Magnera Corp quarterly report, Q1 FY2016

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Business context and reporting period

This is P. H. Glatfelter Company’s unaudited Form 10-Q for the quarter ended March 31, 2016, filed May 3, 2016. The filing identifies the registrant as a manufacturer of specialty papers and fiber-based engineered materials, with Composite Fibers, Advanced Airlaid Materials and Specialty Papers business units. The request names Magnera Corp; that does not match the registrant identified in this filing and should be verified.

Unless otherwise noted, financial amounts below are in U.S. dollars. The filing’s income and cash flow comparisons are for the three months ended March 31, 2016 and 2015.

Financial performance and position

  • Revenue was $402.9 million, down 4.0% from $419.5 million. Net sales declined 3.7% to $402.2 million; currency translation reduced the year-over-year comparison by $5.2 million.
  • Gross profit rose 11.0% to $57.8 million; gross margin on net sales improved to 14.4% from 12.5%.
  • Operating income increased 10.5% to $26.0 million. Operating margin was approximately 6.4%, versus 5.6% a year earlier.
  • Net income increased 16.1% to $16.2 million; diluted EPS was $0.37, up from $0.32. Adjusted earnings, a non-GAAP measure, were $16.3 million, or $0.37 per diluted share, versus $13.4 million, or $0.30.
  • Operating cash flow was $11.4 million, compared with $2.2 million. Capital expenditures were $43.3 million, versus $21.7 million; cash flow after capital expenditures was therefore negative $31.9 million. Cash declined $35.0 million to $70.3 million.
  • At March 31, current assets were $528.7 million and current liabilities were $289.3 million, a current ratio of approximately 1.83. The company reported $251.8 million of available revolving-credit capacity.
  • Total debt principal was $367.2 million, up from $363.9 million at year-end; cash was $70.3 million. The revolving facility had $61.5 million drawn, and the $250.0 million of 5.375% notes mature in October 2020. The company reported a 1.8x leverage ratio against a 3.5x maximum and compliance with debt covenants.
  • Other comprehensive income was $15.7 million, principally reflecting $13.4 million of favorable foreign-currency translation, versus a $35.3 million comprehensive loss in Q1 2015.

Material changes versus the prior comparable period

  • Gross profit improved despite lower revenue, with lower costs of products sold and stronger Specialty Papers and Advanced Airlaid Materials results contributing.
  • Composite Fibers operating income fell to $11.2 million from $14.7 million, with softer food and beverage demand, lower prices and unfavorable currency effects. Advanced Airlaid operating income rose 24.5% to $6.6 million; Specialty Papers rose 57.9% to $15.0 million.
  • Capital spending nearly doubled year over year, primarily reflecting Specialty Papers environmental-compliance work and Advanced Airlaid capacity expansion.
  • Reported GAAP net income included no disposition gain in Q1 2016; the prior-year quarter included a $2.7 million net gain on asset dispositions. Adjusted earnings remove specified items, so the non-GAAP comparison differs from GAAP results.

Outlook, management commentary and risks

  • For Q2 2016, management expected Composite Fibers shipments to be about 10% above Q1; Advanced Airlaid volume, prices and average raw-material costs roughly in line with Q1; and Specialty Papers shipments about 5% lower, with prices expected to rise slightly and input costs to remain in line.
  • Planned U.S. maintenance outages in Q2 were expected to reduce pretax operating profit by approximately $25 million to $27 million, compared with $33.4 million in Q2 2015. Corporate costs were expected to be about $2 million higher than Q1.
  • Full-year 2016 capital expenditures were forecast at $150 million to $170 million, including approximately $40 million to $45 million each for the Advanced Airlaid expansion and Specialty Papers environmental-compliance projects. Full-year pension expense was expected to be about $4.6 million, versus $9.1 million in 2015.
  • Management expected 2016 cash uses for capital expenditures, strategic investments and environmental compliance to exceed operating cash generation, with needs met through operating cash flow, cash, the credit facility and other debt.
  • Fox River environmental matter: the company reported a $16.4 million reserve at March 31. It estimated reasonably possible costs could exceed accrued amounts by between insignificant and $175 million; it considered outcomes at the upper end less likely and amounts above the range remote. The company expected to spend less than $10 million on 2016 remediation work but said interim funding obligations and final cost allocation remained uncertain. An adverse outcome could materially affect financial position, liquidity or results, and could threaten debt-covenant compliance.
  • Other disclosed risks include demand and pricing changes, input and energy costs, production interruptions, international and foreign-exchange exposure, environmental regulation, tax audits and litigation. The company noted euro-denominated revenue exceeds euro expenses by approximately €120 million annually.
  • The filing says disclosure controls were effective at quarter-end. It also describes implementation of enhancements to Composite Fibers demand-to-fulfillment systems and related invoicing and inventory controls.

Important facts for investors to verify

  1. Confirm the intended issuer: this filing is for P. H. Glatfelter Company, not Magnera Corp.
  2. Track Fox River litigation, remediation spending, the proposed consent decree and whether the $16.4 million reserve remains adequate given the disclosed potential exposure.
  3. Assess the timing and returns of the $150 million to $170 million 2016 capital program, including the airlaid expansion and environmental projects, against operating cash flow and liquidity.
  4. Compare realized Q2 volumes, pricing, maintenance-outage costs and corporate expenses with management’s stated expectations.
  5. Review debt balances, available revolver capacity, covenant headroom and the company’s ability to fund investment and environmental obligations without materially increasing leverage.