding impacts, adversely impacted sales, prices paid for energy, production and collection of receivables and resulted in the recording of a $117.3 million asset impairment charge; ii) the completion of two significant acquisitions in 2021, which collectively added $123.7 million of net sales; iii) the adverse impact of significant inflationary pressures, particularly energy costs, which outpaced our efforts to realize higher selling prices; and iv) interest expense increased reflecting the acquisition financing.
In addition to the results reported in accordance with GAAP, we evaluate our performance using adjusted earnings and adjusted earnings per diluted share. We disclose this information to allow investors to evaluate our performance exclusive of certain items that impact the comparability of results from period to period, and we believe it is helpful in understanding underlying operating trends and cash flow generation.
Adjusted earnings consists of net income determined in accordance with GAAP adjusted to exclude the impact of the following:
Strategic initiatives. These adjustments primarily reflect professional and legal fees incurred directly related to evaluating and executing certain strategic initiatives including costs associated with acquisitions, related integrations, and charges incurred to step-up acquired inventory to fair-value.
Corporate headquarters relocation. These adjustments reflect costs incurred in connection with the strategic relocation of the Company’s corporate headquarters to Charlotte, NC. The costs are primarily related to employee relocation costs and exit costs at the former corporate headquarters.
Cost optimization actions. These adjustments reflect charges incurred in connection with initiatives to optimize the cost structure of the Company, improve efficiencies or other objectives. Such actions may include asset rationalization,
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headcount reductions or similar actions. These adjustments, which have occurred at various times in the past, are irregular in timing and relate to specific identified programs to reduce or optimize the cost structure of a particular operating segment or the corporate function.
Goodwill and other asset impairment charges. This adjustment represents a non-cash charge recorded to reduce the carrying amount of certain long-lived assets, intangible assets and goodwill of our Dresden facility and the Composite Fibers reporting segment. The impairment was directly related to the adverse impact of the Russia/Ukraine military conflict on our projected revenue and EBITDA.
Russia/Ukraine conflict charges. This adjustment represents a non-cash charge recorded to reduce the carrying amount of accounts receivable and inventory directly related to the Russia/Ukraine military conflict.
Timberland sales and related costs. These adjustments exclude gains from the sales of timberlands as these items are not considered to be part of our core business, ongoing results of operations or cash flows. These adjustments are irregular in timing and amount and may benefit our operating results.
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 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 period indicated:
| Three months ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| In thousands, except per share | Amount | EPS | Amount | EPS | |||||||||||||||||||
| Net income (loss) | $ | (108,327) | $ | (2.42) | $ | 8,394 | $ | 0.19 | |||||||||||||||
| Exclude: Income from discontinued operations, net of tax | 37 | — | — | — | |||||||||||||||||||
| Income (loss) from continuing operations | (108,290) | (2.42) | 8,394 | 0.19 | |||||||||||||||||||
Adjustments (pre-tax): | |||||||||||||||||||||||
Goodwill and other asset impairment charges (1) | 117,349 | — | |||||||||||||||||||||
Russia/Ukraine conflict charges (2) | 3,948 | — | |||||||||||||||||||||
Strategic initiatives (3) | 1,835 | 603 | |||||||||||||||||||||
| Corporate headquarters relocation | 88 | 155 | |||||||||||||||||||||
Cost optimization actions (4) | 941 | — | |||||||||||||||||||||
| Timberland sales and related costs | (2,962) | (850) | |||||||||||||||||||||
| Total adjustments (pre-tax) | 121,199 | (92) | |||||||||||||||||||||
Income taxes (5) | (19,147) | 81 | |||||||||||||||||||||
CARES Act of 2020 tax provision (6) | 79 | 93 | |||||||||||||||||||||
| Total after-tax adjustments | 102,131 | 2.28 | 82 | — | |||||||||||||||||||
| Adjusted earnings | $ | (6,159) | $ | (0.14) | $ | 8,476 | $ | 0.19 | |||||||||||||||
(1)Reflects goodwill impairment charge of $56.1 million and other asset impairment charges of $61.3 million. Refer to Note 6, Goodwill and Other Asset Impairment, for details of this item.
(2)Reflects bad debt expense charges of $2.9 million and inventory reserves charges $1.1 million. Refer to Note 6, Goodwill and Other Asset Impairment, for details of this item.
(3)For 2022, primarily reflects professional services fees (including legal, audit, valuation specialists and consulting) of $1.3 million, employee separation and other costs of $0.5 million and other costs all of which are directly related to acquisitions. For 2021, reflects professional services fees related to acquisitions (including legal, audit and valuation specialists).
(4)Primarily reflects employee separation costs of $0.4 million, equipment write-down of $0.4 million and other costs of $0.1 million directly associated with closure of synthetic fiber production facility in the U.K..
(5)Tax effect on adjustments calculated based on the incremental effective tax rate of the jurisdiction in which each adjustment originated. For items originating in the U.S., no tax effect is recognized due to the previously established valuation allowance on the net deferred tax assets. No tax effects were recognized on the goodwill impairment as there were no related deferred taxes.
(6)Reflects the tax effect of applying certain provisions of the CARES Act of 2020.
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Segment Financial Performance
| Three months ended March 31, | ||||||||||||||
| Dollars in thousands | 2022 | 2021 | ||||||||||||
| Net Sales | ||||||||||||||
| Composite Fibers | $ | 135,829 | $ | 141,249 | ||||||||||
| Airlaid Material | 149,464 | 84,425 | ||||||||||||
| Spunlace | 96,387 | — | ||||||||||||
| Total | $ | 381,680 | $ | 225,674 | ||||||||||
| Operating income (loss) | ||||||||||||||
| Composite Fibers | $ | (335) | $ | 16,065 | ||||||||||
| Airlaid Material | 12,221 | 7,197 | ||||||||||||
| Spunlace | (1,572) | — | ||||||||||||
| Other and unallocated | (126,203) | (5,943) | ||||||||||||
| Total | $ | (115,889) | $ | 17,319 | ||||||||||
| Depreciation and amortization | ||||||||||||||
| Composite Fibers | $ | 6,519 | $ | 6,981 | ||||||||||
| Airlaid Material | 7,629 | 5,848 | ||||||||||||
| Spunlace | 2,914 | — | ||||||||||||
| Other and unallocated | 1,422 | 904 | ||||||||||||
| Total | $ | 18,484 | $ | 13,733 | ||||||||||
| Capital expenditures | ||||||||||||||
| Composite Fibers | $ | 6,127 | $ | 2,773 | ||||||||||
| Airlaid Material | 3,468 | 1,739 | ||||||||||||
| Spunlace | 2,085 | — | ||||||||||||
| Other and unallocated | 668 | 867 | ||||||||||||
| Total | $ | 12,348 | $ | 5,379 | ||||||||||
| Tons shipped (metric) | ||||||||||||||
| Composite Fibers | 28,211 | 34,140 | ||||||||||||
| Airlaid Material | 43,052 | 28,864 | ||||||||||||
| Spunlace | 20,736 | — | ||||||||||||
| Total | 91,999 | $ | 63,004 | |||||||||||
Segments Results of individual operating segments are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual segments are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the segments. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the segment are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the table set forth above.
Management evaluates results of operations of the operating segments before certain corporate level costs and the effects of certain gains or losses not considered to be related to the core business operations. Management believes that this is a more meaningful representation of the operating performance of its core businesses, the profitability of the segments and the extent of cash flow generated from these core operations. Such amounts are presented under the caption “Other and Unallocated.” In the evaluation of operating segments results, management does not use any measures of total assets. This presentation is aligned with the management and operating structure of our company. It is also on this basis that the Company’s performance is evaluated internally and by the Company’s Board of Directors.
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Sales and Costs of Products Sold
| Three months ended March 31, | |||||||||||||||||
| In thousands | 2022 | 2021 | Change | ||||||||||||||
| Net sales | $ | 381,680 | $ | 225,674 | $ | 156,006 | |||||||||||
| Costs of products sold | 350,015 | 186,378 | 163,637 | ||||||||||||||
| Gross profit | $ | 31,665 | $ | 39,296 | $ | (7,631) | |||||||||||
| Gross profit as a percent of Net sales | 8.3 | % | 17.4 | % | |||||||||||||
The following table sets forth the contribution to consolidated net sales by each segment:
| Three months ended March 31, | |||||||||||
| Percent of Total | 2022 | 2021 | |||||||||
| Segment | |||||||||||
| Composite Fibers | 35.6 | % | 62.6 | ||||||||