Business context and reporting period
This filing is P. H. Glatfelter Company’s Form 10-Q for the quarter ended June 30, 2019. The supplied company label, “Magnera Corp,” does not match the registrant named in the filing; the filing identifies P. H. Glatfelter Company (NYSE: GLT). Continuing operations comprise Composite Fibers and Advanced Airlaid Materials. Specialty Papers was sold in October 2018 and is presented as discontinued operations.
Comparisons are with the three and six months ended June 30, 2018. Results include the acquired Georgia-Pacific European nonwovens business from October 1, 2018, so reported growth partly reflects the acquisition.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $235.1 million | $215.7 million | $464.2 million | $426.9 million |
| Gross profit | $37.5 million | $33.3 million | $73.1 million | $69.9 million |
| Gross margin | 16.0% | 15.4% | 15.8% | 16.4% |
| Operating income | $15.1 million | $7.7 million | $26.8 million | $15.4 million |
| Income from continuing operations | $6.3 million | $1.3 million | $10.9 million | $3.5 million |
| Net income (loss), including discontinued operations | $5.8 million | $(7.4) million | $11.1 million | $(1.7) million |
| Diluted EPS, continuing operations | $0.14 | $0.03 | $0.25 | $0.08 |
Management’s non-GAAP adjusted earnings from continuing operations were $8.5 million, or $0.19 per diluted share, in Q2 2019 versus $4.0 million, or $0.09, a year earlier. For the first half, adjusted earnings were $15.7 million, or $0.35 per diluted share, versus $7.9 million, or $0.18. These measures exclude specified items and are not GAAP results.
Cash flow, debt and liquidity
- Cash and cash equivalents were $58.9 million at June 30, 2019, down from $142.7 million at year-end 2018. About 60% was held by foreign subsidiaries; the company said it could be repatriated without significant additional tax.
- For the first half, continuing-operations operating cash flow was negative $19.3 million, investing cash flow was negative $11.6 million, and financing cash flow was negative $40.4 million. The filing attributes operating cash use partly to working-capital needs and a $20.5 million Fox River payment. Cash used in investing declined from the prior year as airlaid expansion spending fell.
- Total debt was $387.7 million at June 30, compared with $413.0 million at December 31, 2018; reported long-term debt, net of current portion and issuance costs, was $361.8 million. The company repaid its $250 million 5.375% notes using proceeds from a new €220 million term loan and amended $400 million revolver.
- At June 30, $94.5 million was drawn on the revolver. The credit agreement’s maximum leverage covenant was 4.0x (temporarily 4.5x after qualifying acquisitions); reported leverage was 3.5x. The filing states the company expected operating cash flow, cash, its credit facility and other debt to meet cash needs.
- Variable-rate debt represented 89.6% of debt net of issuance costs. A hypothetical 100-basis-point rate change would affect annual interest expense by approximately $3.4 million. The quarterly dividend remained $0.13 per share.
Material changes and management commentary
- Q2 sales rose about 9% year over year. Advanced Airlaid Materials sales increased $29.7 million, supported by the Steinfurt acquisition and 9.6% organic shipping-volume growth, especially in wipes, hygiene and table-top products. Composite Fibers sales fell $10.4 million, primarily from lower volumes in metallized and wallcover products and unfavorable currency translation.
- For the first half, Advanced Airlaid sales rose 42.5%, while Composite Fibers sales fell 8.2%. Excluding Steinfurt and on a constant-currency basis, first-half Advanced Airlaid sales increased 15.4% and Composite Fibers declined 3.2%.
- Management cited lower corporate costs, cost-reduction efforts, Advanced Airlaid growth and lower net interest expense as contributors to improved adjusted earnings. Higher raw-material and energy costs, production downtime, supply disruption for a key raw material, weaker Composite Fibers volumes and unfavorable currency translation were offsets.
- In February 2019, Glatfelter entered a new five-year credit facility and redeemed the 2020 notes. The company also reported $5.9 million of first-half cost-optimization charges and a $1.0 million debt-refinancing adjustment in its adjusted-earnings reconciliation.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said it expected to meet near- and long-term cash requirements through operating cash flow, cash balances, the credit facility and other long-term debt.
- Key stated risks include demand and pricing changes, competition, raw-material and energy costs, production interruptions, customer concentration or loss, labor disruption, foreign exchange and geopolitical exposure, tax matters, and the ability to finance and integrate acquisitions.
- Foreign-currency exposure is notable: annual euro-denominated revenue exceeds euro expenses by an estimated €160 million. Currency translation reduced first-half sales by $19.5 million but increased reported net income by $3.1 million versus constant exchange rates.
- Fox River environmental obligations remained material. After a 2019 consent decree, the company paid $20.5 million for past response costs and natural-resource damages and agreed to future government oversight costs and long-term monitoring obligations. The reserve was $21.9 million at June 30, including $6.9 million current and $15.0 million long-term; the filing notes monitoring may continue for at least 30 years.
- The qualified pension plan was frozen effective May 31 and terminated June 30, 2019, with an enhanced defined-contribution plan replacing benefits for active employees. The termination produced a $1.9 million gain recorded in other comprehensive income.
- The company recorded a $1.6 million additional valuation allowance against deferred tax assets. Gross unrecognized tax benefits were $30.6 million; management said the balance could decrease by up to $6.2 million over the next 12 months, subject to examinations and statute expirations.
Important facts for investors to verify
- Confirm the registrant identity: this document is Glatfelter’s 2019 second-quarter 10-Q, not a filing under the supplied Magnera Corp label.
- Assess how much reported Advanced Airlaid growth and earnings improvement is attributable to the Steinfurt acquisition versus organic performance, and whether Composite Fibers’ volume weakness persists.
- Track cash conversion and working-capital needs, the sharp decline in cash, capital spending, and progress toward maintaining leverage covenant headroom.
- Review variable-rate borrowing exposure, refinancing terms and future debt amortization, as well as the sustainability of the dividend relative to cash generation.
- Monitor the Fox River reserve and future oversight and remediation costs, tax-asset realizability and audit outcomes, and the execution and costs of pension-plan termination and cost-optimization actions.