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| GLT > SEC Filings for GLT > Form 10-K on 13-Mar-2009 | All Recent SEC Filings |
13-Mar-2009
Annual Report
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, net sales, costs of products sold, non-cash pension income, 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. changes in the cost or availability of raw materials we use, in particular pulpwood, market pulp, pulp substitutes, caustic soda and abaca fiber;
ii. changes in energy-related costs and commodity raw materials with an energy component;
iii. variations in demand, including the impact of any unplanned market-related downtime, and the pricing of our products;
iv. our ability to develop new, high value-added Specialty Papers and Composite Fibers products;
v. our ability to renew our electricity sales agreement at acceptable margins in relation to our current coal supply contract;
vi. the impact of competition, changes in industry paper production capacity, including the construction of new mills, the closing of mills and incremental changes due to capital expenditures or productivity increases;
vii. the impairment of financial institutions as a result of the current credit market conditions and any resulting impact on us, our customers, or our vendors;
viii. the gain or loss of significant customers and/or on-going viability of such customers;
ix. cost and other effects of environmental compliance, cleanup, damages, remediation or restoration, or personal injury or property damages related thereto, such as the costs of natural resource restoration or damages related to the presence of polychlorinated biphenyls ("PCBs") in the lower Fox River on which our former Neenah mill was located;
x. risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates;
xi. geopolitical events, including war and terrorism;
xii. enactment of adverse state, federal or foreign tax or other legislation or changes in government policy or regulation;
xiii. adverse results in litigation; and
xiv. our ability to finance, consummate and integrate future acquisitions.
Introduction We manufacture, both domestically and internationally, a wide array of specialty papers and engineered products. Substantially all of our revenue is earned from the sale of our products to customers in numerous markets, including book publishing, envelope and converting, carbonless papers and forms, food and beverage, decorative laminates for furniture and flooring, and other highly technical niche markets.
Overview Our results of operations for 2008 when compared with 2007 reflect improved pricing conditions and increased shipping volumes in each of our business units. However, each of our business units' results in the comparison was adversely impacted by significantly higher input costs that offset, to a large degree, the benefits from higher selling prices.
Specialty Papers' operating income in 2008 increased approximately 45% compared to 2007 largely due to initiatives taken to improve the operational effectiveness and overall profitability of the Chillicothe facility.
Net sales in our Composite Fibers business unit increased 24% primarily due to the 2007 Caerphilly acquisition, foreign currency translation and higher selling prices. However, operating income decreased 3.5% in 2008 compared to 2007.
The results of operations in 2007 include $26 million of pre-tax charges related to our estimated costs associated with the Fox River environmental matter. The results also include approximately $5.7 million of income tax benefits recorded as a result of a change in the German corporate income tax rate.
As part of our strategy to monetize the value of our timberlands, we completed sales of these assets generating proceeds of $19.3 million and $84.4 million in 2008 and 2007 respectively. We also monetized a $43.2 million note received in 2007 as consideration for the sale of timberlands by pledging this asset to secure a $36.7 million borrowing. Proceeds from the new borrowing were used to reduce outstanding debt.
RESULTS OF OPERATIONS
The following table sets forth summarized results of operations:
Year Ended December 31
In thousands, except per share 2008 2007
Net sales $ 1,263,850 $ 1,148,323
Gross profit 177,782 156,312
Operating income 99,209 118,818
Net income 57,888 63,472
Earnings per diluted share 1.27 1.40
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The consolidated results of operations for the years ended December 31, 2008 and 2007 include the following non-routine items:
After-tax
In thousands, except per share Income (loss) Diluted EPS
2008
Gains on sale of timberlands $ 10,984 $ 0.24
Reversal of shutdown and restructuring charges 517 0.01
Acquisition integration costs (889 ) (0.02 )
2007
Gains on sale of timberlands $ 44,052 $ 0.97
Environmental remediation (15,979 ) (0.35 )
Acquisition integration costs (1,569 ) (0.03 )
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These items increased earnings by $10.6 million, or $0.23 per diluted share in 2008. Comparatively, the items identified above increased earnings in 2007 by $26.5 million, or $0.59 per diluted share.
Business Units Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the business unit are allocated primarily based on an estimated utilization of support area services or are included in "Other and Unallocated" in the table below.
Management evaluates results of operations of the business units before non-cash pension income, charges related to the Fox River environmental reserves, restructuring related charges, unusual items, certain corporate level costs, effects of asset dispositions and insurance recoveries because it believes this is a more meaningful representation of the operating performance of its core papermaking businesses, the profitability of business units and the extent of cash flow generated from core operations. Such amounts are presented under the caption "Other and Unallocated." 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.
Business Unit Performance Year Ended December 31
In thousands, except tons Specialty Papers Composite Fibers Other and Unallocated Total
2008 2007 2008 2007 2008 2007 2008 2007
Net sales $ 833,899 $ 802,293 $ 429,952 $ 346,030 $ (1 ) $ - $ 1,263,850 $ 1,148,323
Energy sales, net 9,364 9,445 - - - - 9,364 9,445
Total revenue 843,263 811,738 429,952 346,030 $ (1 ) - 1,273,214 1,157,768
Cost of products sold 739,481 721,216 366,791 287,606 (10,840 ) (7,366 ) 1,095,432 1,001,456
Gross profit 103,782 90,522 63,161 58,424 10,839 7,366 177,782 156,312
SG&A 54,596 56,561 38,206 32,541 5,095 27,042 97,897 116,144
Shutdown and restructuring charges - - - - (856 ) 35 (856 ) 35
Gains on dispositions of plant, equipment and timberlands - - - - (18,468 ) (78,685 ) (18,468 ) (78,685 )
Total operating income 49,186 33,961 24,955 25,883 25,068 58,974 99,209 118,818
Non operating income (expense) - - - - (18,183 ) (24,884 ) (18,183 ) (24,884 )
Income before income taxes $ 49,186 $ 33,961 $ 24,955 $ 25,883 $ 6,885 $ 34,090 $ 81,026 $ 93,934
Supplementary Data
Net tons sold 743,755 726,657 85,599 72,855 - - 829,354 799,512
Depreciation, depletion and amortization $ 35,010 $ 34,882 $ 25,601 $ 21,119 $ - $ - $ 60,611 $ 56,001
Capital expenditures 20,878 17,395 31,591 11,565 - - 52,469 28,960
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Sales and Costs of Products Sold
Year Ended December 31
In thousands 2008 2007 Change
Net sales $ 1,263,850 $ 1,148,323 $ 115,527
Energy sales - net 9,364 9,445 (81 )
Total revenues 1,273,214 1,157,768 115,446
Costs of products sold 1,095,432 1,001,456 93,976
Gross profit $ 177,782 $ 156,312 $ 21,470
Gross profit as a percent of Net sales 14.1 % 13.6 %
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The following table sets forth the contribution to consolidated net sales by each business unit:
Percent of total
2008 2007
Business Unit
Specialty Papers 66.0 % 69.9 %
Composite Fibers 34.0 30.1
Total 100.0 % 100.0 %
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Net sales totaled $1,263.9 million for the year ended December 31, 2008, an increase of $115.5 million, or 10.1%, compared to the previous year.
In the Specialty Papers business unit, net sales for 2008 increased $31.6 million to $833.9 million and operating income totaled $49.2 million, an increase of $15.2 million over the previous year. The improved operating income is primarily due to progress achieved in executing Chillicothe's profit improvement initiatives and improved operating efficiencies. Higher average selling prices contributed $36.4 million of the increase in net sales and volumes shipped increased 2.4%. These price and volume increases were partially offset by expected mix changes between carbonless papers and uncoated papers, as well as lower sales of scrap paper. The benefits of higher average selling prices were offset by $37.7 million of higher costs, largely driven by fiber and energy. Unplanned operating downtime at the Spring Grove and Chillicothe facilities also reduced operating results by $4.3 million in 2008 compared to 2007.
In Composite Fibers, net sales were $430.0 million for 2008, an increase of $83.9 million from the previous year. The completion of the November 30, 2007 Caerphilly acquisition accounted for $40.9 million of the increase in net sales, the translation of foreign currencies benefited net sales by $14.4 million and higher average selling prices contributed $16.3 million. Total volumes shipped by this business unit increased 17.5%, including a 4.3% increase in Food & Beverage paper product shipments. Shipments of Composite Laminates were down 1.5% primarily due to the weak housing and related markets.
Energy and raw material costs in the Composite Fibers business unit were $17.1 million higher than a year ago, increasing at a rate faster than average selling prices. Operating income for Composite Fibers declined $0.9 million in the comparison and totaled $25.0 million for 2008. During 2008, this unit's results were adversely impacted by an aggregate of $6.2 million due to operating issues, market related downtime and accelerated depreciation related to completed or planned machine upgrades.
Non-Cash Pension Income Non-cash pension income resulted from the over-funded status of our pension plans. The following summarizes non-cash pension income for 2008 compared to 2007:
Year Ended December 31
In thousands 2008 2007 Change
Recorded as:
Costs of products sold $ 11,067 $ 8,846 $ 2,221
SG&A expense 4,995 4,050 945
Total $ 16,062 $ 12,896 $ 3,166
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The amount of pension income recognized each year is determined using various actuarial assumptions and certain other factors, including the fair value of our pension assets as of the beginning of the year. As discussed in Item 8 - Financial Statements and Supplementary Data - Note 11, the fair value of the plans' assets has declined approximately 34% since the beginning of 2008. Accordingly, during 2009 we expect to recognize net pension expense totaling approximately $6 million, pre-tax.
Selling, general and administrative ("SG&A") expenses decreased $18.2 million in the year-to-year comparison and totaled $97.9 million in 2008 compared to $116.1 million a year ago. The decrease was primarily due to a $26.0 million charge for the Fox River environmental matter in 2007 partially offset by the inclusion in 2008 of a full year's result for the Caerphilly acquisition.
Gain on Sales of Plant, Equipment and Timberlands During 2008 and 2007, we completed sales of timberlands which are included in the following table:
Dollars in thousands Acres Proceeds Gain
2008
Timberlands 4,561 $ 19,279 $ 18,649
Other n/a - (181 )
Total $ 19,279 $ 18,468
2007
Timberlands 37,448 $ 84,409 $ 78,958
Other n/a 377 (273 )
Total $ 84,786 $ 78,685
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In connection with each of the asset sales set forth above, we received cash proceeds with the exception of the sale of approximately 26,000 acres of timberland completed in November 2007. As consideration for the timberland sold in this transaction, we received a $43.2 million, 20-year interest-bearing note due from the
buyer, Glawson Investments Corp. ("Glawson"), a Georgia corporation, and GIC Investments LLC, a Delaware limited liability company owned by Glawson. The note receivable is fully secured by a letter of credit issued by The Royal Bank of Scotland plc. In January 2008, we monetized this note receivable by pledging it as collateral for a new $36.7 million term note payable.
Income taxes During 2008, we recorded income tax expense totaling $23.1 million on pre tax income of $81.0 million. The comparable amounts in 2007 were income taxes of $30.5 million on a taxable income of $93.9 million. The effective rate in 2007 included a $5.7 million deferred income tax benefit related to the reduction of German corporate income tax rates passed into law July 2007. Overall, the decline in the effective tax rate from 2007 to 2008 was primarily due to higher gains from timberland sales in the prior year which are taxed at a higher rate.
Foreign Currency We own and operate paper and pulp mills in Germany, France, the United Kingdom and the Philippines. The functional currency in Germany and France is the Euro, in the UK it is the British Pound Sterling, and in the Philippines it is the Peso. During 2008, Euro functional currency operations generated approximately 20.6% of our sales and 19.9% of operating expenses and British Pound Sterling operations represented 10.6% of net sales and 11.2% of operating expenses. 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:
Year Ended
In thousands December 31
Favorable
(unfavorable)
Net sales $ 14,360
Costs of products sold (10,435 )
SG&A expenses (855 )
Income taxes and other (1,033 )
Net income $ 2,037
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The above table only presents the financial reporting impact of foreign currency translations. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.
RESULTS OF OPERATIONS
2007 versus 2006
The following table sets forth summarized results of operations:
Year Ended December 31
In thousands, except per share 2007 2006
Net sales $ 1,148,323 $ 986,411
Gross profit 156,312 105,294
Operating income 118,818 94
Net income (loss) 63,472 (12,236 )
Earnings (loss) per diluted share 1.40 (0.27 )
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The consolidated results of operations for the years ended December 31, 2007 and 2006 include the following significant items:
After-tax
In thousands, except per share Income (loss) Diluted EPS
2007
Gains on sale of timberlands $ 44,052 $ 0.97
Environmental remediation (15,979 ) (0.35 )
Acquisition integration costs (1,569 ) (0.03 )
2006
Gains on sale of timberlands 8,812 0.20
Shutdown and restructuring charges (35,212 ) (0.79 )
Acquisition integration costs (8,647 ) (0.19 )
Debt redemption premium (1,820 ) (0.04 )
Insurance recoveries 130 -
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These items increased earnings by $26.5 million, or $0.59 per diluted share in 2007. Comparatively, the items identified above decreased earnings in 2006 by $36.7 million, or $0.82 per diluted share.
GLATFELTER
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Table of Contents
Business Units The following table sets forth profitability information by
business unit and the composition of consolidated income from continuing
operations before income taxes:
Year Ended December 31
In thousands, except tons Specialty Papers Composite Fibers Other and Unallocated Total
2007 2006 2007 2006 2007 2006 2007 2006
Net sales $ 802,293 $ 693,660 $ 346,030 $ 292,751 $ - $ - $ 1,148,323 $ 986,411
Energy sales, net 9,445 10,726 - - - - 9,445 10,726
Total revenue 811,738 704,386 346,030 292,751 - - 1,157,768 997,137
Cost of products sold 721,216 635,143 287,606 246,797 (7,366 ) 9,903 1,001,456 891,843
Gross profit 90,522 69,243 58,424 45,954 7,366 (9,903 ) 156,312 105,294
SG&A 56,561 50,285 32,541 28,458 27,042 13,738 116,144 92,481
Restructuring charges - - - - 35 30,318 35 30,318
Gains on dispositions of plant, equipment and
timberlands - - - - (78,685 ) (17,394 ) (78,685 ) (17,394 )
Gain on insurance recoveries - - - - (205 ) - (205 )
Total operating income (loss) 33,961 18,958 25,883 17,496 58,974 (36,360 ) 118,818 94
Nonoperating income (expense) - - - - (24,884 ) (22,322 ) (24,884 ) (22,322 )
Income (loss) from continuing operations before income
taxes $ 33,961 $ 18,958 $ 25,883 $ 17,496 $ 34,090 $ (58,682 ) $ 93,934 $ (22,228 )
Supplementary Data
Net tons sold 726,657 653,734 72,855 68,148 - 10 799,512 721,892
Depreciation expense $ 34,882 $ 32,824 $ 21,119 $ 17,197 $ - $ - $ 56,001 $ 50,021
Capital expenditures 17,395 36,484 11,565 7,976 - - 28,960 44,460
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Sales and Costs of Products Sold
Year Ended December 31
In thousands 2007 2006 Change
Net sales $ 1,148,323 $ 986,411 $ 161,912
Energy sales - net 9,445 10,726 (1,281 )
Total revenues 1,157,768 997,137 160,631
Costs of products sold 1,001,456 891,843 109,613
Gross profit $ 156,312 $ 105,294 $ 51,018
Gross profit as a percent of Net sales 13.6 % 10.7 %
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The following table sets forth the contribution to consolidated net sales by each business unit:
Percent of total
2007 2006
. . .
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