Business context and reporting period
This is P. H. Glatfelter Company’s unaudited Form 10-Q for the quarter ended June 30, 2018, filed July 31, 2018. The filing describes a manufacturer of specialty papers and fiber-based engineered materials, with Composite Fibers, Advanced Airlaid Materials and Specialty Papers segments. The request identifies Magnera Corp, but the filing itself names P. H. Glatfelter Company; confirm the intended issuer.
Financial performance and liquidity
Amounts below are in U.S. dollars; millions unless stated otherwise.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $405.8 | $387.3 | $816.4 | $778.1 |
| Gross profit / gross margin | $21.6 / 5.3% | $29.7 / 7.7% | $70.5 / 8.6% | $85.4 / 11.0% |
| Operating income (loss) | ($9.4) | ($1.8) | $4.0 | $19.0 |
| Net income (loss) | ($7.4) | ($5.7) | ($1.7) | $5.9 |
| EPS, diluted | ($0.17) | ($0.13) | ($0.04) | $0.13 |
- Sales increased year over year, but higher input costs outpaced selling-price increases, compressing gross margin. Management estimated this net cost/pricing headwind at $13.9 million for the first half.
- First-half operating cash flow was essentially break-even at $38,000, versus $28.8 million in 2017. Working-capital needs, especially inventory, and lower operating profits weighed on cash generation. Capital expenditures were $36.9 million; operating cash flow less capital expenditures was approximately negative $36.9 million.
- Cash declined to $107.2 million from $116.2 million at year-end 2017. Total debt was $522.8 million, up from $483.3 million; debt less cash was approximately $415.6 million. Interest expense was $11.0 million for the first half, versus $8.5 million.
- Current assets were $604.3 million and current liabilities $336.9 million at June 30. The $400 million revolving facility had $217.9 million drawn. The company reported a 3.1x leverage ratio against a 3.5x maximum covenant and stated it was in compliance with debt covenants.
- Dividends declared were $0.13 per share for Q2 and $0.26 for the first half, unchanged from comparable 2017 periods.
Material changes versus comparable periods
- Q2 sales rose 4.8%, while gross profit fell $8.1 million and operating loss widened by $7.6 million. First-half sales rose 4.9%, but operating income fell $15.0 million and results shifted from net income to a net loss.
- Composite Fibers and Advanced Airlaid sales grew in the first half, supported by currency translation, pricing and, for Airlaid, volume growth. Specialty Papers sales declined as a result of a 2017 machine shutdown; its first-half operating result moved to an $18.5 million loss from break-even.
- Management cited higher raw-material and energy costs, particularly purchased pulp, as key pressures. Specialty Papers also faced higher annual maintenance-outage costs ($29.0 million in 2018 versus $22.9 million in 2017), transition costs, severe weather and water-quality issues.
- Foreign-currency translation added $32.5 million to first-half reported sales but only $1.7 million to net income; Q2 translation had approximately no net-income impact. Other comprehensive income included a $20.5 million first-half foreign-currency translation loss.
Outlook, commentary, risks and unusual items
- For Q3 2018, management expected Composite Fibers shipments about 8% above Q2; Specialty Papers shipments about 8% higher; and Advanced Airlaid shipments approximately in line with Q2. Input prices were expected to increase slightly. Specialty Papers average selling prices were expected to rise about $20 per ton.
- For full-year 2018, Advanced Airlaid shipments were expected to be 6%–8% above 2017, with a Q3 demand-alignment downtime expected to reduce operating income by approximately $1 million. Capital expenditures were forecast at $60–$62 million. The effective tax rate on adjusted earnings was expected to be about 35% in the second half.
- On June 19, the company agreed to acquire Georgia-Pacific’s European nonwovens business for $185 million, subject to customary adjustments, conditions and regulatory approvals. Closing was expected in Q4 2018; funding was planned from cash and revolver borrowings. The business reported 2017 sales of $99 million.
- Fox River environmental matters remain a material contingency. The company recorded a $45.2 million reserve, including $26.0 million current, and estimated reasonably possible additional costs ranging from insignificant to approximately $30 million. Management said an adverse outcome could materially affect financial position, liquidity or results, or lead to a covenant default; it also noted possible 2018 spending above $26 million.
- Tax results reflect U.S. tax reform, a $3.1 million investment tax credit, and the GILTI provision, which management said increased the first-half effective tax rate by about 10 percentage points. Tax accounting remained provisional; the ultimate impact could differ materially.
- Reported first-half GAAP net loss was $1.7 million; non-GAAP adjusted earnings were $4.3 million, down from $14.5 million. Adjusted results exclude specified items, including strategic-initiative costs and Airlaid expansion costs. Timberland sales generated $2.1 million of gains in the first half.
- Key stated risks include raw-material and energy prices, customer demand and competition, production interruptions, foreign exchange, environmental obligations, tax audits and the ability to finance and integrate acquisitions. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Confirm the issuer and filing match the intended company: this filing is for P. H. Glatfelter Company, not Magnera Corp.
- Track whether pricing actions catch up with raw-material and energy inflation, particularly in Specialty Papers, and whether gross margins recover.
- Monitor operating cash generation, inventory and working capital, capital-spending delivery, and the effect of additional borrowing on leverage and covenant headroom.
- Verify acquisition approvals, closing timing, final purchase price, financing and integration progress for the $185 million GP transaction.
- Follow Fox River litigation and monitoring obligations, reserve adequacy, potential additional cash costs and covenant implications.
- Reconcile adjusted earnings to GAAP results and assess the final tax-reform and GILTI accounting when the provisional estimates are updated.