May 4, 2021, 3:06 p.m. EDT

10-Q: GLATFELTER CORP

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(EDGAR Online via COMTEX) -- 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 2020 Annual Report on Form 10-K.

Forward-Looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future consolidated financial position or results of operations, made in this Report on Form 10-Q are forward looking. We use words such as "anticipates", "believes", "expects", "future", "intends" and similar expressions to identify forward-looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from such expectations. The following discussion includes forward-looking statements 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.

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. 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. During the first three months of 2021, our financial performance and results of operations have been impacted by the pandemic primarily by weaker demand for tabletop products used by restaurants, catering and similar venues, all of which were impacted by "lockdowns" throughout many regions of the world. The majority of our other product portfolios are considered to be "essential or life-sustaining" and we continued to produce products used in the global response effort to the pandemic. 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.

Pending Acquisition As discussed in Item 1 - Financial Statements, Note 3 "Pending Acquisition," we signed a definitive agreement to purchase Georgia-Pacific's U.S. nonwovens business ("G-P") for $175 million. This business includes the Mount Holly, NC manufacturing facility, with annual production capacity of approximately 37,000 metric tons, and an R&D center and pilot line for nonwovens product development in Memphis, TN. G-P had annual net sales of approximately $100 million in 2020. Upon completion

- 21 -

GLATFELTER

Form 10-Q

of the acquisition, which is expected by mid-May 2021, the acquired business will be operated as part of our Airlaid Materials reporting segment.

RESULTS OF OPERATIONS

Introduction We manufacture a wide array of engineered materials and report our results along two segments:

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

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

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.

Three months ended March 31, 2021 versus the three months ended March 31, 2020

Overview For the first three months of 2021, we reported income from continuing operations of $8.4 million, or $0.19 per share compared with $7.4 million and $0.17 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   2021            2020
        Net sales                      $ 225,674       $ 231,560
        Gross profit                      39,296          36,875
        Operating income                  17,319          12,281
        Continuing operations
        Income                             8,394           7,406
        Earnings per share                  0.19            0.17
        Net income                         8,394           7,406
        Earnings per share             $    0.19       $    0.17
        


The reported results are in accordance with generally accepted accounting principles in the United States ("GAAP") and reflect a number of significant actions we undertook including strategic initiatives, corporate headquarter relocation, cost optimization and the restructuring and consolidation of our metallized business, among others. Excluding these items from reported results, adjusted earnings, a non-GAAP measure, was $8.5 million, or $0.19 per diluted share for 2021, compared with $10.8 million, or $0.24 per diluted share, a year ago. Operating income for Composite Fibers increased by $1.0 million, or 6.4%; however, Airlaid Materials' operating income was $4.8 million, or 40.1% lower.

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 and related integrations.

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.

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, UK. The charge in the first quarter of 2020 included a non-cash charge of $2.5 million associated with accelerated depreciation and cash severance costs totaling $3.5 million.

- 22 -

GLATFELTER

Form 10-Q

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.

Pension settlement expenses, net. This adjustment reflects professional fees recorded in connection with the Company's termination of its qualified pension plan and the related actions to settle all obligations to the plan's participants. Since the pension plan was fully funded, the settlement of pension obligations did not require the use of the Company's cash, but instead was accomplished with plan assets.

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 taxes recorded 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.

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 three months ended March 31, 2021 and 2020:







                                                                    Three months ended
                                                                         March 31
                                                               2021                   2020
        In thousands, except per share                  Amount       EPS        Amount       EPS
        Net income                                      $ 8,394     $ 0.19     $  7,406     $ 0.17
        Adjustments (pre-tax)
        Strategic initiatives                               603                       -
        Corporate headquarters relocation                   155                       -
        Restructuring charge - Metallized operations          -                   5,987
        Cost optimization actions                             -                   1,748
        Pension settlement expenses, net                      -                      73
        Timberland sales and related costs                 (850 )                     -
        Total adjustments (pre-tax)                         (92 )                 7,808
        Income taxes (1)                                     81                  (1,835 )
        CARES Act of 2020 tax provision (benefit) (2)        93                  (2,569 )
        Total after-tax adjustments                          82          -        3,404       0.07
        Adjusted earnings                               $ 8,476     $ 0.19     $ 10,810     $ 0.24
        


(1) Tax effect on adjustments calculated based on the incremental effective tax rate of the jurisdiction in which each adjustment originated.

(2) Tax impact 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.

- 23 -

GLATFELTER

Form 10-Q







        Segment Financial Performance
        Three months ended
        March 31                                                                            Other and
        Dollars in thousands      Composite Fibers           Airlaid Materials             Unallocated                    Total
                                 2021          2020          2021          2020         2021         2020          2021          2020
        Net sales              $ 141,249     $ 132,711     $  84,425     $ 98,849     $      -     $       -     $ 225,674     $ 231,560
        Cost of products sold    114,267       106,985        72,585       82,246         (474 )       5,454       186,378       194,685
        Gross profit (loss)       26,982        25,726        11,840       16,603          474        (5,454 )      39,296        36,875
        SG&A                      10,917        10,624         4,643        4,581        7,267         9,389        22,827        24,594
        Gains on dispositions
        of plant,
          equipment and
        timberlands, net               -             -             -            -         (850 )           -          (850 )           -
        Total operating income
        (loss)                    16,065        15,102         7,197       12,022       (5,943 )     (14,843 )      17,319        12,281
        Non-operating expense          -             -             -            -       (1,735 )      (2,267 )      (1,735 )      (2,267 )
        Income (loss) before
        income taxes           $  16,065     $  15,102     $   7,197     $ 12,022     $ (7,678 )   $ (17,110 )   $  15,584     $  10,014
        Supplementary Data
        Net tons sold             34,140        35,983        28,864       35,039            -             -        63,004        71,022
        Depreciation,
        depletion and
        amortization ($ in
        thousands) (1)         $   6,981     $   6,466     $   5,848     $  5,451     $    904     $   3,485     $  13,733     $  15,402
        Capital expenditures       2,773         3,956         1,739        2,103          867           955         5,379         7,014
        


(1) The amount presented in 2020 in the Other and unallocated column represents accelerated depreciation incurred in connection with the restructuring of the metallized operations.

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.







        Sales and Costs of Products Sold
                                                  Three months ended
                                                       March 31
        In thousands                             2021            2020         Change
        Net sales                              $ 225,674       $ 231,560     $ (5,886 )
        Costs of products sold                   186,378         194,685       (8,307 )
        Gross profit                           $  39,296       $  36,875     $  2,421
        Gross profit as a percent of Net sales      17.4 %          15.9 %
        


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

Three months ended







                                  March 31
        Percent of Total    2021            2020
        Segment
        Composite Fibers       62.6 %         57.3 %
        Airlaid Materials      37.4           42.7
        Total                 100.0 %        100.0 %
        


- 24 -

GLATFELTER

Form 10-Q

Net sales totaled $225.7 million and $231.6 million in the first three months of 2021 and 2020, respectively. On a constant currency basis, Composite Fibers' and Airlaid Material's net sales decreased by 1.4% and 18.8%, respectively.

Composite Fibers' net sales increased $8.5 million or 6.4% in the first quarter of 2021, compared to the year-ago quarter, mainly driven by favorable currency translation of $10.3 million. Overall shipments, excluding metallized, which was restructured in the second quarter of 2020, were in-line with the first quarter of 2020.

Composite Fibers' operating income of $16.1 million was $1.0 million higher, or approximately 6% favorable, compared to the first quarter of 2020 as a result of improved sales mix, which favorably impacted results by $1.1 million. Raw material and energy prices were $1.3 million higher than the same period last year, but mostly mitigated by improved operations of $1.2 million. The primary drivers of the change in Composite Fibers' operating income are summarized in the following chart:

[[Image Removed]]

Airlaid Materials' net sales decrease $14.4 million, in the year-over-year comparison. Shipments were 18% lower driven by continued softness in tabletop demand from delays in restaurant opening as well as lower shipments in the hygiene and wipes categories as customers adjusted their buying patterns following elevated year-end inventory levels maintained due to the pandemic. Currency translation was $4.2 million favorable.

Airlaid Materials' first quarter 2021 operating income of $7.2 million was $4.8 million lower when compared to the first quarter of 2020. Lower shipping volumes unfavorably impacted earnings by $3.2 million and operations were $1.3 million unfavorable driven by lower production to manage customer demand and inventory levels. Selling price increases due to raw material pass-through provisions were more than offset by higher raw material and energy prices, reducing earnings by net $0.3 million. The primary drivers are summarized in the following chart:

[[Image Removed]]

- 25 -

GLATFELTER

Form 10-Q

Other and Unallocated The amount of "Other and Unallocated" operating expense in our table of Segment Financial Information totaled $5.9 million in the first three months of 2021 compared with $14.8 million in the first three months of 2020. Excluding the items identified to present "adjusted earnings," unallocated expenses for the comparison decreased $1.0 million.

Income taxes During the first three months of 2021, income from continuing operations totaled $15.6 million and income tax expense totaled $7.2 million. On adjusted pre-tax income of $15.5 million, income tax expense was $7.0 million in the first three months of 2021. The comparable amounts in the same period of 2020 were $17.8 million and $7.0 million, respectively. The effective tax rate on adjusted earnings was 45% in the first three months of 2021.

Foreign Currency We own and operate facilities in Canada, Germany, France, the United Kingdom and the Philippines. The functional currency of our Canadian operations is the U.S. dollar. However, in Germany and France it is the Euro, in the UK, it is the British Pound Sterling, and in the Philippines the functional currency is the Peso. On an annual basis, our Euro denominated revenue exceeds Euro expenses by an estimated ?150 million. For the first three months of 2021, the average currency exchange rate was 1.19 dollar/euro compared with 1.10 in the same period of 2020. With respect to the British Pound Sterling, Canadian Dollar, and Philippine Peso, we have differing amounts of inflows and outflows of these currencies, although to a lesser degree than the Euro. As a result, we are exposed to changes in currency exchange rates and such changes could be significant. The translation of the results from international operations into U.S. dollars is subject to changes in foreign currency exchange rates.

The table below summarizes the translation impact on reported results that changes in currency exchange rates had on our non-U.S. based operations from the conversion of these operation's results for the first three months of 2021.







                                  Three months ended
        In thousands                March 31, 2021
                                      Favorable
                                    (unfavorable)
        Net sales                       $        14,527
        Costs of products sold                  (13,587 )
        SG&A expenses                              (863 )
        Income taxes and other                     (201 )
        Net loss                        $          (124 )
        


The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2021 were the same as 2020. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.







        LIQUIDITY AND CAPITAL RESOURCES
        Our business requires significant expenditures for new or enhanced equipment, to
        support our research and development efforts, and to support our business
        strategy. In addition, we have mandatory debt service requirements of both
        principal and interest. The following table summarizes cash flow information for
        each of the periods presented:
                                                                   Three months ended
                                                                        March 31
        In thousands                                             2021               2020
        Cash, cash equivalents and restricted cash at the
        beginning of period                                  $    111,665       $    126,201
        Cash used by
        Operating activities                                       (6,046 )           (5,603 )
        Investing activities                                       (4,603 )           (7,014 )
        Financing activities                                          179             (6,847 )
        Effect of exchange rate changes on cash                    (2,213 )             (937 )
        Change in cash and cash equivalents from
        discontinued operations                                       (78 )             (316 )
        Net cash used                                             (12,761 )          (20,717 )
        Cash, cash equivalents and restricted cash at the
        end of period                                              98,904            105,484
        Less: restricted cash in Prepaid and other current
        assets                                                     (2,000 )           (1,259 )
        Less: restricted cash in Other assets                      (9,538 )                -
        Cash and cash equivalents at the end of period       $     87,366       $    104,225
        


- 26 -

GLATFELTER

Form 10-Q

At March 31, 2021, we had $87.4 million in cash and cash equivalents ("cash") held by both domestic and foreign subsidiaries. Approximately 90.6% of our cash and cash equivalents is held by our foreign subsidiaries but could be repatriated without incurring a significant amount of additional taxes. In addition to cash, as of March 31, 2021, $178.1 million was available under our existing revolving credit agreement.

Cash used by operating activities in the first three months of 2021 totaled $6.0 million compared with $5.6 million in the same period a year ago. The change in operating cash flow used reflects a slight decrease in earnings before interest, taxes, depreciation and amortization as well as by increased working capital usage primarily for inventory.

At March 31, 2021, we recorded approximately $12 million of value added tax liability and a related receivable identified while reviewing certain customer sales arrangements. We expect to fully recover all amounts owed with no net impact to earnings or cash flow of the Company. However, the timing of payment and the recovery from customers may not occur in the same quarterly period.

Net cash used by investing activities was $4.6 million compared with $7.0 million in the same period a year ago. Capital expenditures totaled $5.4 million and $7.0 million for the three months ended March 31, 2021 and 2020, respectively, and are expected to be $38 million to $42 million for the full year 2021.

Net cash provided by financing activities totaled $0.2 million in the first three months of 2021 compared with a use of $6.8 million in the same period of 2020. The change in financing activities primarily reflects a $11.7 million . . .

May 04, 2021

COMTEX_385843685/2041/2021-05-04T15:06:19

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