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| GLT > SEC Filings for GLT > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
ii. changes in the cost or availability of raw materials we use, in particular pulpwood, market pulp, pulp substitutes, caustic soda and abaca fiber;
iii. changes in energy-related costs and commodity raw materials with an energy component;
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 & converting, carbonless papers and
forms, food & beverage filter papers, decorative laminates for furniture and
flooring, metallized papers and other highly technical niche markets.
Overview Our results of operations for the first six months of 2009 when
compared with the same period of 2008 were significantly and adversely impacted
by the weak global economic conditions. Overall volumes shipped by Specialty
Papers declined 2.3% and Composite Fibers declined 10.1% in the period-to-period
comparison. As a result of the soft demand for most of our products and our
efforts to reduce inventory, we incurred significant market-related downtime at
many of our facilities which adversely affected results of operations. However,
we generated $64.9 million of cash from operations, including alternative fuel
mixture credits, by reducing inventories, controlling costs and deferring
discretionary capital spending. During the first half of 2009, we registered two
of our facilities with the U.S. Internal Revenue Service as alternative fuel
mixers based on their use of black liquor as an alternative fuel source. Our
results of operations in the first half of 2009 included, on a pre-tax basis,
$40.8 million of alternative fuel mixture credits, of which $29.7 million was
received in cash. We intend to realize remaining credits in the form of
non-taxable income tax credits.
Specialty Papers' operating income totaled $12.0 million and $10.8 million
for the first half of 2009 and 2008, respectively. The weak economic environment
adversely affected demand in all markets served by Specialty Papers. As a result
of weak demand and our efforts to reduce inventory, during the second quarter of
2009, this unit incurred market related downtime totaling 14,400 tons of paper,
or 8% of its total quarterly capacity. We reduced Specialty Papers' inventories
by 14.4% during the second quarter of 2009.
Our Composite Fibers business unit's operating income declined to
$9.1 million from $12.9 million in the first half of 2008. Volumes shipped
during the first half of 2009 declined 10.1% compared to 2008 as a result of the
weak economic environment and our customers' actions to reduce their inventory
levels. Demand for tea and coffee filter papers, this unit's largest product
line, declined by 1.4% primarily due to weak order patterns and customers'
inventory destocking primarily in Russia, Eastern Europe and
other related regions. As a result of weak demand and our inventory reduction
efforts, during the second quarter we incurred unscheduled downtime totaling
3,380 tons of paper, or 22% of the unit's total quarterly capacity. We reduced
inventory in this business unit by 12.2% during the second quarter of 2009.
In addition, our after-tax consolidated results of operations were adversely
affected by $13.8 million of lower gains in 2009 from the sale of timberlands.
We also recorded $3.7 million of pension expense in the first six months of 2009
compared with pension income of $8.0 million in the year-earlier quarter.
RESULTS OF OPERATIONS
Six Months Ended June 30, 2009 versus the
Six Months Ended June 30, 2008
The following table sets forth summarized results of operations:
Six months ended June 30
In thousands, except per share 2009 2008
Net sales $ 570,531 $ 625,723
Gross profit 102,315 76,656
Operating income 51,926 42,502
Net income 31,408 22,831
Diluted earnings per share 0.69 0.50
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The consolidated results of operations for the six months ended June 30, 2009 include the following significant items:
After-tax Diluted EPS
In thousands, except per share Gain (loss)
2009
Alternative fuel mixing credit $ 30,418 $ 0.67
2008
Timberland sales $ 8,656 $ 0.19
Reversal of shutdown and restructuring charges 532 0.01
Acquisition integration related costs (588 ) (0.01 )
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The above items increased earnings by $30.4 million, or $0.67 per diluted share, in the first six months of 2009. In the comparable period a year ago, the above items increased earnings by $8.6 million, or $0.19 per diluted share.
GLATFELTER
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Table of Contents
For the six months ended June 30
Dollars In thousands Specialty Papers Composite Fibers Other and Unallocated Total
2009 2008 2009 2008 2009 2008 2009 2008
Net sales $ 383,971 $ 408,242 $ 186,560 $ 217,480 - $ 1 $ 570,531 $ 625,723
Energy sales, net 4,062 4,727 - - - - 4,062 4,727
Total revenue 388,033 412,969 186,560 217,480 - 1 574,593 630,450
Cost of products sold 350,147 374,224 160,376 184,858 (38,245 ) (5,288 ) 472,278 553,794
Gross profit 37,886 38,745 26,184 32,622 38,245 5,289 102,315 76,656
SG&A 25,925 27,979 17,122 19,709 8,014 1,824 51,061 49,512
Shutdown and
restructuring charges - - - - - (856 ) - (856 )
Gains on dispositions of
plant, equipment and
timberlands - - - - (672 ) (14,502 ) (672 ) (14,502 )
Total operating income 11,961 10,766 9,062 12,913 30,903 18,823 51,926 42,502
Nonoperating income
(expense) - - - (9,123 ) (8,840 ) (9,123 ) (8,840 )
Income (loss) before
income taxes $ 11,961 $ 10,766 $ 9,062 $ 12,913 $ 21,780 $ 9,983 $ 42,803 $ 33,662
Supplementary Data
Net tons sold 356,354 364,911 39,264 43,695 - - 395,618 408,606
Depreciation, depletion
and amortization $ 17,749 $ 17,612 $ 11,301 $ 13,054 $ - $ - $ 29,050 $ 30,666
Capital expenditures 7,018 10,446 4,357 14,961 100 - 11,475 25,407
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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 above.
Management evaluates results of operations of the business units before
pension income or expense, alternative fuel mixture credits, charges related to
the Fox River environmental reserves, restructuring related charges, unusual
items, certain corporate level costs, and the effects of asset dispositions.
Management believes that 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 these 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.
Sales and Costs of Products Sold
Six months ended
June 30
In thousands 2009 2008 Change
Net sales $ 570,531 $ 625,723 $ (55,192 )
Energy sales - net 4,062 4,727 (665 )
Total revenues 574,593 630,450 (55,857 )
Costs of products sold 472,278 (1) 553,794 (81,516 )
Gross profit $ 102,315 $ 76,656 $ 25,659
Gross profit as a percent of Net sales 17.9 % 12.3 %
(1) Includes
$40.8 million
of
alternative
fuel mixture
credits, net
of related
expenses.
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The following table sets forth the contribution to consolidated net sales by each business unit:
Percent of Total
2009 2008
Business Unit
Specialty Papers 67.3 % 65.2 %
Composite Fibers 32.7 34.8
Total 100.0 % 100.0 %
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Net sales totaled $570.5 million for the first six months of 2009, a decrease
of $55.2 million, or 8.8%, compared to the same period a year ago.
In the Specialty Papers business unit, net sales for the first six months of
2009 decreased $24.3 million to $384.0 million. Operating income totaled
$12.0 million, an increase of $1.2 million, or 11.1%, over the same period a
year ago. The improved operating income is primarily due to increases in average
selling prices outpacing increases in input costs and improved operating
efficiencies. Higher average selling prices contributed $7.6 million of the
increase in operating profit. These price increases were
partially offset by lower volumes and expected mix changes between carbonless
papers and uncoated papers. In addition, this business unit's results were
adversely impacted by $2.0 million of higher input costs, largely driven by
caustic soda and coal. Unplanned downtime at the Spring Grove and Chillicothe
facilities further reduced operating results by approximately $8.5 million in
the first six months of 2009 compared to the same period of 2008.
In Composite Fibers, net sales were $186.6 million for the first six months
of 2009, a decline of $30.9 million from the year-earlier period. Operating
income declined by $3.9 million in the comparison to $9.1 million. Total volumes
shipped by this business unit declined 10.1% led by lower shipments of composite
laminates and metallized products, which declined 26.3% and 9.3%, respectively,
and, to a lesser extent, a 1.4% decline in food & beverage paper product
shipments. The translation of foreign currencies adversely impacted net sales by
$26.6 million; however, higher average selling prices contributed $6.8 million.
Energy and raw material costs in the Composite Fibers business unit were
$8.2 million higher in the first six months of 2009 than in the same period a
year ago. Market-related downtime adversely impacted operating results by
$5.3 million in the first half of 2009 compared to the first half of 2008.
Alternative Fuel Mixture Credits The U.S. Internal Revenue Code provides a
tax credit for companies that use alternative fuel mixtures to produce energy to
operate their businesses. The credit, equal to $0.50 per gallon of alternative
fuel contained in the mixture, is refundable to the taxpayer. The accompanying
consolidated statement of income for the six months ended June 30, 2009 includes
a credit of $40.8 million recorded in cost of products sold representing
alternative fuel mixture credits earned through June 30, 2009, net of associated
expenses.
We began mixing black liquor and diesel fuel in late February 2009 and filed
an application to be registered as an alternative fuel mixer with the Internal
Revenue Service in March 2009. On May 11, 2009, the Company was notified by the
Internal Revenue Service that its application to be registered as an alternative
fuel mixer was approved. We subsequently filed an excise tax refund claim for
the alternative fuel mixture consumed at its Spring Grove, PA and Chillicothe,
OH facilities during the period February 20, 2009 through May 17, 2009 (the
"First Refund Claim"). We received a payment from the Internal Revenue Service
("IRS") on June 30, 2009 in the amount of $29.7 million related to the First
Refund Claim. In addition, for the period May 18, 2009 through June 30, 2009, we
earned an additional $12.8 million of alternative fuel mixture credits for which
a claim has yet to be submitted to the IRS. We intend to realize the balance of
the credits in the form of a non-taxable income tax credit in connection with
the filing of our 2009 federal corporate income tax return.
According to the Internal Revenue Code, the tax credit is scheduled to expire
on December 31, 2009. However, there can be no assurances that the incentive
program for alternative fuel mixtures will continue in effect or that its
provisions, including taxes applicable to the credits, will not be changed, or
that we will be successful in receiving future credits under the program.
Pension Expense/Income Pension expense or income results from the over-funded
status of our pension plans. The following summarizes the amounts of pension
expense or income recognized for the first six months of 2009 compared to the
same period of 2008:
Six months ended
June 30
In thousands 2009 2008 Change
Recorded as:
Costs of products sold $ 2,502 $ (5,465 ) $ 7,967
SG&A expense 1,203 (2,500 ) 3,703
Total $ 3,705 $ (7,965 ) $ 11,670
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The amount of pension expense or 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 1 - Financial Statements - Note 9, the fair value of the plans' assets
declined approximately 29% during 2008. As a result, during 2009 we expect to
recognize net pension expense totaling approximately $7.3 million, on a pre-tax
basis. However, we do not expect to be required to make cash contributions to
our qualified defined benefit pension plans in 2009.
Selling, general and administrative ("SG&A") expenses increased $1.5 million
in the period-to-period comparison and totaled $51.1 million for the first six
months of 2009. Benefits from our cost control initiatives were more than offset
by $1.2 million of pension expense recorded in the first six months of 2009
compared with $2.5 million of pension income in the same period of 2008. In
addition, SG&A expenses for the first six months of 2008 included a $1.5 million
non-recurring benefit from a recovery in a litigation matter, net of legal fees.
Gain on Sales of Plant, Equipment and Timberlands During the first six months of 2009 and 2008, we completed sales of timberlands which are summarized by the following table:
Dollars in thousands Acres Proceeds Gain
2009
Timberlands 189 $ 728 $ 699
Other n/a - (27 )
$ 728 $ 672
2008
Timberlands 3,595 $ 14,997 $ 14,603
Other n/a - (101 )
$ 14,997 $ 14,502
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Income taxes Our results of operations for the first six months of 2009
reflect an effective tax rate of 26.6% compared to 32.2% in the same period a
year ago. The decline in the effective tax rate is primarily due to a lower
proportion of timberland gains, which are taxed at a higher effective tax rate,
and by $40.8 million of alternative fuel mixture credits taxed at a lower
effective tax rate. In addition, approximately $12.8 million of the alternative
fuel mixture credits included in pre-tax income are treated as non-taxable.
Foreign Currency We own and operate paper and pulp mills in Germany, France,
the United Kingdom and the Philippines. The local currency in Germany and France
is the Euro, in the UK it is the British Pound Sterling, and in the Philippines
the currency is the Peso. During the first six months of 2009, Euro functional
currency operations generated approximately 19.8% of our sales and 18.8% of
operating expenses and British Pound Sterling operations represented 10.2% of
net sales and 10.1% of operating expenses. The translation of results from these
international operations into U.S. dollars is impacted by changes in foreign
currency exchange rates.
The table below summarizes the effect from foreign currency translation on
first half 2009 reported results compared to the first half 2008:
Six months
In thousands ended June 30
Favorable
(unfavorable)
Net sales $ (26,617 )
Costs of products sold 25,710
SG&A expenses 3,267
Income taxes and other (57 )
Net income $ 2,303
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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.
Three Months Ended June 30, 2009 versus the Three Months Ended June 30, 2008 The following table sets forth summarized results of operations:
Three months ended
June 30
In thousands, except per share 2009 2008
Net sales $ 278,979 $ 320,224
Gross profit 59,001 32,398
Operating income 32,426 7,861
Net income 19,870 3,156
Diluted earnings per share 0.43 0.07
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The consolidated results of operations for the three months ended June 30 include the following significant items:
After-tax Diluted EPS
In thousands, except per share Gain (loss)
2009
Alternative fuel mixing credit $ 30,418 $ 0.67
Timberland sales and related transaction costs (441 ) (0.01 )
2008
Reversal of shutdown and restructuring charges $ 532 $ 0.01
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The above items increased earnings by $30.0 million, or $0.66 per diluted share, and $0.5 million, or $0.01 per diluted share, in the second quarters of 2009 and 2008, respectively.
Business Units The following table sets forth profitability information by business unit and the composition of consolidated income before income taxes:
Business Unit Performance For the three months ended June 30
Dollars in thousands Specialty Papers Composite Fibers Other and Unallocated Total
2009 2008 2009 2008 2009 2008 2009 2008
Net sales $ 184,364 $ 207,296 $ 94,615 $ 112,928 $ - $ - $ 278,979 $ 320,224
Energy sales, net 2,131 2,743 - - - - 2,131 2,743
Total revenue 186,495 210,039 94,615 112,928 - - 281,110 322,967
Cost of products sold 178,817 196,948 82,730 96,462 (39,438 ) (2,841 ) 222,109 290,569
. . .
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