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Feb. 25, 2021, 5:42 p.m. EST

10-K: GLATFELTER CORP

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(EDGAR Online via COMTEX) -- ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this annual report. Our discussion and analysis of 2020 compared to 2019 is included herein. For discussion and analysis of 2019 compared to 2018, please refer to Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which was filed with the United States Securities and Exchange Commission on February 26, 2020 and is incorporated herein by reference.

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. 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;

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

iii. 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;

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

v. geopolitical matters, including any impact to our operations from events in Russia, Ukraine and Philippines;

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

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

viii. changes in energy-related prices and commodity raw materials with an energy component;

ix. the impact of unplanned production interruption at our facilities or at any of our key suppliers;

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

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

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 taxes;

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

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

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

Composite Fibers with net 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; and

Airlaid Materials with net 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.

Specialty Papers' results of operations and financial condition are reported as discontinued operations. The following discussion and analysis primarily focuses on the financial results of operations and financial condition of our continuing operations.

COVID-19 Pandemic On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic as the virus spread throughout the world. As the virus continued its rapid spread, a significant portion of the world's economies were significantly impacted by government mandates that all "non-essential" businesses close and that residents "shelter-in-place" or practice "social distancing." These actions have had, and are likely to have, a continuing significant adverse impact on a wide range of economies and industries throughout the world, including certain markets we serve.

The COVID-19 pandemic and the actions undertaken throughout the world in an attempt to contain the virus have had an unprecedented and significant adverse impact on global economies in terms of reduced GDP, increased unemployment, and insolvencies in a variety of industries and markets. As a result, we have experienced and may continue to experience weaker demand for certain of our products due to the effects of the pandemic, and there may be periods during which demand for our products is insufficient to enable us to operate our production facilities in an economical manner which may force us to take machine downtime to curtail production to match demand.

Our financial performance and results of operations have been impacted by the weaker economic conditions related to the pandemic as demand for wallcover products were significantly weaker particularly during the second quarter of 2020, although shipping volumes increased significantly during the second half of 2020. In addition, demand for tabletop products has been significantly adversely impacted by the pandemic and the effect on venues, such as restaurants, which use tabletop products. The majority of our other product portfolios is considered to be "essential" consumer staples. We believe demand for certain of our products, such as Composite Fibers' food & beverage filtration products and Airlaid Materials' personal hygiene and wipes, will remain strong. To date, we have successfully maintained our global supply chain securing critical raw materials with minimal disruptions or incremental costs and the demand for substantially all products has been stable as our customers continued to serve critical products to end-user consumers.

As disclosed in Item 1A - Risk Factors to this Annual Report, approximately $79 million of our net sales in 2020 was earned from customers located in Ukraine, Russia, and members of the Commonwealth of Independent States. The large majority of our net sales from this region consists of wallcover base material. During the second quarter of 2020, our wallcover net sales were significantly impacted by temporary suspension of operations of many of our customers due to government orders related to the pandemic. Although our customers have resumed operations and demand for our wallcover products returned to more normalized levels, if the governmental authorities reimplement actions to fight any resurgence of COVID-19 in these regions, or if economic hardships continue, sales to some of our customers, such as wallpaper printers, may be adversely impacted. In addition, as authorities instituted restrictions limiting business operations, social distancing and other health and safety measures, restaurants and similar venues globally were forced to significantly curtail or close their businesses. As a result, tabletop volumes in our Airlaid Materials segment were significantly lower in 2020.

The health and safety of our employees and their families are a top priority, and we remain committed to taking all the necessary measures to protect them. We have instituted appropriate new safety, hygiene, and communication protocols throughout our facilities to ensure we maintain our ability to produce product. Accordingly, we continue to proactively work to identify and mitigate risks to safeguard the continuity of our business. We believe we are well positioned from a liquidity and leverage perspective following the successful restructuring and cost optimization initiatives in 2019 and 2020 and the debt refinancing in 2019. As a result, we believe we are able to supply our customers high-quality engineered materials necessary to manufacture a variety of essential and life-sustaining consumer staples including wipes, health and hygiene products, and food and beverage items during this challenging time.

GLATFELTER 2020 FORM 10-K 15

RESULTS OF OPERATIONS

2020 versus 2019

Overview For the year ended December 31, 2020 we reported income from continuing operations of $20.8 million, or $0.47 per share compared with a loss of $25.2 million, or $0.57 per share in 2019.

The following table sets forth summarized GAAP-based consolidated results of operations:







                                              Year ended
                                              December 31
        In thousands, except per share   2020            2019
        Net sales                      $ 916,498       $ 927,673
        Gross profit                     147,869         147,542
        Operating income                  49,156          54,635
        Continuing operations
        Income (loss)                     20,783         (25,211 )
        Earnings (loss) per share           0.47           (0.57 )
        Discontinued operations
        Income                               515           3,670
        Earnings per share                  0.01            0.08
        Net income (loss)                 21,298         (21,541 )
        Earnings (loss) per share      $    0.48       $   (0.49 )
        


We generated $109.0 million of cash from operations in 2020 compared with $102.8 million a year ago. The amount reported for 2019 includes $53.4 million of cash, before tax, available to us as a result of the pension plan termination and settlement of all liabilities. During 2020 and 2019, capital expenditures totaled $28.1 and $27.8 million, respectively.

The results presented above are in accordance with generally accepted accounting principles in the United States ("GAAP") and reflect a number of significant actions we undertook including cost optimization, the restructuring and consolidation of our metallized business, debt refinancing and termination and settlement of our qualified pension plan, among others. Excluding these items from reported results, adjusted earnings, a non-GAAP measure, was $37.4 million, or $0.84 per diluted share for 2020, compared with $33.2 million, or $0.75 per diluted share, a year ago. Operating income for our segments, Composite Fibers and Airlaid Materials, increased by $4.2 million, or 8.8%, and $5.2 million, or 12.6%, respectively. Although growth in aggregate shipping volumes was limited due to the COVID-19 pandemic, the segments' results benefited from a favorable mix of products sold, efficient operations and disciplined cost control. In addition, interest expense, net declined $2.7 million reflecting the benefits of our debt refinancing in 2019.

Adjusted earnings consists 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, its results of operations, including the loss recorded in 2018 connection with the sale, are reported as discontinued operations for all periods presented. This adjustment reflects the net results of this discontinued operation.

Restructuring charge - Metallized operations. This adjustment represents the charges incurred in connection with the decision to restructure a portion of the Composite Fibers segment, primarily consisting of the consolidation of our metallizing operation from Gernsbach, Germany to Caerphilly, U.K. The adjustment includes a non-cash charge of $5.0 million associated with accelerated depreciation and the write-off of inventory and spare parts in addition to cash severance costs totaling $6.1 million.

Cost optimization actions. These adjustments reflect charges incurred in connection with initiatives to optimize the cost structure of the Company, including costs related to the organizational change to a functional operating model. The costs are primarily related to executive separations, other headcount reductions, professional fees, asset write-offs and certain contract termination costs. 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.

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 previous corporate headquarters.

Pension settlement expenses, net. This adjustment reflects expenses incurred in connection with the termination of the Company's qualified pension plan in 2019 and the reversion of excess pension plan assets to the Company. In the fourth quarter of 2019, the Company incurred a $75.3 million pension settlement charge in connection with the termination of the plan. Since the pension plan was fully funded, the settlement of the pension obligations did not require the use of the Company's cash, but instead was accomplished with plan assets. In connection with the reversion of excess pension plan assets in the second quarter of 2020, the Company incurred pension settlement expenses related to excise taxes, net of post settlement adjustments and certain related professional fees.

COVID-19 incremental costs. This adjustment represents incremental cash costs incurred directly related to the COVID-19 pandemic such as mill employee incentive payments, enhanced hygiene protocols, safety and supplies and professional fees primarily associated with the CARES Act benefit.

Asset Impairment Charge. This adjustment represents a non-cash charge recorded to reduce the carrying amount of a tradename intangible asset of the Dresden wallcover business due to the impact of the COVID 19 pandemic on the underlying forecasted revenue stream.

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

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 and the related integration.

Debt refinancing costs. Represents a charge to write-off unamortized debt issuance costs in connection with the redemption of the Company's $250 million, 5.375% Notes.

Fox River environmental matter. This adjustment excludes a gain and reflects a decrease in the Company's overall reserve for the Fox River matter primarily due to the resolution of the litigation in the first quarter of 2019.

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.

Coronavirus Aid, Relief, and Economic Security (CARES) Act 2020. This adjustment reflects the tax benefit recognized as a result of the March 27, 2020 change in U.S. tax law which, among others, allows net operating losses to be carried back five years.

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.

GLATFELTER 2020 FORM 10-K 17

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, 2020 and 2019:







                                                                           Year ended
                                                                           December 31
                                                                2020                        2019
        In thousands, except per share                  Amount          EPS         Amount          EPS
        Net income                                     $  21,298     $    0.48     $ (21,541 )   $   (0.49 )
        Exclude: Income from discontinued operations        (515 )       (0.01 )      (3,670 )       (0.08 )
        Income (loss) from continuing operations          20,783          0.47       (25,211 )       (0.57 )
        Adjustments (pre-tax)
        Restructuring charge - Metallized operations      11,111                           -
        Cost optimization actions                          5,979                       8,583
        Corporate headquarters relocation                  1,053                           -
        Pension settlement expenses, net                   6,154                      75,326
        COVID 19 - incremental costs                       2,715                           -
        Asset impairment charge                              900                           -
        Airlaid capacity expansion costs                       -                       1,014
        Debt refinancing                                       -                         992
        Strategic initiatives                              1,567                         249
        Fox River environmental matter                         -                      (2,509 )
        Timberland sales and related costs                (1,382 )                    (1,572 )
        Total adjustments (pre-tax)                       28,097                      82,083
        Income taxes (1)                                  (5,405 )                   (23,722 )
        CARES Act of 2020 tax benefit (2)                 (6,082 )                         -
        Total after-tax adjustments                       16,610          0.37        58,361          1.32
        Adjusted earnings                              $  37,393     $    0.84     $  33,150     $    0.75
        


(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.

(2) Tax benefit recorded in connection with passage of the Coronavirus Aid, Relief, and Economic Security Act ("CARES") related to provisions that modified the "net operating loss" provisions of previous law to allow certain losses to be carried back five years.







        Segment Financial Performance
        Year ended
        December 31                                                                            Other and
        Dollars in thousands       Composite Fibers            Airlaid Materials              Unallocated                     Total
                                  2020          2019          2020          2019          2020           2019          2020          2019
        Net sales               $ 525,089     $ 521,666     $ 391,409     $ 406,007     $       -     $        -     $ 916,498     $ 927,673
        Cost of products sold     430,420       432,154       326,809       346,568        11,400          1,409       768,629       780,131
        Gross profit (loss)        94,669        89,512        64,600        59,439       (11,400 )       (1,409 )     147,869       147,542
        SG&A                       42,575        41,629        18,296        18,321        39,174         35,017       100,045        94,967
        Gains on dispositions
        of plant,
          equipment and
        timberlands, net                -             -             -             -        (1,332 )       (2,060 )      (1,332 )      (2,060 )
        Total operating income
        (loss)                     52,094        47,883        46,304        41,118       (49,242 )      (34,366 )      49,156        54,635
        Non-operating expense           -             -             -             -       (16,797 )      (89,088 )     (16,797 )     (89,088 )
        Income (loss) before
        income taxes            $  52,094     $  47,883     $  46,304     $  41,118     $ (66,039 )   $ (123,454 )   $  32,359     $ (34,453 )
        Supplementary Data
        Net tons sold
        (thousands)               134,758       133,473       136,661       137,595             -              -       271,419       271,068
        Depreciation, depletion
        and amortization        $  26,175     $  26,153     $  22,416     $  21,136     $   8,009     $    3,531     $  56,600     $  50,820
        Capital expenditures       13,262        11,972         9,311        13,667         5,563          2,126        28,136        27,765
        


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

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 operating segment are allocated primarily based on an estimated utilization of support area services or are included in "Other and Unallocated" in the table above.

Management evaluates results of operations of the 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 operating 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 segment 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                             2020            2019         Change
        Net sales                              $ 916,498       $ 927,673     $ (11,175 )
        Costs of products sold                   768,629         780,131       (11,502 )
        Gross profit                           $ 147,869       $ 147,542     $     327
        Gross profit as a percent of Net sales      16.1 %          15.9 %
        


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

Year ended







        Percent of Total   2020          2019
        Segment
        Composite Fibers     57.3 %        56.2 %
        Airlaid Materials    42.7          43.8
        Total               100.0 %       100.0 %
        


Net sales on a consolidated basis totaled $916.5 million and $927.7 million in 2020 and 2019, respectively. The $11.2 million decrease was primarily driven by lower average selling prices partially offset by favorable currency translation. Shipping volumes increased 0.1%.

Composite Fibers' net sales increased $3.4 million, or 0.7%, and totaled $525.1 million in 2020. The increase was primarily due to a more favorable mix of products sold and $7.1 million from favorable currency translation. Shipping volumes increased 1.0% and lower selling prices adversely impacted the comparison by $11.3 million.

GLATFELTER 2020 FORM 10-K 19

Composite Fibers' operating income for the year ended December 31, 2020 increased $4.2 million to $52.1 million compared to a year ago. The segment's results were favorably impacted by $10.4 million from lower raw material and energy prices, operational efficiencies, and volume/mix improvements. Currency was $0.9 million unfavorable compared to the prior year. The primary drivers are summarized in the following chart (in millions):

[[Image Removed]]

Airlaid Materials' net sales totaled $391.4 million in 2020, a $14.6 million decrease in the year-over-year comparison driven by $13.7 million of lower selling prices. Shipping volumes declined slightly as the closure of restaurants globally due to the COVID-19 pandemic resulted in significantly lower tabletop volumes. This decline was partially offset by strong shipments of home care, food pads and wipes products. Lower selling prices primarily reflects contractual pass-through arrangements. Currency translation was favorable $4.4 million.

Airlaid Materials' operating income totaled $46.3 million, an increase of $5.2 million, or 12.6% compared to a year ago. The increase was primarily due to lower raw material and energy costs partially offset by lower selling prices, primarily reflecting pass-through arrangements. Currency translation was favorable $2.0 million. The primary drivers are summarized in the following chart (in millions):

[[Image Removed]]

Other and Unallocated The amount of net operating expenses not allocated to an operating segment and reported as "Other and Unallocated" in our table of Segment Financial Performance, totaled $49.2 million for 2020 compared with $34.4 million in 2019. Excluding the items identified to present "adjusted earnings," unallocated expenses for the comparison declined $1.3 million primarily reflecting cost reduction initiatives, position elimination and less travel.

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







        Dollars in thousands    Acres       Proceeds       Gain (loss)
        2020
        . . .
        


Feb 25, 2021

COMTEX_381740862/2041/2021-02-25T17:42:04

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