Magnera Corp quarterly report, Q3 FY2018

Business context and reporting period

Issuer identification: The supplied filing is P. H. Glatfelter Company’s Form 10-Q for the quarter ended September 30, 2018—not a filing identified as Magnera Corp. Glatfelter made engineered materials through Composite Fibers and Advanced Airlaid Materials. Specialty Papers was classified as discontinued operations following the planned sale.

Unless noted otherwise, financial figures below are in U.S. dollars. The filing presents three- and nine-month comparisons with the periods ended September 30, 2017.

Financial performance and position

• Q3 diluted loss per share was $2.19; nine-month diluted loss per share was $2.23. The reported losses chiefly reflect the Specialty Papers impairment described below.
• Management’s non-GAAP adjusted earnings from continuing operations were a loss of $0.2 million (approximately $0.00 per share) for Q3 and income of $7.8 million ($0.18 per share) for the first nine months, compared with $7.6 million ($0.17) and $17.8 million ($0.40), respectively, in 2017.
• For the first nine months, continuing-operations cash used in operating activities was $16.2 million, versus $20.5 million provided in 2017. Continuing-operations investing cash use was $30.2 million, and financing provided $148.3 million. Cash and equivalents at September 30 were $234.1 million.
• Gross debt was $647.7 million at September 30, up from $483.3 million at December 31, 2017, principally reflecting higher revolving-credit-facility borrowings. Long-term debt, net of current maturities and issuance costs, was $635.4 million. The company reported a 2.9x leverage ratio against a 4.0x maximum covenant and said it was compliant with covenants.
• Cash dividends declared were $0.13 per share for Q3 and $0.39 per share for the first nine months, unchanged from the comparable 2017 periods.

Material changes versus the prior comparable period

• Nine-month continuing sales increased 7.7%, but gross profit fell $5.5 million and gross margin declined 2.1 percentage points. Management attributed pressure mainly to input-cost increases exceeding higher selling prices by $7.8 million net.
• Q3 sales were nearly flat year over year, while gross profit fell $7.5 million and operating income fell $6.1 million. Composite Fibers faced lower shipment volumes and higher woodpulp costs; Advanced Airlaid Materials’ results were affected by new-facility costs and depreciation.
• Specialty Papers recorded a $125.6 million pre-tax impairment charge, resulting in a $100.4 million nine-month loss from discontinued operations after tax. The impairment was based on estimated sale proceeds and the carrying value of the business’s net assets.
• Foreign-currency translation increased nine-month sales by $30.2 million, but its estimated net-income benefit was only $1.4 million. In Q3, currency translation reduced net income by an estimated $2.5 million.

Outlook, transactions, risks and unusual items

• Transactions after quarter-end: The European nonwovens acquisition from Georgia-Pacific closed October 1, 2018 for $186 million, funded with cash and revolving-facility borrowings. The business had 2017 sales of $99 million; its results are included prospectively after acquisition. The Specialty Papers sale closed October 31 for $360 million cash-free and debt-free; estimated cash proceeds were approximately $323 million, with the buyer also assuming about $38 million of retiree healthcare liabilities and approximately $220 million of pension liabilities, alongside transfer of related pension assets.
• Tax: The company recorded a $5.7 million valuation allowance against deferred tax assets in Q3. Management expected an approximately 75% 2018 effective tax rate for continuing operations. It noted that GILTI increased the nine-month effective rate by approximately 11 percentage points in the tax note; the MD&A separately cites an approximately 20% increase, so the filing’s descriptions are not consistent. Management said use of tax-loss carryforwards meant no related cash-tax impact.
• Environmental contingency: The Fox River reserve was $45.0 million, including $26.0 million current. The company estimated reasonably possible additional costs ranging from insignificant to approximately $30 million; it said an outcome at the high end was less likely, but warned the matter could materially affect liquidity, results or covenant compliance.
• Liquidity and market risks: Management expected to meet cash needs through operating cash flow, cash, its credit facility and other debt, while noting Fox River downside risk. A 100-basis-point change in variable rates was estimated to change annual interest expense by $3.5 million. No formal earnings guidance was provided in the supplied text.
• Management cited higher raw-material and energy costs, demand and volume changes, competition, production interruptions, foreign-exchange movements, tax uncertainty, litigation and acquisition integration among material risks.

Important facts for investors to verify

• Confirm issuer identity and filing period: this document names P. H. Glatfelter Company, not Magnera Corp.
• Review the Specialty Papers sale’s final proceeds and purchase-price adjustments, pension-asset transfer, and effect of debt repayment after closing.
• Assess post-acquisition performance and integration of the Georgia-Pacific European nonwovens business, including the financing burden.
• Reconcile the filing’s differing descriptions of GILTI’s effective-tax-rate impact and monitor deferred-tax valuation allowances and tax examinations.
• Track Fox River litigation, monitoring costs, reserve adequacy and covenant headroom, as well as cash generation and margin recovery in continuing operations.