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GLT Glatfelter

Filed: 4 May 21, 3:03pm

`

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2021

or

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from           to

 

 

4350 Congress Street, Suite 600

Charlotte, North Carolina 28209

(Address of principal executive offices)

(704) 885-2555

(Registrant's telephone number, including area code)

 

 

Commission file

number

 

Exact name of registrant as

specified in its charter

 

IRS Employer

Identification No.

 

State or other jurisdiction of

incorporation or organization

 

 

1-03560

 

Glatfelter Corporation

 

23-0628360

 

Pennsylvania

 

(N/A)

Former name or former address, if changed since last report

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

GLT

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at the past 90 days.   Yes      No  .

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No  .

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes      No  .

Common Stock outstanding on April 23, 2021 totaled 44,451,658 shares.

 

 

 


 

 

GLATFELTER CORPORATION AND SUBSIDIARIES

REPORT ON FORM 10-Q

For the QUARTERLY PERIOD ENDED

March 31, 2021

Table of Contents

 

 

 

Page

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1

Financial Statements

 

 

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2021 and 2020 (unaudited)

 

2

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020 (unaudited)

 

3

 

Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 (unaudited)

 

4

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)

 

5

 

Statements of Shareholders’ Equity for the three months ended March 31, 2021 and 2020 (unaudited)

 

6

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

 

1.

Organization

 

7

 

2.

Accounting Policies

 

7

 

3.

Pending Acquisition

 

7

 

4.

Revenue

 

8

 

5.

Gain on Disposition of Plant, Equipment and Timberlands

 

8

 

6.

Discontinued Operations

 

9

 

7.

Earnings Per Share

 

9

 

8.

Accumulated Other Comprehensive Income

 

10

 

9.

Stock-based Compensation

 

11

 

10.

Retirement Plans and Other Post- Retirement Benefits

 

12

 

11.

Income Taxes

 

13

 

12.

Inventories

 

14

 

13.

Leases

 

14

 

14.

Short-term Debt

 

15

 

15.

Long-term Debt

 

15

 

16.

Fair Value of Financial Instruments

 

16

 

17.

Financial Derivatives and Hedging Activities

 

16

 

18.

Commitments, Contingencies and Legal Proceedings

 

19

 

19.

Segment Information

 

20

 

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

Item 3

Quantitative and Qualitative Disclosures About Market Risks

 

28

Item 4

Controls and Procedures

 

29

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 6

Exhibits

 

29

 

 

 

 

 

SIGNATURES

 

30

 

 

 

 

 


 

 

PART I

Item 1 – Financial Statements

GLATFELTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

 

 

Three months ended

March 31

 

In thousands, except per share

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

225,674

 

 

$

231,560

 

Costs of products sold

 

 

186,378

 

 

 

194,685

 

Gross profit

 

 

39,296

 

 

 

36,875

 

Selling, general and administrative expenses

 

 

22,827

 

 

 

24,594

 

Gains on dispositions of plant, equipment and timberlands, net

 

 

(850

)

 

 

 

Operating income

 

 

17,319

 

 

 

12,281

 

Non-operating income (expense)

 

 

 

 

 

 

 

 

Interest expense

 

 

(1,531

)

 

 

(1,778

)

Interest income

 

 

20

 

 

 

264

 

Other, net

 

 

(224

)

 

 

(753

)

Total non-operating expense

 

 

(1,735

)

 

 

(2,267

)

Income from continuing operations before income taxes

 

 

15,584

 

 

 

10,014

 

Income tax provision

 

 

7,190

 

 

 

2,608

 

Net income

 

$

8,394

 

 

$

7,406

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.19

 

 

$

0.17

 

Income from discontinued operations

 

 

 

 

 

 

Basic earnings per share

 

$

0.19

 

 

$

0.17

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.19

 

 

$

0.17

 

Income from discontinued operations

 

 

 

 

 

 

Diluted earnings per share

 

$

0.19

 

 

$

0.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

44,450

 

 

 

44,275

 

Diluted

 

 

44,869

 

 

 

44,530

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

- 2 -

GLATFELTER

Form 10-Q


 

 

GLATFELTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

 

 

Three months ended

March 31

 

In thousands

 

2021

 

 

2020

 

Net income

 

$

8,394

 

 

$

7,406

 

Foreign currency translation adjustments

 

 

(13,193

)

 

 

(13,903

)

Net change in:

 

 

 

 

 

 

 

 

Deferred gains (losses) on cash flow hedges, net of taxes

   of $(1,301) and $401, respectively

 

 

3,261

 

 

 

(1,317

)

Unrecognized retirement obligations, net of taxes

   of $(73) and $51, respectively

 

 

92

 

 

 

(101

)

Other comprehensive loss

 

 

(9,840

)

 

 

(15,321

)

Comprehensive loss

 

$

(1,446

)

 

$

(7,915

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

- 3 -

GLATFELTER

Form 10-Q


 

 

GLATFELTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

 

 

March 31

 

 

December 31

 

In thousands

 

2021

 

 

2020

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

87,366

 

 

$

99,581

 

Accounts receivable, net

 

 

126,507

 

 

 

122,817

 

Inventories

 

 

203,333

 

 

 

196,230

 

Prepaid expenses and other current assets

 

 

45,844

 

 

 

34,297

 

Total current assets

 

 

463,050

 

 

 

452,925

 

 

 

 

 

 

 

 

 

 

Plant, equipment and timberlands, net

 

 

523,428

 

 

 

543,267

 

Goodwill

 

 

157,341

 

 

 

164,369

 

Intangible assets, net

 

 

76,182

 

 

 

81,835

 

Other assets

 

 

47,878

 

 

 

44,485

 

Total assets

 

$

1,267,879

 

 

$

1,286,881

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

23,942

 

 

$

25,057

 

Short-term debt

 

 

11,725

 

 

 

 

Accounts payable

 

 

115,456

 

 

 

127,505

 

Dividends payable

 

 

6,001

 

 

 

5,988

 

Environmental liabilities

 

 

3,600

 

 

 

3,700

 

Other current liabilities

 

 

75,005

 

 

 

71,093

 

Total current liabilities

 

 

235,729

 

 

 

233,343

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

271,079

 

 

 

288,464

 

Deferred income taxes

 

 

75,387

 

 

 

77,131

 

Other long-term liabilities

 

 

114,623

 

 

 

110,011

 

Total liabilities

 

 

696,818

 

 

 

708,949

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

Common stock

 

 

544

 

 

 

544

 

Capital in excess of par value

 

 

62,576

 

 

 

63,261

 

Retained earnings

 

 

725,756

 

 

 

723,365

 

Accumulated other comprehensive loss

 

 

(68,493

)

 

 

(58,653

)

 

 

 

720,383

 

 

 

728,517

 

Less cost of common stock in treasury

 

 

(149,322

)

 

 

(150,585

)

Total shareholders’ equity

 

 

571,061

 

 

 

577,932

 

Total liabilities and shareholders’ equity

 

$

1,267,879

 

 

$

1,286,881

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

- 4 -

GLATFELTER

Form 10-Q


 

 

GLATFELTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

Three months ended

March 31

 

In thousands

 

2021

 

 

2020

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

8,394

 

 

$

7,406

 

Adjustments to reconcile to net cash used by continuing operations:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

13,733

 

 

 

15,402

 

Amortization of debt issue costs and original issue discount

 

 

153

 

 

 

147

 

Deferred income tax benefit

 

 

(410

)

 

 

(2,612

)

Gains on dispositions of plant, equipment and timberlands, net

 

 

(850

)

 

 

 

Share-based compensation

 

 

1,208

 

 

 

1,085

 

Change in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(7,002

)

 

 

(7,203

)

Inventories

 

 

(13,248

)

 

 

(3,688

)

Prepaid and other current assets

 

 

167

 

 

 

(2,315

)

Accounts payable

 

 

(7,460

)

 

 

(11,605

)

Accruals and other current liabilities

 

 

(3,447

)

 

 

(2,931

)

Other

 

 

2,716

 

 

 

711

 

Net cash used by operating activities from continuing operations

 

 

(6,046

)

 

 

(5,603

)

Investing activities

 

 

 

 

 

 

 

 

Expenditures for purchases of plant, equipment and timberlands

 

 

(5,379

)

 

 

(7,014

)

Proceeds from disposals of plant, equipment and timberlands, net

 

 

876

 

 

 

 

Other

 

 

(100

)

 

 

 

Net cash used by investing activities from continuing operations

 

 

(4,603

)

 

 

(7,014

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from short-term debt

 

 

11,725

 

 

 

 

Net borrowings under revolving credit facility

 

 

1,151

 

 

 

2,452

 

Payments of borrowing costs

 

 

(35

)

 

 

 

Repayment of term loans

 

 

(6,136

)

 

 

(3,089

)

Payments of dividends

 

 

(5,990

)

 

 

(5,752

)

Payments related to share-based compensation awards and other

 

 

(536

)

 

 

(458

)

Net cash provided (used) by financing activities from continuing operations

 

 

179

 

 

 

(6,847

)

Effect of exchange rate changes on cash

 

 

(2,213

)

 

 

(937

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(12,683

)

 

 

(20,401

)

Decrease in cash, cash equivalents and restricted cash from discontinued operations

 

 

(78

)

 

 

(316

)

Cash, cash equivalents and restricted cash at the beginning of period

 

 

111,665

 

 

 

126,201

 

Cash, cash equivalents and restricted cash at the end of period

 

 

98,904

 

 

 

105,484

 

Less: restricted cash in Prepaid expenses 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

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

1,408

 

 

$

1,443

 

Income taxes, net

 

 

3,493

 

 

 

3,446

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

- 5 -

GLATFELTER

Form 10-Q


 

 

GLATFELTER CORPORATION AND SUBSIDIARIES

STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited)

 

In thousands

 

Common

stock

 

 

Capital in

Excess of

Par Value

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Treasury

Stock

 

 

Total

Shareholders’

Equity

 

Balance at January 1, 2021

 

$

544

 

 

$

63,261

 

 

$

723,365

 

 

$

(58,653

)

 

$

(150,585

)

 

$

577,932

 

Net income

 

 

 

 

 

 

 

 

 

 

8,394

 

 

 

 

 

 

 

 

 

 

 

8,394

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,840

)

 

 

 

 

 

 

(9,840

)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,446

)

Cash dividends declared ($0.135 per share)

 

 

 

 

 

 

 

 

 

 

(6,003

)

 

 

 

 

 

 

 

 

 

 

(6,003

)

Share-based compensation expense

 

 

 

 

 

 

1,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,208

 

Delivery of treasury shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs and PSAs

 

 

 

 

 

 

(1,893

)

 

 

 

 

 

 

 

 

 

 

1,263

 

 

 

(630

)

Balance at March 31, 2021

 

$

544

 

 

$

62,576

 

 

$

725,756

 

 

$

(68,493

)

 

$

(149,322

)

 

$

571,061

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2020

 

$

544

 

 

$

59,900

 

 

$

725,795

 

 

$

(77,896

)

 

$

(152,384

)

 

$

555,959

 

Net income

 

 

 

 

 

 

 

 

 

 

7,406

 

 

 

 

 

 

 

 

 

 

 

7,406

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,321

)

 

 

 

 

 

 

(15,321

)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,915

)

Cash dividends declared ($0.13 per share)

 

 

 

 

 

 

 

 

 

 

(5,761

)

 

 

 

 

 

 

 

 

 

 

(5,761

)

Share-based compensation expense

 

 

 

 

 

 

1,085

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,085

 

Delivery of treasury shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs and PSAs

 

 

 

 

 

 

(1,213

)

 

 

 

 

 

 

 

 

 

 

807

 

 

 

(406

)

Employee stock options exercised — net

 

 

 

 

 

 

(149

)

 

 

 

 

 

 

 

 

 

 

97

 

 

 

(52

)

Balance at March 31, 2020

 

$

544

 

 

$

59,623

 

 

$

727,440

 

 

$

(93,217

)

 

$

(151,480

)

 

$

542,910

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

- 6 -

GLATFELTER

Form 10-Q


 

 

 

GLATFELTER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.

ORGANIZATION

Glatfelter Corporation and subsidiaries (“Glatfelter”) is a leading global supplier of engineered materials. Our high-quality, innovative and customizable solutions are found in tea and single-serve coffee filtration, personal hygiene and packaging products as well as home improvement and industrial applications. We are headquartered in Charlotte, NC, and operate facilities in the United States, Canada, Germany, France, the United Kingdom and the Philippines. We have sales and distribution offices in the United States, Europe, Russia, Italy, and China. Our products are marketed worldwide, either directly to customers or through brokers and agents. The terms “we,” “us,” “our,” “the Company,” or “Glatfelter,” refer to Glatfelter Corporation and subsidiaries unless the context indicates otherwise.

2.

ACCOUNTING POLICIES

Basis of Presentation The unaudited condensed consolidated financial statements (“financial statements”) include the accounts of Glatfelter and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

We prepared these financial statements in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements. In our opinion, the financial statements reflect all normal, recurring adjustments needed to present fairly our results for the interim periods. When preparing these financial statements, we have assumed you have read the audited consolidated financial statements included in our 2020 Annual Report on Form 10-K.

Discontinued Operations The results of operations and cash flows of our former Specialty Papers business have been classified as discontinued operations for all periods presented in the condensed consolidated statements of income.

Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Management believes the estimates and assumptions used in the preparation of these financial statements are reasonable, based upon currently available facts and known circumstances, but recognizes actual results may differ from those estimates and assumptions.

Recently Issued Accounting Pronouncements   In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”). The update eliminates, clarifies, and modifies certain guidance related to the accounting for income taxes. We adopted ASU No. 2019-12 effective January 1, 2021 and it did not have a material impact on our financial statements.

 

3.

PENDING ACQUISITION

On January 5, 2021, we signed a definitive agreement to purchase Georgia-Pacific's U.S. nonwovens business ("G-P") for $175 million, subject to customary post-closing purchase price adjustments. 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.

The waiting period for regulatory review expired, satisfying one of the conditions to the closing of the proposed acquisition, which remains subject to other customary closing conditions. The transaction is expected to close by mid-May 2021. The acquisition will be financed through a combination of cash on hand and borrowings under our revolving credit facility. Upon completion of the acquisition, the acquired business will be operated as part of our Airlaid Materials reporting segment.

- 7 -

GLATFELTER

Form 10-Q


 

4.

REVENUE

The following tables set forth disaggregated information pertaining to our net sales:

 

 

 

Three months ended

March 31

 

In thousands

 

2021

 

 

2020

 

Composite Fibers

 

 

 

 

 

 

 

 

Food & beverage

 

$

76,953

 

 

$

71,458

 

Wallcovering

 

 

22,629

 

 

 

19,893

 

Technical specialties

 

 

23,495

 

 

 

20,007

 

Composite laminates

 

 

9,809

 

 

 

9,763

 

Metallized

 

 

8,363

 

 

 

11,590

 

 

 

 

141,249

 

 

 

132,711

 

Airlaid Materials

 

 

 

 

 

 

 

 

Feminine hygiene

 

 

47,641

 

 

 

50,096

 

Specialty wipes

 

 

15,916

 

 

 

17,212

 

Tabletop

 

 

6,863

 

 

 

15,052

 

Adult incontinence

 

 

4,678

 

 

 

6,145

 

Home care

 

 

3,923

 

 

 

5,212

 

Other

 

 

5,404

 

 

 

5,132

 

 

 

 

84,425

 

 

 

98,849

 

 

 

$

225,674

 

 

$

231,560

 

 

 

 

Three months ended

March 31

 

In thousands

 

2021

 

 

2020

 

Composite Fibers

 

 

 

 

 

 

 

 

Europe, Middle East and Africa

 

$

86,945

 

 

$

79,586

 

Americas

 

 

31,841

 

 

 

32,721

 

Asia Pacific

 

 

22,463

 

 

 

20,404

 

 

 

 

141,249

 

 

 

132,711

 

 

 

 

 

 

 

 

 

 

Airlaid Materials

 

 

 

 

 

 

 

 

Europe, Middle East and Africa

 

 

45,072

 

 

 

52,720

 

Americas

 

 

37,485

 

 

 

44,386

 

Asia Pacific

 

 

1,868

 

 

 

1,743

 

 

 

 

84,425

 

 

 

98,849

 

 

 

$

225,674

 

 

$

231,560

 

 

5.

GAINS ON DISPOSITION OF PLANT, EQUIPMENT AND TIMBERLANDS

 

The following table sets forth sales of timberlands and other assets completed during the first three months of 2021. There were no such sales in the first three months of 2020:

 

Dollars in thousands

 

Acres

 

Proceeds

 

 

Gain

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

Timberlands

 

358

 

$

876

 

 

$

850

 

 

Other

 

n/a

 

 

 

 

 

 

 

Total

 

 

 

$

876

 

 

$

850

 

 

 

- 8 -

GLATFELTER

Form 10-Q


 

 

6.

DISCONTINUED OPERATIONS

On October 31, 2018, we completed the previously announced sale of our Specialty Papers business on a cash free and debt free basis to Pixelle Specialty Solutions LLC, an affiliate of Lindsay Goldberg (the “Purchaser”) for $360 million.

 

The following table sets forth a summary of cash flows from discontinued operations which is included in the condensed consolidated statements of cash flows:

 

 

 

Three months ended

March 31

 

 

In thousands

 

2021

 

 

2020

 

 

Net cash used by operating activities

 

$

(78

)

 

$

(316

)

 

Net cash used by investing activities

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

 

 

 

 

 

Change in cash and cash equivalents from discontinued operations

 

$

(78

)

 

$

(316

)

 

 

7.

EARNINGS PER SHARE

The following table sets forth the details of basic and diluted earnings per share (“EPS”) from continuing operations:

 

 

 

Three months ended

March 31

 

In thousands, except per share

 

2021

 

 

 

2020

 

Income from continuing operations

 

$

8,394

 

 

 

$

7,406

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding used in basic EPS

 

 

44,450

 

 

 

 

44,275

 

Effect of dilutive SOSARs, PSAs and RSUs

 

 

419

 

 

 

 

255

 

Weighted average common shares outstanding and

 

 

 

 

 

 

 

 

 

common share equivalents used in diluted EPS

 

 

44,869

 

 

 

 

44,530

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from continuing operations

 

 

 

 

 

 

 

 

 

Basic

 

$

0.19

 

 

 

$

0.17

 

Diluted

 

 

0.19

 

 

 

 

0.17

 

 

The following table sets forth potential common shares outstanding that were not included in the computation of diluted EPS for the periods indicated, because their effect would be anti-dilutive:

 

 

 

March 31

 

In thousands

 

2021

 

 

 

2020

 

Three months ended

 

 

1,082

 

 

 

 

1,231

 

 

 

- 9 -

GLATFELTER

Form 10-Q


 

 

8.

ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table sets forth details of the changes in accumulated other comprehensive income (losses) for the three months ended March 31, 2021 and 2020.

 

In thousands

Currency translation adjustments

 

 

Unrealized gain (loss) on cash flow hedges

 

 

Change in pensions

 

 

Change in other postretirement defined benefit plans

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2021

$

(42,525

)

 

$

(2,496

)

 

$

(12,844

)

 

$

(788

)

 

$

(58,653

)

Other comprehensive income (loss) before reclassifications (net of tax)

 

(13,193

)

 

 

3,274

 

 

 

 

 

 

 

 

 

(9,919

)

Amounts reclassified from accumulated

   other comprehensive income (net of tax)

 

 

 

 

(13

)

 

 

138

 

 

 

(46

)

 

 

79

 

Net current period other comprehensive income (loss)

 

(13,193

)

 

 

3,261

 

 

 

138

 

 

 

(46

)

 

 

(9,840

)

Balance at March 31, 2021

$

(55,718

)

 

$

765

 

 

$

(12,706

)

 

$

(834

)

 

$

(68,493

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2020

$

(76,346

)

 

$

4,316

 

 

$

(7,253

)

 

$

1,387

 

 

$

(77,896

)

Other comprehensive income (loss) before reclassifications (net of tax)

 

(13,903

)

 

 

283

 

 

 

 

 

 

 

 

 

(13,620

)

Amounts reclassified from accumulated

   other comprehensive income (net of tax)

 

 

 

 

(1,600

)

 

 

148

 

 

 

(249

)

 

 

(1,701

)

Net current period other comprehensive income (loss)

 

(13,903

)

 

 

(1,317

)

 

 

148

 

 

 

(249

)

 

 

(15,321

)

Balance at March 31, 2020

$

(90,249

)

 

$

2,999

 

 

$

(7,105

)

 

$

1,138

 

 

$

(93,217

)

 

 

- 10 -

GLATFELTER

Form 10-Q


 

 

Reclassifications out of accumulated other comprehensive income and into the condensed consolidated statements of income were as follows:

 

 

 

Three months ended

March 31

 

 

 

In thousands

 

2021

 

 

2020

 

 

 

Description

 

 

 

 

 

 

 

 

 

Line Item in Statements of Income

Cash flow hedges (Note 17)

 

 

 

 

 

 

 

 

 

 

(Gains) losses on cash flow hedges

 

$

24

 

 

$

(2,182

)

 

Costs of products sold

Tax expense (benefit)

 

 

(51

)

 

 

582

 

 

Income tax provision

Net of tax

 

 

(27

)

 

 

(1,600

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on interest rate swaps

 

 

21

 

 

 

 

 

Interest expense

Tax benefit

 

 

(7

)

 

 

 

 

Income tax provision

Net of tax

 

 

14

 

 

 

 

 

 

Total cash flow hedges

 

 

(13

)

 

 

(1,600

)

 

 

Retirement plan obligations (Note 10)

 

 

 

 

 

 

 

 

 

 

Amortization of deferred benefit pension plans

 

 

 

 

 

 

 

 

 

 

Prior service costs

 

 

12

 

 

 

12

 

 

Other, net

Actuarial losses

 

 

199

 

 

 

160

 

 

Other, net

 

 

 

211

 

 

 

172

 

 

 

Tax benefit

 

 

(73

)

 

 

(24

)

 

Income tax provision

Net of tax

 

 

138

 

 

 

148

 

 

 

Amortization of deferred benefit other plans

 

 

 

 

 

 

 

 

 

 

Prior service costs

 

 

(58

)

 

 

(116

)

 

Other, net

Actuarial gains

 

 

12

 

 

 

(209

)

 

Other, net

 

 

 

(46

)

 

 

(325

)

 

 

Tax expense

 

 

 

 

76

 

 

Income tax provision

Net of tax

 

 

(46

)

 

 

(249

)

 

 

Total reclassifications, net of tax

 

$

79

 

 

$

(1,701

)

 

 

 

 

9.STOCK-BASED COMPENSATION

The P. H. Glatfelter Amended and Restated Long-Term Incentive Plan (the “LTIP”) provides for the issuance of Glatfelter common stock to eligible participants in the form of restricted stock units, restricted stock awards, non-qualified stock options, performance shares, incentive stock options and performance units.

Pursuant to terms of the LTIP, we have issued to eligible participants restricted stock units (“RSUs”), performance share awards (“PSAs”) and stock only stock appreciation rights.

- 11 -

GLATFELTER

Form 10-Q


 

In 2021, we issued awards of RSUs and PSAs under our LTIP. Approximately 40% of fair value of the awards granted in 2021 were RSUs, which vest based on the passage of time, generally over a three-year period or in certain instances the RSUs were issued with five-year cliff vesting. In addition, some awards vest over one year or less depending upon the retirement eligibility of the grantees in the LTIP. The remaining 60% of the fair value of the awards granted in 2021 were PSAs. The PSAs awarded in 2021 vest based on either the achievement of a cumulative financial performance target covering a two-year period followed by an additional one-year service period or based on the three-year total shareholder return relative to a broad market index. The performance measures include a minimum, target and maximum performance level providing the grantees an opportunity to receive more or less shares than targeted depending on actual financial performance. For RSUs, the grant date fair value of the awards, or the closing price per common share on the date of the award, is used to determine the amount of expense to be recognized over the applicable service period. For PSAs, the grant date fair value is estimated using a lattice model. The significant inputs include the stock price, volatility, dividend yield, and risk-free rate of return. Settlement of RSUs and PSAs will be made in shares of our common stock currently held in treasury. 

The following table summarizes RSU and PSA activity during periods indicated:

 

Units

 

2021

 

 

 

2020

 

Balance at January 1,

 

 

1,071,652

 

 

 

 

896,463

 

Granted

 

 

287,805

 

 

 

 

294,315

 

Forfeited

 

 

(90,355

)

 

 

 

(17,455

)

Shares delivered

 

 

(123,038

)

 

 

 

(78,509

)

Balance at March 31,

 

 

1,146,064

 

 

 

 

1,094,814

 

 

The amount granted in 2021 and 2020 includes 161,453 and 168,663, respectively, of PSAs exclusive of reinvested dividends.

The following table sets forth aggregate RSU and PSA compensation expense included in continuing operations for the periods indicated:

 

 

March 31

 

In thousands

 

2021

 

 

 

2020

 

Three months ended

 

$

1,208

 

 

 

$

1,085

 

 

Stock Only Stock Appreciation Rights (“SOSARs”) Under terms of the SOSAR, a recipient receives the right to a payment in the form of shares of common stock equal to the difference, if any, in the fair market value of one share of common stock at the time of exercising the SOSAR and the exercise price. The SOSARs vest ratably over a three-year period and have a term of ten years. NaN SOSARs were awarded since 2016.

The following table sets forth information related to outstanding SOSARS:

 

 

 

2021

 

 

2020

 

SOSARS

 

Shares

 

 

 

Wtd Avg

Exercise

Price

 

 

Shares

 

 

Wtd Avg

Exercise

Price

 

Outstanding at January 1,

 

 

1,082,413

 

 

 

$

20.40

 

 

 

1,291,947

 

 

$

20.05

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

(44,710

)

 

 

12.94

 

Canceled / forfeited

 

 

 

 

 

 

 

 

 

(2,841

)

 

 

17.27

 

Outstanding at March 31,

 

 

1,082,413

 

 

 

$

20.40

 

 

 

1,244,396

 

 

$

20.31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.

RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS

The following tables provide information with respect to the net periodic costs of our pension and post-retirement medical benefit plans included in continuing operations.

 

 

Three months ended

March 31

 

In thousands

 

2021

 

 

 

2020

 

Pension Benefits

 

 

 

 

 

 

 

 

 

Service cost

 

$

 

 

 

$

44

 

Interest cost

 

 

250

 

 

 

 

301

 

Amortization of prior service cost

 

 

12

 

 

 

 

12

 

Amortization of actuarial loss

 

 

199

 

 

 

 

160

 

Total net periodic benefit expense

 

$

461

 

 

 

$

517

 

 

 

 

 

 

 

 

 

 

 

Other Benefits

 

 

 

 

 

 

 

 

 

Service cost

 

$

7

 

 

 

$

7

 

Interest cost

 

 

32

 

 

 

 

46

 

Amortization of prior service credit

 

 

(58

)

 

 

 

(116

)

Amortization of actuarial loss (gain)

 

 

12

 

 

 

 

(209

)

Total net periodic benefit income

 

$

(7

)

 

 

$

(272

)

- 12 -

GLATFELTER

Form 10-Q


 

 

 

 

11.

INCOME TAXES

Income taxes are recognized for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our condensed consolidated financial statements or tax returns. The effects of income taxes are measured based on enacted tax laws and rates.

For the three months ended March 31, 2021, we had pretax income of $15.6 million and income tax expense of $7.2 million. The effective income tax rate for the period ended March 31, 2021, was unfavorably impacted primarily by $4.5 million in operating losses in the U.S. which generated 0 tax benefit and a $0.5 million impact attributable to a local income tax rate increase in Germany.

For the three months ended March 31, 2021, we recorded a decrease in our valuation allowance of $1.0 million against our net deferred tax assets. In assessing the need for a valuation allowance, management considers all available positive and negative evidence in its analysis. Based on this analysis, we recorded a valuation allowance for the portion of deferred tax assets where the weight of the evidence indicated it is more likely than not that the deferred assets will not be realized.

As of March 31, 2021 and December 31, 2020, we had $47.2 million and $46.3 million, respectively, of gross unrecognized tax benefits. As of March 31, 2021, if such benefits were to be recognized, approximately $36.7 million would be recorded as a component of income tax expense, thereby affecting our effective tax rate.

We, or one of our subsidiaries, file income tax returns with the United States Internal Revenue Service, as well as various state and foreign authorities.

The following table summarizes, by major jurisdiction, tax years that remain subject to examination:

 

 

Open Tax Years

Jurisdiction

Examinations not

yet initiated

 

 

Examinations in

progress

 

 

 

 

 

United States

 

 

 

 

Federal

2014 - 2015;

2017 - 2020

 

 

N/A

State

2016 - 2020

 

 

2015 - 2018

Canada(1)

2013 - 2018; 2020

 

 

2019

Germany(1)

2016 - 2020

 

 

N/A

France

2018 - 2020

 

 

N/A

United Kingdom

2019 - 2020

 

 

N/A

Philippines

2019 - 2020

 

 

2018

 

(1)

includes provincial or similar local jurisdictions, as applicable

The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Management performs a comprehensive review of its global tax positions on a quarterly basis and accrues amounts for uncertain tax positions. Based on these reviews and the result of discussions and resolutions of matters with certain tax authorities and the closure of tax years subject to tax audit, reserves are adjusted as necessary. However, future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are determined or resolved or as such statutes are closed. Due to potential for resolution of federal, state and foreign examinations, and the lapse of various statutes of limitation, it is reasonably possible our gross unrecognized tax benefits balance may decrease within the next twelve months by a range of 0 to $6.3 million. Substantially all of this range relates to tax positions taken in the U.S.

We recognize interest and penalties related to uncertain tax positions as income tax expense. The following table summarizes information included in continuing operations related to interest on uncertain tax positions:

 

Three months ended

March 31

 

In millions

2021

 

 

 

2020

 

Interest expense (income)

$

0.2

 

 

 

$

0.1

 

 

 

March 31

 

 

 

December 31

 

 

2021

 

 

 

2020

 

Accrued interest payable

$

2.0

 

 

 

$

1.8

 

 

- 13 -

GLATFELTER

Form 10-Q


 

 

 

12.

INVENTORIES

Inventories, net of reserves, were as follows:

 

 

 

March 31

 

 

 

December 31

 

In thousands

 

2021

 

 

 

2020

 

Raw materials

 

$

57,700

 

 

 

$

55,466

 

In-process and finished

 

 

101,830

 

 

 

 

97,109

 

Supplies

 

 

43,803

 

 

 

 

43,655

 

Total

 

$

203,333

 

 

 

$

196,230

 

 

 

13.

LEASES

We enter into a variety of arrangements in which we are the lessee for the use of automobiles, forklifts and other production equipment, production facilities, warehouses and office space. We determine if an arrangement contains a lease at inception. All our lease arrangements are operating leases and are recorded in the condensed consolidated balance sheet under the caption “Other assets” and the lease obligation is under “Other current liabilities” and “Other long-term liabilities.” We currently do not have any finance leases.

Operating lease right of use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. We use our incremental borrowing rate based on information available at the commencement date in determining the lease liabilities as our leases generally do not provide an implicit rate. Lease terms may include options to extend or terminate when we are reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term.

The following table sets forth information related to our leases as of the periods indicated.

 

 

 

March 31

 

 

December 31

 

 

Dollars in thousands

 

2021

 

 

2020

 

 

Right of use asset

 

$

15,605

 

 

$

11,789

 

 

Weighted average discount rate

 

 

2.95

%

 

 

2.94

%

 

Weighted average remaining maturity (months)

 

 

89

 

 

 

66

 

 

 

 

 

 

 

 

 

 

 

 

The following table sets for operating lease expense for the periods indicated:

 

 

March 31

 

 

In thousands

 

2021

 

 

2020

 

 

Three months ended

 

 

1,347

 

 

 

1,442

 

 

 

The following table sets forth required future minimum lease payments for the years indicated:

 

 

In thousands

 

 

 

 

 

 

 

2021

 

 

 

$

3,518

 

 

2022

 

 

 

 

3,475

 

 

2023

 

 

 

 

2,039

 

 

2024

 

 

 

 

1,537

 

 

2025

 

 

 

 

1,278

 

 

Thereafter

 

 

 

 

7,440

 

 

 

 

- 14 -

GLATFELTER

Form 10-Q


 

 

14.

SHORT-TERM DEBT

On March 30, 2021, through Glatfelter Gernsbach GmbH, a wholly-owned subsidiary, we borrowed $11.7 million from Commerzbank AG, a German financial institution. The non-amortizing borrowing bears a fixed-interest rate of 0.75% per annum and the loan matures on March 29, 2022. The proceeds were used for general purposes.

 

 

15.

LONG-TERM DEBT

Long-term debt is summarized as follows:

 

 

 

March 31

 

 

 

December 31

 

In thousands

 

2021

 

 

 

2020

 

Revolving credit facility, due Feb. 2024

 

$

36,531

 

 

 

$

36,813

 

Term loan, due Feb. 2024

 

 

235,379

 

 

 

 

249,715

 

2.40% Term Loan, due Jun. 2022

 

 

2,094

 

 

 

 

2,629

 

2.05% Term Loan, due Mar. 2023

 

 

12,516

 

 

 

 

14,737

 

1.30% Term Loan, due Jun. 2023

 

 

3,769

 

 

 

 

4,382

 

1.55% Term Loan, due Sep. 2025

 

 

6,466

 

 

 

 

7,143

 

Total long-term debt

 

 

296,755

 

 

 

 

315,419

 

Less current portion

 

 

(23,942

)

 

 

 

(25,057

)

Unamortized deferred issuance costs

 

 

(1,734

)

 

 

 

(1,898

)

Long-term debt, net of current portion

 

$

271,079

 

 

 

$

288,464

 

 

On February 8, 2019, we entered into an amended and restated $400 million Revolving Credit Facility and a €220 million Term Loan with a consortium of banks (together, the “Credit Agreement”). The proceeds of the Term Loan due Feb. 2024 were used to redeem in its entirety the 5.375% Notes. The principal amount of the Term Loan amortizes in consecutive quarterly installments of principal, with each such quarterly installment to be in an amount equal to 1.25% of the Term Loan funded, commencing on July 1, 2019 and continuing quarterly thereafter.

For all U.S. dollar denominated borrowings under the Revolving Credit Facility, the borrowing rate is, at our option, either, (a) the bank’s base rate which is equal to the greater of i) the prime rate; ii) the federal funds rate plus 50 basis points; or iii) the Euro-rate plus 100 basis points plus an applicable spread over either i), ii) or iii) ranging from 12.5 basis points to 100 basis points based on the Company’s leverage ratio and its corporate credit ratings determined by Standard & Poor’s Rating Services and Moody’s Investor Service, Inc. (the “Corporate Credit Rating”); or (b) the Euro-rate plus an applicable margin ranging from 112.5 basis points to 200 basis points based on the Company’s leverage ratio and the Corporate Credit Rating. For non-US dollar denominated borrowings, the borrowing rate is, at our option, based on (b) above or for Euro denominated borrowings, the Euro Interbank Offering Rate (“EURIBOR”) plus an applicable margin ranging from 112.5 basis points to 200 basis points based on the Company’s leverage ratio and the Corporate Credit Rating.

The Credit Agreement contains a number of customary covenants for financings of this type that, among other things, restrict our ability to dispose of or create liens on assets, incur additional indebtedness, repay other indebtedness, limits certain intercompany financing arrangements, make acquisitions and engage in mergers or consolidations. We are also required to comply with specified financial tests and ratios including: i) maximum net debt to EBITDA ratio (the “leverage ratio”); and ii) a consolidated EBITDA to interest expense ratio. The most restrictive of our covenants is a maximum leverage ratio of 4.0x provided that such ratio increases to 4.5x during the period of four fiscal quarters immediately following a material acquisition. As of March 31, 2021, the leverage ratio, as calculated in accordance with the definition in our Credit Agreement, was 1.8x. A breach of these requirements would give rise to certain remedies under the Revolving Credit Facility, among which are the termination of the agreement and accelerated repayment of the outstanding borrowings plus accrued and unpaid interest under the Credit Agreement.

All remaining principal outstanding and accrued interest under the Credit Agreement will be due and payable on February 8, 2024.

- 15 -

GLATFELTER

Form 10-Q


 

Glatfelter Gernsbach GmbH (“Gernsbach”), a wholly-owned subsidiary of ours, entered into a series of borrowing agreements with IKB Deutsche Industriebank AG, Düsseldorf (“IKB”) as summarized below:

 

Amounts in thousands

 

Original

Principal

 

 

 

Interest

Rate

 

 

 

Maturity

Borrowing date

 

 

 

 

 

 

 

 

 

 

 

 

Apr. 11, 2013

 

42,700

 

 

 

 

2.05

%

 

 

Mar. 2023

Sep. 4, 2014

 

 

10,000

 

 

 

 

2.40

%

 

 

Jun. 2022

Oct. 10, 2015

 

 

2,608

 

 

 

 

1.55

%

 

 

Sep. 2025

Apr. 26, 2016

 

 

10,000

 

 

 

 

1.30

%

 

 

Jun. 2023

May 4, 2016

 

 

7,195

 

 

 

 

1.55

%

 

 

Sep. 2025

 

Each of the borrowings require quarterly repayments of principal and interest and provide for representations, warranties and covenants customary for financings of these types. The financial covenants contained in each of the IKB loans, which relate to the minimum ratio of consolidated EBITDA to consolidated interest expense and the maximum ratio of consolidated total net debt to consolidated adjusted EBITDA, are calculated by reference to our Credit Agreement.

Glatfelter Corporation guarantees all debt obligations of its subsidiaries. All such obligations are recorded in these condensed consolidated financial statements.

Letters of credit issued to us by certain financial institutions totaled $7.3 million as of March 31, 2021 and December 31, 2020. The letters of credit, which reduce amounts available under our Revolving Credit Facility, primarily provide financial assurances for the benefit of certain state workers compensation insurance agencies in conjunction with our self-insurance program and for performance of certain remediation activity related to the Fox River matter. We bear the credit risk on this amount to the extent that we do not comply with the provisions of certain agreements. NaN amounts are outstanding under the letters of credit.

 

16.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The amounts reported on the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximate their respective fair value. The following table sets forth carrying value and fair value of long-term debt:

 

 

March 31, 2021

 

 

 

December 31, 2020

 

In thousands

Carrying

Value

 

 

Fair Value

 

 

 

Carrying

Value

 

 

Fair Value

 

Variable rate debt

$

36,531

 

 

$

36,531

 

 

 

$

36,813

 

 

$

36,813

 

Term loan, due Feb. 2024

 

235,379

 

 

 

235,379

 

 

 

 

249,715

 

 

 

249,715

 

2.40% Term Loan

 

2,094

 

 

 

2,116

 

 

 

 

2,629

 

 

 

2,651

 

2.05% Term Loan

 

12,516

 

 

 

12,669

 

 

 

 

14,737

 

 

 

14,873

 

1.30% Term Loan

 

3,769

 

 

 

3,784

 

 

 

 

4,382

 

 

 

4,384

 

1.55% Term Loan

 

6,466

 

 

 

6,544

 

 

 

 

7,143

 

 

 

7,210

 

Total

$

296,755

 

 

$

297,023

 

 

 

$

315,419

 

 

$

315,646

 

 

The values set forth above are based on observable inputs and other relevant market data (Level 2). The fair value of financial derivatives is set forth below in Note 17.

 

 

17.

FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES

As part of our overall risk management practices, we enter into financial derivatives primarily designed to either i) hedge foreign currency risks associated with forecasted transactions (“cash flow hedges”); ii) mitigate the impact that changes in currency exchange rates have on intercompany financing transactions and foreign currency denominated receivables and payables (“foreign currency hedges”); or iii) convert variable-interest-rate debt to fixed rates.

Derivatives Designated as Hedging Instruments - Cash Flow Hedges We use currency forward contracts as cash flow hedges to manage our exposure to fluctuations in the currency exchange rates on certain forecasted production costs. Currency forward contracts involve fixing the exchange for delivery of a specified amount of foreign currency on a specified date. As of March 31, 2021, the maturity of currency forward contracts ranged from one month to 18 months.

- 16 -

GLATFELTER

Form 10-Q


 

We designate certain currency forward contracts as cash flow hedges of forecasted raw material purchases, certain production costs or capital expenditures with exposure to changes in foreign currency exchange rates. Changes in the fair value of derivatives designated and that qualify as cash flow hedges of foreign exchange risk is deferred as a component of accumulated other comprehensive income in the accompanying condensed consolidated balance sheets. With respect to hedges of forecasted raw material purchases or production costs, the amount deferred is subsequently reclassified into costs of products sold in the period that inventory produced using the hedged transaction affects earnings. For hedged capital expenditures, deferred gains or losses are reclassified and included in the historical cost of the capital asset and subsequently affect earnings as depreciation is recognized.

We had the following outstanding derivatives that were used to hedge foreign exchange risks associated with forecasted transactions and designated as hedging instruments:

 

In thousands

March 31, 2021

 

 

December 31, 2020

 

Derivative

 

 

 

 

 

 

 

Sell/Buy - sell notional

 

 

 

 

 

 

 

Philippine Peso / Euro

 

 

 

 

18,522

 

Euro / British Pound

 

17,219

 

 

 

18,638

 

U.S. Dollar / Euro

 

 

 

 

1,041

 

Canadian Dollar / U.S. Dollar

 

 

 

 

70

 

 

 

 

 

 

 

 

 

Sell/Buy - buy notional

 

 

 

 

 

 

 

Euro / Philippine Peso

 

1,003,403

 

 

 

853,686

 

British Pound / Philippine Peso

 

1,006,093

 

 

 

1,081,791

 

Euro / U.S. Dollar

 

72,770

 

 

 

69,324

 

U.S. Dollar / Canadian Dollar

 

34,707

 

 

 

34,847

 

 

In October 2019, we entered into a €180 million notional value floating-to-fixed interest rate swap agreement with certain financial institutions. Under the terms of the swap, we will pay a fixed interest rate of the applicable margin plus 0.0395% on €180 million of the underlying variable rate term loan. We will receive the greater of 0.00% or EURIBOR.

Derivatives Designated as Hedging Instruments – Net Investment Hedge  The €220 million Term Loan discussed in Note 15 – “Long-Term Debt” is designated as a net investment hedge of our Euro functional currency foreign subsidiaries. During the first three months of 2021, we recognized a pre-tax gain of $11.0 million and in the same period of 2020 a pre-tax gain of $5.9 million on the remeasurement of the term loan from changes in currency exchange rates. Such amounts are recorded as a component of Other Comprehensive Income (Loss).

Derivatives Not Designated as Hedging Instruments - Foreign Currency Hedges We also entered into forward foreign exchange contracts to mitigate the impact changes in currency exchange rates have on balance sheet monetary assets and liabilities. None of these contracts are designated as hedges for financial accounting purposes and, accordingly, changes in value of the foreign exchange forward contracts and in the offsetting underlying on-balance-sheet transactions are reflected in the accompanying condensed consolidated statements of income under the caption “Other, net.”

The following sets forth derivatives used to mitigate the impact changes in currency exchange rates have on balance sheet monetary assets and liabilities:

 

In thousands

March 31, 2021

 

 

December 31, 2020

 

Derivative

 

 

 

 

 

 

 

Sell/Buy -  sell notional

 

 

 

 

 

 

 

U.S. Dollar / British Pound

 

25,850

 

 

 

25,250

 

U.S. Dollar / Euro

 

250

 

 

 

 

Euro / British Pound

 

500

 

 

 

600

 

British Pound / Euro

 

2,200

 

 

 

1,900

 

 

 

 

 

 

 

 

 

Sell/Buy - buy notional

 

 

 

 

 

 

��

Euro / U.S. Dollar

 

 

 

 

7,500

 

 

These contracts have maturities of one month from the date originally entered into.

- 17 -

GLATFELTER

Form 10-Q


 

Fair Value Measurements The following table summarizes the fair values of derivative instruments for the period indicated and the line items in the accompanying condensed consolidated balance sheets where the instruments are recorded:

 

In thousands

March 31,    2021

 

 

December 31, 2020

 

 

March 31,   2021

 

 

December 31, 2020

 

 

Prepaid Expenses and Other

 

 

Other

 

Balance sheet caption

Current Assets

 

 

Current Liabilities

 

Designated as hedging:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward foreign currency exchange contracts

$

1,876

 

 

$

577

 

 

$

406

 

 

$

4,342

 

Interest rate swap

 

 

 

 

 

 

 

108

 

 

 

136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not designated as hedging:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward foreign currency exchange contracts

$

66

 

 

$

456

 

 

$

349

 

 

$

118

 

 

The amounts set forth in the table above represent the net asset or liability giving effect to rights of offset with each counterparty. The effect of netting the amounts presented above did not have a material effect on our consolidated financial position.

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The fair values of the foreign exchange forward contracts are considered to be Level 2. Foreign currency forward contracts are valued using foreign currency forward and interest rate curves. The fair value of each contract is determined by comparing the contract rate to the forward rate and discounting to present value. Contracts in a gain position are recorded in the condensed consolidated balance sheets under the caption “Prepaid expenses and other current assets” and the value of contracts in a loss position is recorded under the caption “Other current liabilities.”

The following table summarizes the amount of income or (loss) from derivative instruments recognized in our results of operations for the periods indicated and the line items in the accompanying condensed consolidated statements of income where the results are recorded:

 

 

 

Three months ended

March 31

 

 

In thousands

 

 

2021

 

 

2020

 

 

Designated as hedging:

 

 

 

 

 

 

 

 

 

 

Forward foreign currency exchange contracts:

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

$

(24

)

 

$

2,182

 

 

Interest expense

 

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not designated as hedging:

 

 

 

 

 

 

 

 

 

 

Forward foreign currency exchange contracts:

 

 

 

 

 

 

 

 

 

 

Other – net

 

 

$

270

 

 

$

(619

)

 

The impact of activity not designated as hedging was substantially all offset by the remeasurement of the underlying on-balance-sheet item.

A rollforward of fair value amounts recorded as a component of accumulated other comprehensive income (loss), before taxes, is as follows:

 

In thousands

2021

 

 

2020

 

Balance at January 1,

$

(3,460

)

 

$

5,859

 

Deferred gains (losses) on cash flow hedges

 

4,558

 

 

 

463

 

Reclassified to earnings

 

3

 

 

 

(2,182

)

Balance at March 31,

$

1,101

 

 

$

4,140

 

 

We expect substantially all of the amounts recorded as a component of accumulated other comprehensive income will be recorded in results of operations within the next 12 to 18 months and the amount ultimately recognized will vary depending on actual market rates.

- 18 -

GLATFELTER

Form 10-Q


 

Credit risk related to derivative activity arises in the event the counterparty fails to meet its obligations to us. This exposure is generally limited to the amounts, if any, by which the counterparty’s obligations exceed our obligation to them. Our policy is to enter into contracts only with financial institutions which meet certain minimum credit ratings.

 

18.

Fox River - Neenah, Wisconsin

Background We have previously reported that we face liabilities associated with environmental claims arising out of the presence of polychlorinated biphenyls (“PCBs”) in sediments in the lower Fox River, on which our former Neenah facility was located, and in the Bay of Green Bay, Wisconsin (collectively, the “Site”). Since the early 1990s, the United States, the State of Wisconsin and two Indian tribes (collectively, the “Governments”) have pursued a cleanup of a 39-mile stretch of river from Little Lake Butte des Morts into Green Bay and natural resource damages (“NRDs”).

The United States originally notified several entities that they were potentially responsible parties (“PRPs”); however, after giving effect to settlements reached with the Governments, the remaining PRPs exposed to continuing obligations to implement the remainder of the cleanup consist of us, Georgia-Pacific Consumer Products, L.P. (“Georgia-Pacific”) and NCR Corporation.

The United States Environmental Protection Agency (“EPA”) has divided the Site into 5 “operable units”, including the most upstream portion of the Site on which our facility was located (“OU1”) and four downstream reaches of the river and bay (“OU2-5”).

Over the past several years, we and certain other PRPs implemented and completed all remedial actions pursuant to applicable consent decrees or a Unilateral Administrative Order.

In January 2019, we reached an agreement with the United States, the State of Wisconsin, and Georgia-Pacific to resolve all remaining claims among those parties. Under the Glatfelter consent decree, we are primarily responsible for long-term monitoring and maintenance in OU2-OU4a and for reimbursement of government oversight costs paid after October 2018. Finally, we remain responsible for our obligation to continue long-term monitoring and maintenance under our OU1 consent decree.  

Cost estimates  Our remaining obligations under the OU1 consent decree consist of long-term monitoring and maintenance. Furthermore, we are primarily responsible for long term monitoring and maintenance in OU2-OU4a over a period of at least 30 years. The monitoring activities consist of, among others, testing fish tissue, sampling water quality and sediment, and inspections of the engineered caps. In 2018, we entered into a fixed-price, 30-year agreement with a third party for the performance of all of our monitoring and maintenance obligations in OU1 through OU4a with limited exceptions, such as, for extraordinary amounts of cap maintenance or replacement. Our obligation under this agreement is included in our total reserve for the Site. We are obligated to make the regular payments under that fixed-price contract until the remaining amount due is less than the OU1 escrow account balance. We are permitted to pay for this contract using the remaining balance of the escrow account established by us and WTM I Company (“WTM I”) another PRP, under the OU1 consent decree during any period that the balance in the escrow account exceeds the amount due under our fixed-price contract. As of March 31, 2021, the balance in the escrow is less than amounts due under the fixed-price contract by approximately $1.6 million. Our obligation to pay this difference is secured by a letter of credit.

At March 31, 2021, the escrow account balance totaled $8.9 million which is included in the condensed consolidated balance sheet under the caption “Other assets.”

Under the consent decree, we are responsible for reimbursement of government oversight costs paid from October 2018 and later over approximately the next 30 years. We anticipate that oversight costs will decline as activities at the site transition from remediation to long-term monitoring and maintenance.

Reserves for the Site Our reserve for past and future government oversight costs and long-term monitoring and maintenance is set forth below:

 

 

Three months ended

March 31

 

In thousands

 

 

2021

 

 

 

 

2020

 

Balance at January 1,

 

$

18,455

 

 

 

$

21,870

 

Payments

 

 

(420

)

 

 

 

(131

)

Accretion

 

 

51

 

 

 

52

 

Balance at March 31,

 

$

18,086

 

 

 

$

21,791

 

 

- 19 -

GLATFELTER

Form 10-Q


 

 

The payments set forth above represent amounts due under the long-term monitoring and maintenance agreement. With respect to our total reserve for the Fox River, $3.6 million is recorded in the accompanying March 31, 2021 condensed consolidated balance sheet under the caption “Environmental liabilities” and the remaining $14.5 million is recorded under the caption “Other long-term liabilities.”

Range of Reasonably Possible Outcomes Based on our analysis of all available information, including but not limited to decisions of the courts, official documents such as records of decision, discussions with legal counsel, cost estimates for future monitoring and maintenance and other post-remediation costs to be performed at the Site, we do not believe that our costs associated with the Fox River matter could exceed the aggregate amounts accrued by a material amount.

19.

SEGMENT INFORMATION

The following tables set forth financial and other information by segment for the period indicated:

 

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 our 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.

 

 

 

 

- 20 -

GLATFELTER

Form 10-Q


 

 

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:

 

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:

 

- 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.

 

In thousands

Three months ended

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 short-term borrowing, the proceeds of which were used for general purposes.

The 2019 Facility contains a number of customary compliance covenants, the most restrictive of which is a maximum leverage ratio of 4.0x provided that such ratio increases to 4.5x during the period of four fiscal quarters immediately following a material acquisition. As of March 31, 2021, the leverage ratio, as calculated in accordance with the definition in our amended credit agreement, was 1.8x, within the limits set forth in our credit agreement. As part of our proactive management of potential risks presented by the COVID-19 pandemic we assessed our liquidity position in a number of more severe scenarios projecting potential implications of the economic crises. We believe the strength of our balance sheet and our production of engineered materials essential to the global response effort provides adequate financial flexibility in this challenging time. Based on our expectations of future results of operations and capital needs, we do not believe the debt covenants will impact our operations or limit our ability to undertake financings that may be necessary to meet our capital needs.

The following table sets forth our outstanding long-term indebtedness:

 

 

 

March 31

 

 

 

December 31

 

In thousands

 

2021

 

 

 

2020

 

Revolving credit facility, due Feb. 2024

 

$

36,531

 

 

 

$

36,813

 

Term loan, due Feb. 2024

 

 

235,379

 

 

 

 

249,715

 

2.40% Term Loan, due Jun. 2022

 

 

2,094

 

 

 

 

2,629

 

2.05% Term Loan, due Mar. 2023

 

 

12,516

 

 

 

 

14,737

 

1.30% Term Loan, due Jun. 2023

 

 

3,769

 

 

 

 

4,382

 

1.55% Term Loan, due Sep. 2025

 

 

6,466

 

 

 

 

7,143

 

Total long-term debt

 

 

296,755

 

 

 

 

315,419

 

Less current portion

 

 

(23,942

)

 

 

 

(25,057

)

Unamortized deferred issuance costs

 

 

(1,734

)

 

 

 

(1,898

)

Long-term debt, net of current portion

 

$

271,079

 

 

 

$

288,464

 

In addition to the debt summarized above, on March 30, 2021, we entered into an $11.7 million one-year, fixed-rate borrowing arrangement with a commercial bank. The proceeds are available for general corporate purposes. Financing activities include cash used for common stock dividends. In both the first three months of 2021 and 2020, we used $6.0 million and $5.8 million, respectively, of cash for dividends on our common stock. Our Board of Directors determines what, if any, dividends will be paid to our shareholders. Dividend payment decisions are based upon then-existing factors and conditions and, therefore, historical trends of dividend payments are not necessarily indicative of future payments.

We are subject to various federal, state and local laws and regulations intended to protect the environment as well as human health and safety. At various times, we have incurred significant costs to comply with these regulations and we could incur additional costs as new regulations are developed or regulatory priorities change.

- 27 -

GLATFELTER

Form 10-Q


 

As discussed earlier, we signed a definitive agreement to purchase Georgia-Pacific's U.S. nonwovens business for $175 million, subject to customary post-closing purchase price adjustments. The acquisition will be financed through a combination of cash on hand and borrowings under our revolving credit facility.

At March 31, 2021, we had ample liquidity consisting of $87.4 million of cash on hand and $178.1 million of capacity under our revolving credit facility. We expect to meet all of our near and long-term cash needs from a combination of operating cash flow, cash and cash equivalents, our existing credit facility and other long-term debt.

Off-Balance-Sheet Arrangements As of March 31, 2021 and December 31, 2020, we had not entered into any off-balance-sheet arrangements. Financial derivative instruments, to which we are a party, and guarantees of indebtedness, which solely consist of obligations of subsidiaries, are reflected in the condensed consolidated balance sheets included herein in Item 1 – Financial Statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

 

 

Year Ended December 31

 

 

 

March 31, 2021

 

 

In thousands, except percentages

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

2025

 

 

 

Carrying Value

 

 

Fair Value

 

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average principal outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At variable interest rates

 

$

263,849

 

 

$

252,564

 

 

$

239,667

 

 

$

43,240

 

 

$

 

 

 

$

271,910

 

 

$

271,910

 

 

At fixed interest rates – Term Loans

 

 

20,704

 

 

 

11,289

 

 

 

3,797

 

 

 

1,796

 

 

 

431

 

 

 

 

24,845

 

 

 

25,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

296,755

 

 

$

297,023

 

 

Weighted-average interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On variable rate debt

 

 

1.26

%

 

 

1.26

%

 

 

1.26

%

 

 

1.26

%

 

 

 

 

 

 

 

 

 

 

 

 

 

On fixed rate debt – Term Loans

 

 

1.83

%

 

 

1.73

%

 

 

1.58

%

 

 

1.55

%

 

 

1.55

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pay fixed/received variable (notional)

 

180,000

 

 

180,000

 

 

180,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate paid

 

 

0.0395

%

 

 

0.0395

%

 

 

0.0395

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate received

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The table above presents the average principal outstanding and related interest rates for the next five years for debt outstanding as of March 31, 2021. Fair values included herein have been determined based upon rates currently available to us for debt with similar terms and remaining maturities.

Our market risk exposure primarily results from changes in interest rates and currency exchange rates. At March 31, 2021, we had $295.0 million of long-term debt, net of unamortized debt issuance costs, of which 92.2% was at variable interest rates. After giving effect to the interest rate swap agreement, approximately 20.6% of our debt was at variable interest rates. The fixed rate Term Loans and the variable rate debt are primarily euro-based borrowings and thus the value of which is also subject to currency risk. Variable-rate debt outstanding represents borrowings under our revolving credit agreement, primarily Euro-denominated, that accrues interest based on one-month Euro LIBOR, but in no event less than zero, plus the applicable margin. In addition, variable-rate debt includes U.S. dollar denominated borrowings that accrue interest based on one-month U.S. dollar LIBOR. At March 31, 2021, the weighted-average interest rate paid was equal to 1.26%. A hypothetical 100 basis point increase in the interest rate on variable rate debt would increase annual interest expense by $0.3 million. In the event rates are lower, interest expense would be unchanged.

We entered into a €180 million notional value floating-to-fixed interest rate swap agreement with certain financial institutions. Under the terms of the swap, we will pay a fixed interest rate of 0.0395% on €180 million of the underlying variable rate term loan. We will receive the greater of 0.00% or EURIBOR.

As part of our overall risk management practices, we enter into financial derivatives primarily designed to either i) hedge foreign currency risks associated with forecasted transactions – “cash flow hedges”; or ii) mitigate the impact that changes in currency exchange rates have on intercompany financing transactions and foreign currency denominated receivables and payables – “foreign currency hedges.” For a more complete discussion of this activity, refer to Item 1 – Financial Statements – Note 17.

We are subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. Dollar. On an annual basis, our Euro denominated revenue exceeds euro expenses by an estimated €150 million. With respect to the British Pound Sterling, Canadian Dollar, and Philippine Peso, we have differing amounts

- 28 -

GLATFELTER

Form 10-Q


 

of inflows and outflows of these currencies, although to a lesser degree than the Euro. As a result, particularly with respect to the Euro, we are exposed to changes in currency exchange rates and such changes could be significant.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures Our chief executive officer and our principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2021, have concluded that, as of the evaluation date, our disclosure controls and procedures are effective.

Changes in Internal Controls There were no changes in our internal control over financial reporting during the three months ended March 31, 2021, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

ITEM 6. EXHIBITS

The following exhibits are filed herewith or incorporated by reference as indicated.

 

 

 

31.1

Certification of Dante C. Parrini, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, filed herewith.

 

 

31.2

Certification of Samuel L. Hillard, Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, filed herewith.

 

 

32.1

Certification of Dante C. Parrini, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, furnished herewith.

 

 

32.2

Certification of Samuel L. Hillard, Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, furnished herewith.

 

 

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data file because its iXBRL tags are embedded within the Inline XBRL document.

 

 

101.SCH

XBRL Taxonomy Extension Schema.

 

 

101.CAL

XBRL Extension Calculation Linkbase.

 

 

101.DEF

XBRL Extension Definition Linkbase.

 

 

101.LAB

XBRL Extension Label Linkbase.

 

 

101.PRE

XBRL Extension Presentation Linkbase.

 

 

104

Cover Page Interactive Data File (formatted as an inline XBRL and contained in Exhibit 101).

 

- 29 -

GLATFELTER

Form 10-Q


 

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Glatfelter Corporation

(Registrant)

 

 

 

 

May 4, 2021

 

 

 

 

 

 

 

 

By

 

/s/ David C. Elder

 

 

 

     David C. Elder

 

 

 

     Vice President, Finance and Chief Accounting Officer

(Principal Accounting Officer)

 

 

- 30 -

GLATFELTER

Form 10-Q