Filing summary
Entity and period: The supplied filing is Glatfelter Corporation’s unaudited Form 10-Q for the quarter ended June 30, 2021, not a filing under the name Magnera Corp. It reports continuing operations in Composite Fibers and Airlaid Materials; the former Specialty Papers business is classified as discontinued operations. Unless otherwise noted, amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $244.9 million | $216.2 million | $470.6 million | $447.7 million |
| Gross profit | $35.6 million | $32.1 million | $74.9 million | $68.9 million |
| Gross margin | 14.5% | 14.8% | 15.9% | 15.4% |
| Operating income | $8.1 million | $9.1 million | $25.4 million | $21.4 million |
| Income from continuing operations | $1.5 million | $(2.3) million | $9.9 million | $5.1 million |
| Diluted EPS from continuing operations | $0.03 | $(0.05) | $0.22 | $0.12 |
Q2 net income was $1.4 million versus a $2.4 million net loss a year earlier; first-half net income was $9.8 million versus $5.0 million. Management-reported adjusted earnings, a non-GAAP measure, were $8.0 million ($0.18 per diluted share) in Q2 and $16.5 million ($0.37 per diluted share) for the first half, down from $9.9 million ($0.22) and $20.7 million ($0.46), respectively. The adjustments included strategic initiative and relocation costs in 2021 and restructuring, pension settlement, impairment and other items in 2020.
Cash flow, balance sheet and debt
- First-half operating cash flow from continuing operations was $1.4 million, compared with a $0.9 million use in 2020. Working-capital outflows included higher receivables and inventories; the company also reported an approximately $11.8 million VAT payment it expected to recover from customers in the second half of 2021.
- Investing cash outflow was $181.1 million, principally reflecting the $170.7 million Mount Holly acquisition. Capital expenditures were $11.2 million in the first half.
- Financing cash inflow was $165.1 million, including $178.1 million net revolving-credit borrowings and $11.7 million of short-term borrowing; dividends paid were $12.0 million.
- At June 30, cash and cash equivalents were $84.2 million, with $113.0 million available under the revolving facility. Current assets were $492.1 million and current liabilities $242.4 million.
- Total debt carrying value was $483.0 million, including $471.2 million long-term debt and $11.9 million short-term debt. Debt increased substantially from year-end, largely to fund Mount Holly. The credit-agreement leverage ratio was 3.0x; the stated maximum was generally 4.0x, rising to 4.5x for four quarters following a material acquisition.
- Approximately 95.6% of long-term debt was at variable rates before giving effect to the interest-rate swap; management said the swap reduced the variable-rate share to about 50%. A 100-basis-point increase in variable rates was estimated to raise annual interest expense by $1.9 million.
Material changes and operating drivers
- First-half sales rose 5.1% year over year. Composite Fibers sales increased 11%, helped by favorable currency translation and higher shipments, while Airlaid Materials sales declined 2.7% as shipments weakened. The Mount Holly business contributed from its May 13 acquisition date.
- First-half Composite Fibers operating income increased 2% to $27.1 million. Higher raw-material and energy costs—up $7.3 million—partly offset improved mix, pricing and production. An announced 8% price increase had not yet fully offset inflation.
- First-half Airlaid Materials operating income fell 35.7% to $15.6 million. Lower volume and production, customer inventory adjustments and higher input costs outweighed pricing benefits. In Q2, tabletop demand improved as restaurants reopened, but hygiene and wipes customers continued destocking.
- Q2 sales increased 13.3%, while operating income declined 10.8% and gross margin fell 0.3 percentage point. Management attributed the margin and profit pressure chiefly to inflation, mix and operating factors.
- The Q2 2020 comparison included a $6.3 million pension settlement expense and other unusual charges, while Q2 2021 included $7.8 million of strategic-initiative costs and a $1.6 million timberland gain. GAAP and adjusted comparisons therefore differ materially.
Outlook, risks and contingencies
- Management expected full-year 2021 capital expenditures of $30 million to $35 million. It stated that it expected to meet cash needs through operating cash flow, cash, existing credit facilities and other debt; no earnings guidance was provided.
- On July 22, 2021, after quarter-end, Glatfelter agreed to acquire Jacob Holm for approximately $308 million, subject to customary conditions and adjustments, with closing expected later in 2021. The company reported committed financing and intended to use unsecured debt; it also intended to seek an extension of its revolving-credit maturity. Jacob Holm had about $400 million of trailing twelve-month revenue and $45 million of EBITDA as of June 30, supported by pandemic tailwinds.
- COVID-19 continued to affect demand patterns, including weaker tabletop demand earlier in the period and customer inventory adjustments in hygiene and wipes. The filing also identifies risks from raw-material and energy inflation, customer demand and competition, supply or production disruptions, foreign exchange and geopolitical exposure, tax examinations, and acquisition financing and integration.
- The company reported a $17.7 million reserve for Fox River environmental monitoring and oversight obligations, primarily long-term. Management did not believe costs would materially exceed the accrued reserve. The obligations include long-term monitoring and maintenance, with limited exceptions to a fixed-price service agreement.
- Gross unrecognized tax benefits were $48.3 million at June 30, 2021; management said the balance could decrease by up to $6.4 million within 12 months due to audits and statute expirations. The first-half effective tax rate was adversely affected by U.S. pretax losses generating no tax benefit and tax-rate increases in Germany and the U.K.
- Disclosure controls were assessed as effective. The Mount Holly acquisition was being incorporated into the company’s internal controls and was identified as a material change in internal control over financial reporting.
Most important facts to verify
- Confirm the intended issuer: this filing is for Glatfelter Corporation (NYSE: GLT), not Magnera Corp.
- Verify the final Mount Holly purchase-price allocation and post-closing adjustments; the allocation was preliminary.
- Track the Jacob Holm acquisition’s completion, financing terms, integration costs and realized contribution against the disclosed revenue and EBITDA figures.
- Assess whether pricing actions recover raw-material and energy inflation, and whether Airlaid demand and customer destocking improve.
- Monitor operating cash conversion, the expected VAT recovery, debt levels, covenant headroom and refinancing plans.
- Review environmental reserve assumptions and tax audit outcomes, including the range of potential changes to unrecognized tax benefits.