10-K 1 d444088d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

þ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2012

or

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                             to                             

 

LOGO

96 South George Street, Suite 520

York, Pennsylvania 17401

(Address of principal executive offices)

(717) 225-4711

(Registrant’s telephone number, including area code)

 

Commission file number

 

Exact name of registrant as

specified in its charter

 

IRS Employer

Identification No.

 

State or other jurisdiction of

incorporation or organization

1-03560   P. H. Glatfelter Company   23-0628360   Pennsylvania

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on which registered

Common Stock, par value $.01 per share   New York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  þ.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    ¨   Accelerated filer    þ    Non-accelerated filer    ¨   Small reporting company    ¨
     (Do not check if a smaller reporting company).  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)     Yes  ¨    No  þ.

Based on the closing price as of June 30, 2012, the aggregate market value of the Common Stock of the Registrant held by non-affiliates was $692.9 million.

Common Stock outstanding on February 28, 2013 totaled 42,824,288 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference in this Annual Report on Form 10-K:

Portions of the registrant’s Proxy Statement to be dated on or about April 3, 2013 are incorporated by reference into Part III.

 

 

 


Table of Contents

P. H. GLATFELTER COMPANY

ANNUAL REPORT ON FORM 10-K

For the Year Ended

DECEMBER 31, 2012

Table of Contents

 

          Page  
PART I      
Item 1   

Business

     1   
Item 1A   

Risk Factors

     7   
Item 1B   

Unresolved Staff Comments

     11   
Item 2   

Properties

     11   
Item 3   

Legal Proceedings

     11   
  

Executive Officers

     11   
Item 4   

Mine Safety Disclosures

     12   
PART II      
Item 5   

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     12   
Item 6   

Selected Financial Data

     13   
Item 7   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     14   
Item 7A   

Quantitative and Qualitative Disclosures about Market Risk

     25   
Item 8   

Financial Statements and Supplementary Data

     26   
Item 9   

Changes in and Disagreements With Accountants on Accounting and Financial Disclosures

     61   
Item 9A   

Controls and Procedures

     61   
Item 9B   

Other Information

     61   
PART III
 
     
Item 10   

Directors, Executive Officers and Corporate Governance

     61   
Item 11   

Executive Compensation

     61   
Item 12   

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     61   
Item 13   

Certain Relationships and Related Transactions, and Director Independence

     61   
Item 14   

Principal Accountant Fees and Services

     61   
PART IV
 
     
Item 15   

Exhibits, Financial Statement Schedules

     62   

SIGNATURES

     64   

CERTIFICATIONS

     65   

SCHEDULE II

     67   


Table of Contents

PART I

We make regular filings with the Securities and Exchange Commission (SEC), including this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K. These filings are available, free of charge, on our website, www.glatfelter.com, and the SEC website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request to Investor Relations at (717) 225-2719, ir@glatfelter.com, or by mail to Investor Relations, 96 South George Street, Suite 520, York, PA, 17401. In this filing, unless the context indicates otherwise, the terms “we,” “us,” “our,” “the Company,” or “Glatfelter” refer to P. H. Glatfelter Company and subsidiaries.

 

ITEM 1 BUSINESS

Overview    Glatfelter began operations in 1864, and we believe we are one of the world’s leading manufacturers of specialty papers and fiber-based engineered materials. Headquartered in York, Pennsylvania, we own and operate manufacturing facilities located in Pennsylvania, Ohio, Canada, Germany, the United Kingdom, France, and the Philippines.

Products    Our three business units manufacture a wide array of specialty papers and fiber-based engineered materials including:

 

   

Specialty Papers with revenues from the sale of papers for carbonless and other forms, book publishing, envelopes, and engineered products such as papers for digital imaging, casting, release, transfer, playing card, postal, FDA-compliant food and beverage applications, and other niche specialty applications;

 

   

Composite Fibers primarily consists of single-serve coffee and tea filtration papers, metallized and self adhesive labeling papers, composite laminates used for decorative furniture and flooring applications, and technical specialties such as battery pasting papers, among others; and

 

   

Advanced Airlaid Materials with revenue from the sale of airlaid non-woven fabric-like materials used in feminine hygiene and adult incontinence products, cleaning pads and wipes, food pads, napkins, tablecloths, and baby wipes.

The markets served by the Composite Fibers and Advance Airlaid Materials business units are characterized by attractive growth rates as the result of new and emerging products and markets, changing end-user

preferences and evolving demographics. Specialty Papers serves more mature market segments, many of which are in decline.

As a result of our strategy to diversify sources of revenue and invest in growth businesses, revenue generated from Composite Fibers and Advanced Airlaid Materials is expected to represent an increasingly greater proportion of total revenue. For 2012, these two business units comprised 43% of consolidated revenue compared with 30% in 2006.

Consolidated net sales and the relative net sales contribution of each of our business units for the past three years are summarized below:

 

    Dollars in thousands   2012     2011     2010  

Net sales

  $ 1,577,788      $ 1,603,154      $ 1,455,331   

Business unit contribution

       

Specialty Papers

    56.7     54.6     57.9

Composite Fibers

    27.7        29.7        28.8   

Advanced Airlaid Materials

    15.6        15.7        13.3   

Total

    100.0     100.0     100.0

Our strategies are focused on growing revenues, in part, by leveraging leading positions in key global growth markets including the single-serve coffee and tea markets and the hygiene products markets. To ensure we are best positioned to serve these markets, we have made investments to increase production capacity and intend to make additional future investments.

In addition to leveraging our leading positions, our focus on product innovation is a critical component of our business strategy. During 2012, 2011 and 2010, we invested $10.9 million, $11.7 million and $10.4 million, respectively, in new product development activities. In each of the past three years, in excess of 50% of net sales were generated from products developed, enhanced or improved within the past five years.

Other key elements to our success include margin expansion, driven by cost reduction and continuous improvement initiatives; the generation of strong and reliable cash flows; and strategic investments to improve our returns on invested capital. The strength of our balance sheet and generation of cash flows has allowed us to pursue strategic actions such as the $50 million investment to expand capacity in Composite Fibers and share repurchase programs executed in 2011 and 2012. Under the programs we have repurchased $54 million of our common stock. These actions and our disciplined approach to capital expenditures has resulted in the generation of returns on invested capital that exceed our cost of capital.

 

 

Glatfelter 2012 Form 10-K        1


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We have a demonstrated ability to establish leading market positions through the successful acquisition and integration of complementary businesses. Since 2006, we have successfully completed and integrated four acquisitions. Our acquisition strategy complements our long-term strategy of driving growth in our markets.

Our Business Units    We manage our company as three distinct business units: (i) Specialty Papers (ii) Composite Fibers; and (iii) Advanced Airlaid Materials. Net tons sold by each business unit for the past three years were as follows:

 

    Short tons    2012     2011      2010  

Specialty Papers

     789,201        779,647         764,670   

Composite Fibers

     90,300        93,317         90,350   

Advanced Airlaid Materials

     90,332        87,951         72,833   

Total

     969,833        960,915         927,853   

Specialty Papers    Our North America-based Specialty Papers business unit focuses on producing papers for the following markets:

 

   

Carbonless & forms papers for credit card receipts, multi-part forms, security papers and other end-user applications;

 

   

Book publishing papers for the production of high quality hardbound books and other book publishing needs;

 

   

Envelope and converting papers for the direct mail market, shopping bags, and other converting applications; and

 

   

Engineered products for digital imaging, casting, release, transfer, playing card, postal, FDA-compliant food and beverage applications, and other niche specialty applications.

The market segments in which Specialty Papers competes have undergone significant changes over the past several years in response to capacity exceeding demand. This business unit produces both commodity products (comprised of envelopes and certain forms) and higher-value-added specialty products.

Specialty Papers’ revenue composition by market consisted of the following for the years indicated:

 

     In thousands    2012     2011      2010  

Carbonless & forms

   $ 372,950      $ 368,582       $ 359,033   

Book publishing

     155,925        166,506         168,155   

Envelope & converting

     174,781        170,380         157,202   

Engineered products

     187,724        166,660         155,257   

Other

     3,397        2,950         2,967   

Total

   $ 894,777      $ 875,078       $ 842,614   

Although many of the markets served by Specialty Papers are mature and, in many instances, declining, we have been successful at maintaining this unit’s shipments through new product and new business development initiatives while leveraging the flexibility of our operating assets to efficiently respond to changing customer demands. In each of the past eight years, our flexible asset base, new product development capabilities and superior customer service offerings allowed us to outperform the broader uncoated free sheet market in terms of shipping volumes.

We believe we are one of the leading suppliers of carbonless and book publishing papers in the United States. Although the markets for these products are declining, we have been successful in executing our strategy to replace this lost volume with products such as envelope papers and business forms, and other value-added specialty products. Specialty Papers also produces paper that is converted into specialized envelopes in a wide array of colors, finishes and end-uses. While this market is also declining, we have leveraged our customer service capabilities to grow our market share in each of the last several years.

Specialty Papers’ highly technical engineered products include those designed for multiple end uses, such as papers for pressure-sensitive postage stamps, greeting and playing cards, conical cups, digital imaging applications and for release paper applications. Such products comprise an array of distinct business niches that are in a continuous state of evolution. Many of these products are utilized for demanding, specialized customer and end-user applications. Some of our products are new and higher growth while others are more mature and further along in the product life cycle. Because many of these products are technically complex and involve substantial customer-supplier development collaboration, they typically command higher per ton prices and generally exhibit greater pricing stability relative to commodity grade paper products.

The Specialty Papers business unit operates two integrated pulp and paper making facilities with the following combined attributes:

 

Uncoated Production

Capacity (short tons)

 

Principal Raw

Material (“PRM”)

 

Estimated Annual

Quantity of PRM

(short tons)

795,000

  Pulpwood   2,327,250
  Wood-and other pulps      721,600

This business unit’s pulp mills have a combined pulp making capacity of 598,000 tons of bleached pulp per year. The principal raw material used to produce each

 

 

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facility’s pulp is pulpwood, including both hardwoods and softwoods. Pulpwood is obtained from a variety of locations including the states of Pennsylvania, Maryland, Delaware, New Jersey, New York, West Virginia, Virginia, Kentucky, Ohio and Tennessee. To protect our sources of pulpwood, we actively promote conservation and forest management among suppliers and woodland owners. In addition to critical raw materials, the cost to produce Specialty Papers’ products is influenced by energy costs. Although the business unit generates all of its steam needed for production at both facilities and generates more power than it consumes at the Spring Grove, PA facility, in 2012, it purchased approximately 22% of its electricity needed for the Chillicothe, OH mill. The facilities’ source of fuel is primarily coal and, to a lesser extent, natural gas.

Since becoming a member of PJM Interconnection, a federally regulated Independent System Operator (“ISO”) that coordinates the movement and ensures reliability of wholesale electricity in its region, excess electricity generated by Spring Grove is sold to the high-voltage electricity grid. As a member of PJM, we provide capacity to the grid and sell excess power at market prices. Accordingly, our margin earned from energy sales will be subject to market volatility associated with the price at which energy is sold together with volatility in input costs, primarily related to coal.

The Spring Grove facility includes five uncoated paper machines as well as an off-line combi-blade coater and a Specialty Coater (“S-Coater”), which together provide annual production capacity for coated paper of approximately 68,000 tons. Since uncoated paper is used in producing coated paper, this is not additional capacity. The Chillicothe facility operates four paper machines producing uncoated and carbonless paper. Two of the machines have built-in coating capability which along with three additional coaters at the facility provide annual coated capacity of 130,000 tons.

In the carbonless paper market, we compete with Appleton Papers and, to a lesser extent, foreign importers including Fibria Celulose (formerly Votorantim Celulose e Papel) and Asia Pulp and Paper Co. We believe we are one of the leading producers of book publishing papers and compete in these markets with Domtar Corp. and North Pacific Paper (NORPAC), among others. In the envelope sector we compete with International Paper, Domtar Corp., Boise Inc. and Evergreen Packaging, among others. In our Specialty Papers’ engineered products markets, competition is product line specific as the necessity for technical expertise and specialized manufacturing equipment limits the number of companies offering

multiple product lines. We compete with specialty divisions of large companies such as International Paper, Domtar Corp., Boise Inc., NewPage Corp. and Sappi Limited, among others. Service, product performance, technological advances and product pricing are important competitive factors with respect to all our products. We believe our reputation in these areas continues to be excellent.

To be successful in the market environment in which Specialty Papers operates, our strategy is focused on:

 

   

employing our new product and new business development capabilities to meet changing customer demands and ensure optimal utilization of capacity;

 

   

leveraging our flexible operating platform to optimize product mix by shifting production among facilities to more closely match output with changing demand trends;

 

   

aggressively employing methodologies to manage pressures on margins presented by more mature markets;

 

   

utilizing ongoing continuous improvement methodologies to ensure operational efficiencies; and

 

   

maintaining superior customer service.

Composite Fibers    Our Composite Fibers business unit, based in Gernsbach, Germany, serves customers globally and focuses on higher value-added products in the following markets:

 

   

Food & Beverage paper primarily used for single-serve coffee and tea products;

 

   

Metallized products used in the labeling of beer bottles, packaging innerliners, gift wrap, self-adhesive labels and other consumer product applications;

 

   

Composite Laminates papers used in production of decorative laminates, furniture, and flooring applications; and

 

   

Technical Specialties a diverse line of paper products used in batteries, adhesive tapes and other highly-engineered applications.

We believe this business unit maintains a market leadership position in the single-serve coffee and tea markets, and the composite laminates market. Composite

 

 

Glatfelter 2012 Form 10-K        3


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Fibers’ revenue composition by market consisted of the following for the years indicated:

 

     In thousands    2012     2011      2010  

Food & beverage

   $ 265,423      $ 284,748       $ 242,882   

Metallized

     87,720        95,276         88,753   

Composite laminates

     44,613        53,334         50,801   

Technical specialties and other

     38,984        42,671         36,781   

Total

   $ 436,740      $ 476,029       $ 419,217   

We believe many of the market segments served by Composite Fibers, particularly single-serve coffee and tea, present attractive growth opportunities by capitalizing on evolving consumer preferences, expanding into new or emerging geographic markets, and by gaining market share through quality product and service offerings. Many of this unit’s papers are technically sophisticated and most, except for metallized papers, are extremely lightweight and require specialized fibers. Our engineering capabilities, specifically designed papermaking equipment, use of specialized fibers and customer orientation positions us well to compete in these global markets.

The primary raw materials used in the production of our lightweight papers are abaca pulp and wood pulp. Abaca pulp is a specialized pulp with limited sources of availability. Our abaca pulp production process, fulfilled by our Philippine mill, provides a unique advantage by supplying a key raw material used by our Composite Fibers business unit. Sufficient quantities of abaca pulp and the source fiber are required to support growth in this business unit. In the event the supply of abaca fiber becomes constrained or when production demands exceed the capacity of the Philippines mill, alternative sources and/or substitute fibers are used to meet customer demands.

The Composite Fibers business unit is comprised of three paper making facilities (Germany, France and England), metallizing operations (Wales and Germany) and a pulp mill (the Philippines) with the following combined attributes:

 

Production

Capacity

(short tons)

    

Principal Raw

Material
(“PRM”)

  

Estimated Annual

Quantity of PRM

(short tons)

68,400 lightweight

     Abaca pulp    18,100
     Wood pulp    46,000
     Synthetic fiber    12,800

28,100 metallized

     Base stock    30,200

15,300 abaca pulp

     Abaca fiber    26,270

Composite Fibers uses highly specialized inclined wire paper machine technology and we believe we currently maintain approximately 25% of the global inclined wire capacity.

In addition to critical raw materials, the cost to produce Composite Fibers’ products is influenced by energy costs. Although the business unit generates all of its steam needed for production, in 2012, it purchased 93% of its electricity.

In Composite Fibers’ markets, competition is product line specific as the necessity for technical expertise and specialized manufacturing equipment limits the number of companies offering multiple product lines. In single-serve coffee and tea products we compete with companies such as Ahlstrom and Purico. In composite laminates, we compete with PdM, a division of Schweitzer-Maudit, Purico, MB Papeles and Oi feng. For metallized products, competitors include AR Metallizing, Torras Papel Novelis, Vaassen, and Wenzhou Protec Vacuum Metallizing Co. Ltd.

Our strategy in Composite Fibers is focused on:

 

   

capturing global growth in food & beverage, technical specialties and composite laminates;

 

   

expanding value-added production capacity by investing in state-of-the-art inclined wire technology to better ensure our capacity supports consistent growth of markets;

 

   

capitalizing on rapidly growing markets;

 

   

enhancing product mix across all of the business unit’s markets by utilizing new product and new business development capabilities;

 

   

implementing continuous improvement methodologies to increase productivity, reduce costs and expand capacity; and

 

   

ensuring readily available access to specialized raw material requirements to support projected growth.

As part of our commitment to realizing the growth potential of certain of this business unit’s markets, we announced a $50 million investment to expand our inclined wire capacity by nearly 20%, or approximately 10,500 short tons, by converting a flat wire machine, currently producing composite laminates, to a state-of-the-art inclined wire machine. The project began in 2012 and is expected to be completed in the second quarter of 2013. Production of saleable products from the new machine is scheduled to begin in the second quarter of 2013. We expect to achieve a 15% to 20% after-tax return on this investment within three years.

Advanced Airlaid Materials    was formed in connection with our February 2010 acquisition of Concert Industries Corp. (“Concert”). Advanced Airlaid Materials is

 

 

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a leading global supplier of highly absorbent cellulose-based airlaid non-woven materials used to manufacture consumer and industrial products for growing global end-user markets. These products include, but are not limited to:

 

   

feminine hygiene;

 

   

adult incontinence;

 

   

home care;

 

   

specialty wipes;

 

   

table top; and

 

   

food pads.

Advanced Airlaid Materials affords us the opportunity to grow with customers who are industry leading consumer product companies for feminine hygiene and adult incontinence products. Advanced Airlaid Materials holds leading market share positions in many of the markets it serves, excels in building long-term customer relationships through superior quality and customer service programs, and has a well-earned reputation for innovation and its ability to quickly bring new products to market.

Advanced Airlaid Materials’ revenue composition by market consisted of the following for the years indicated:

 

     In thousands    2012     2011      2010  

Feminine hygiene

   $ 197,792      $ 206,724       $ 157,660   

Home care

     14,527        15,308         13,691   

Wipes

     13,562        5,463           

Adult incontinence

     6,959        6,083         6,167   

Other

     13,442        18,469         15,981   

Total

   $ 246,282      $ 252,047       $ 193,499   

The feminine hygiene category accounted for 80% of Advanced Airlaid Material’s revenue in 2012, sales of which are to a small group of large, leading global consumer products companies. This market is considered to be more growth oriented driven by population growth in certain geographic regions, consumer preferences, and suppliers’ ability to provide innovative products. In developing regions, demand is also influenced by increases in disposable income and cultural preferences.

The Advanced Airlaid Materials business unit operates state-of-the-art facilities in Falkenhagen, Brandenburg, Germany and Gatineau, Quebec, Canada. The Falkenhagen location operates three multi-bonded production lines and three proprietary single-lane festooners. The Gatineau location consists of two airlaid production lines employing multi-bonded and thermal-bonded airlaid technologies and, with the recently completed investment, two proprietary single-lane festooners.

The business unit’s two facilities operate with the following combined attributes:

 

Airlaid Production

Capacity (short tons)

  

Principal Raw

Material (“PRM”)

   Estimated Annual
Quantity of PRM
(short tons)
 

107,000

   Fluff pulp      73,250   

In addition to the cost of critical raw materials, the cost to produce multi-bonded and thermal-bonded airlaid materials is impacted by energy costs. Advanced Airlaid Materials purchases all of its electricity and natural gas. Approximately 80% of this business unit’s revenue is earned under contracts with pass-through provisions directly related to the price of key input costs.

Advanced Airlaid Materials continues to be a technology and product innovation leader in technically demanding segments of the airlaid market, most notably feminine hygiene. We believe that its facilities are among the most modern and flexible airlaid facilities in the world, allowing it to produce at industry leading operating rates. Its proprietary single-lane rotary festooning technology, developed in 2002, provides customers with a product packaged for efficient use. This business unit’s in-house technical expertise, combined with significant capital investment requirements and rigorous customer expectations creates large barriers to entry for new competitors.

The airlaid industry is made up of several producers, including Buckeye Technologies Inc., Georgia-Pacific LLC, Duni AB, Petropar SA, McAirlaid’s Vliestoffe GmbH & Co. KG, and us.

The markets served by this business unit are characterized by attractive growth opportunities. To take advantage of this, our strategy is focused on:

 

   

maintaining and expanding relationships with customers that are market-leading consumer product companies;

 

   

expanding geographic reach of markets served;

 

   

optimizing the use of existing production capacity;

 

   

employing continuous improvement methodologies and initiatives to reduce costs, improve efficiencies and create capacity; and

 

   

capitalizing on our product and process innovation capabilities.

Additional financial information for each of our business units is included in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 8 – Financial Statements and Supplementary Data, Note 22 including geographic revenue and long-lived asset financial information.

 

 

Glatfelter 2012 Form 10-K        5


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Balance Sheet    We are focused on prudent financial management and the maintenance of a conservative capital structure and strong balance sheet. This includes:

 

   

aggressively managing working capital to enhance cash flow from operations;

 

   

making disciplined capital expenditure decisions; and

 

   

monetizing the value of our timberland assets as opportunities develop.

The success of these actions positions us with the flexibility to pursue strategic opportunities that will benefit our shareholders.

Concentration of Customers    For each of the past three years, no single customer represented more than 10% of our consolidated net sales. However, as discussed in Item 1A Risk Factors, one customer accounted for the majority of Advanced Airlaid Materials net sales in 2012, 2011 and 2010.

Capital Expenditures    Our business is capital intensive and requires extensive expenditures for new and enhanced equipment. These capital investments are necessary to support growth strategies, research and development initiatives, environmental compliance, and for normal upgrades or replacements. Capital expenditures totaled $58.8 million, $64.5 million and $36.5 million, in 2012, 2011 and 2010, respectively. For 2013, capital expenditures are estimated to be $90 million to $100 million. This includes $33.5 million of the $50 million investment to expand capacity to serve Composite Fibers’ growth markets.

Environmental Matters    We are subject to various federal, state and local laws and regulations intended to protect the environment as well as human health and safety. At various times, we have incurred significant costs to comply with these regulations and we could incur additional costs as new regulations are developed or regulatory priorities change. As a result of new air quality regulations including the U.S. EPA Best Available Retrofit Technology rule (BART; otherwise known as the Regional Haze Rule) and the Boiler Maximum Achievable Control Technology rule (Boiler MACT), we anticipate that we could incur material capital and operating costs. For example, on December 20, 2012, the Administrator of the U. S. Environmental Protection Agency signed new rules which could require process modifications and/or installation of air pollution controls on power boilers at two of our facilities. We are currently reviewing these rules to understand the effect they may have on our

operations, such as reducing or curtailing boiler usage or modifying the types of boilers operated or fuel consumed. The cost of compliance is likely to be significant. Our current estimates to implement viable options could result in additional capital spending of approximately $45 million. The amount ultimately incurred may be less depending on our successful implementation of appropriate available options. In addition, the timing of any additional capital spending is uncertain, although we currently expect to incur the expenditures generally in 2015 and 2016. Enactment of new environmental laws or regulations or changes in existing laws or regulations could significantly change our estimates. For a discussion of other environmental matters, see Item 8 – Financial Statements and Supplementary Data – Note 21.

Employees    As of December 31, 2012, we employed 4,258 people worldwide, of which approximately 70% are unionized. The United Steelworkers International Union and the Office and Professional Employees International Union represents approximately 1,600 hourly employees at our Chillicothe, OH and Spring Grove, PA facilities under labor contracts expiring in November 2015 and January 2014, respectively. Hourly employees at each of our international locations are represented by various unions or works councils. We consider the overall relationship with our employees to be satisfactory.

Other Available Information    The Corporate Governance page of our corporate web site includes our Governance Principles and Code of Business Conduct, and biographies of our Board of Directors and Executive Officers. In addition, the website includes the charters for the Audit, Compensation, Finance, and Nominating and Corporate Governance Committees of the Board of Directors. The Corporate Governance page also includes the Code of Business Ethics for the CEO and Senior Financial Officers of Glatfelter, our “whistle-blower” policy and other related material. We satisfy the disclosure requirement for any future amendments to, or waivers from, our Code of Business Conduct or Code of Business Ethics for the CEO and Senior Financial Officers by posting such information on our website. We will provide a copy of the Code of Business Conduct or Code of Business Ethics for the CEO and Senior Financial Officers, without charge, to any person who requests one, by contacting Investor Relations at (717) 225-2719, ir@glatfelter.com or by mail to 96 South George Street, Suite 520, York, PA, 17401.

 

 

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ITEM 1A RISK FACTORS

Our business and financial performance may be adversely affected by the global economic environment or downturns in the target markets that we serve.

Adverse global economic conditions could impact our target markets resulting in decreased demand for our products. Approximately 17% of our net sales in 2012 were shipped to customers in western Europe, the demand for which, in many cases, is dependent on economic conditions in this area, and to the extent customers do business outside of Europe, in other regions of the world. Our results could be adversely affected if economic conditions weaken or fail to improve. Also, there may be periods during which demand for our products is insufficient to enable us to operate our production facilities in an economical manner. The economic environment may cause customer insolvencies which may result in their inability to satisfy their financial obligations to us. These conditions are beyond our ability to control and may have a significant impact on our sales and results of operations.

The markets for our products are also significantly affected by changes in industry capacity and output. There have been periods of supply/demand imbalance in our industry which have caused pulp prices and our products’ selling prices to be volatile. The timing and magnitude of price increases or decreases in these markets have generally varied by region and by product type. A sustained period of weak demand or excess supply would likely adversely affect pulp prices and our products’ selling prices. This could have a material adverse affect on our operating and financial results.

The cost of raw materials and energy used to manufacture our products could increase and the availability of certain raw materials could become constrained.

We require access to sufficient and reasonably priced quantities of pulpwood, purchased pulps, pulp substitutes, abaca fiber, synthetic fibers, and certain other raw materials. Our Spring Grove and Chillicothe locations are vertically integrated manufacturing facilities that generate approximately 82% of their annual pulp requirements.

Our Philippine mill purchases abaca fiber to produce abaca pulp, which we use to manufacture our paper for single-serve coffee, tea and technical specialty products at our Gernsbach, Scaër and Lydney facilities. At certain times in the past, the supply of abaca fiber has been constrained due to factors such as weather related damage to the

source crop as well as decisions by land owners to produce alternative crops in lieu of those used to produce abaca fiber.

Our Advanced Airlaid Materials business unit requires access to sufficient quantities of fluff pulp, the supply of which is subject to availability of certain softwoods. Softwood availability can be limited by many factors, including weather in regions where softwoods are abundant.

The cost of many of our production materials, including petroleum based chemicals, and freight charges, are influenced by the cost of oil. In addition, coal is a principal source of fuel for both the Spring Grove and Chillicothe facilities and natural gas is used as a source of fuel for our Chillicothe facility, and the Composite Fibers and Advanced Airlaid Materials business units’ facilities.

Although we have contractual cost pass-through arrangements with certain customers, we may not be able to fully pass increased raw materials or energy costs on to all customers if the market will not bear the higher price or where existing agreements with our customers limit price increases. If price adjustments significantly trail increases in raw materials or energy prices, our operating results could be adversely affected.

Our industry is highly competitive and increased competition could reduce our sales and profitability.

In the past, global industries in which we compete have been adversely affected by capacity exceeding the demand for products and by declining uncoated free sheet demand. As a result, steps have been taken to reduce underperforming capacity. However, slowing demand or increased competition could force us to lower our prices or to offer additional services at a higher cost to us, which could reduce our gross margins and net income. The greater financial resources of certain of our competitors may enable them to commit larger amounts of capital in response to changing market conditions. Certain competitors may also have the ability to develop product or service innovations that could put us at a competitive disadvantage.

Some of the factors that may adversely affect our ability to compete in the markets in which we participate include:

 

   

the entry of new competitors into the markets we serve, including foreign producers;

 

   

the willingness of commodity-based producers to enter our markets when they are unable to compete or when demand softens in their traditional markets;

 

 

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the aggressiveness of our competitors’ pricing strategies, which could force us to decrease prices in order to maintain market share;

 

   

our failure to anticipate and respond to changing customer preferences;

 

   

the impact of electronic-based substitutes for certain of our products such as carbonless and forms, book publishing, and envelope papers;

 

   

the impact of replacement or disruptive technologies;

 

   

changes in end-user preferences;

 

   

our inability to develop new, improved or enhanced products; and

 

   

our inability to maintain the cost efficiency of our facilities.

If we cannot effectively compete in the markets in which we operate, our sales and operating results would be adversely affected.

We may not be able to develop new products acceptable to our customers.

Our business strategy is market focused and includes investments in developing new products to meet the changing needs of our customers and to maintain our market share. Our success will depend, in part on our ability to develop and introduce new and enhanced products that keep pace with introductions by our competitors and changing customer preferences. If we fail to anticipate or respond adequately to these factors, we may lose opportunities for business with both current and potential customers. The success of our new product offerings will depend on several factors, including our ability to:

 

   

anticipate and properly identify our customers’ needs and industry trends;

 

   

price our products competitively;

 

   

develop and commercialize new products and applications in a timely manner;

 

   

differentiate our products from our competitors’ products; and

 

   

invest efficiently in research and development activities.

Our inability to develop new products could adversely impact our business and ultimately harm our profitability.

We are subject to substantial costs and potential liability for environmental matters.

We are subject to various environmental laws and regulations that govern our operations, including discharges into the environment, and the handling and disposal of hazardous substances and wastes. We are also subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment. The Clean Air Act, and similar regulations, could impose significant compliance costs or require significant capital expenditures. To comply with environmental laws and regulations, we have incurred, and will continue to incur, substantial capital and operating expenditures. We anticipate that environmental regulation of our operations will continue to become more burdensome and that capital and operating expenditures necessary to comply with environmental regulations will continue, and perhaps increase, in the future. Because environmental regulations are not consistent worldwide, our ability to compete globally may be adversely affected by capital and operating expenditures required for environmental compliance. In addition, we may incur obligations to remove or mitigate any adverse effects on the environment, such as air and water quality, resulting from mills we operate or have operated. Potential obligations include compensation for the restoration of natural resources, personal injury and property damages.

Despite favorable rulings in the pending Fox River litigation, we continue to have exposure to liability for remediation and other costs related to the presence of polychlorinated biphenyls in the lower Fox River on which our former Neenah, Wisconsin mill was located. There can be no assurance that we will not be required to ultimately pay material amounts to resolve our liability in the Fox River matter. We have financial reserves for environmental matters, including the Fox River site, but we cannot be certain that those reserves will be adequate to provide for future obligations related to these matters, that our share of costs and/or damages for these matters will not exceed our available resources, or that such obligations will not have a long-term, material adverse effect on our consolidated financial position, liquidity or results of operations.

Our environmental issues are complex and should be reviewed in the context set forth in more detail in Item 8 – Financial Statements and Supplementary Data – Note 21.

 

 

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The Advanced Airlaid Materials business unit generates a substantial portion of its revenue from one customer serving the hygiene products market, the loss of which could have a material adverse effect on our results of operations.

Advanced Airlaid Materials generates the majority of its net sales of hygiene products from one customer. The loss of this significant customer could have a material adverse effect on their operating results. In addition, sales in the feminine hygiene market accounted for 80% of Advanced Airlaid Materials’ net sales in 2012 and sales are concentrated within a small group of large customers. A decline in sales of hygiene products could have a material adverse effect on this unit’s operating results. Customers in the airlaid non-woven fabric material market, including the hygiene market, may also switch to less expensive products, change preferences or otherwise reduce demand for Advanced Airlaid Material’s products, thus reducing the size of the markets in which it currently sells its products. Any of the foregoing could have a material adverse effect on our financial performance and business prospects.

Our operations may be impaired and we may be exposed to potential losses and liability as a result of natural disasters, acts of terrorism or sabotage or similar events.

If we have a catastrophic loss or unforeseen operational problem at certain of our facilities, we could suffer significant lost production which could impair our ability to satisfy customer demands.

Natural disasters, such as earthquakes, flooding or fire, and acts of terrorism or sabotage affecting our operating activities and major facilities could materially and adversely affect our operations, operating results and financial condition. In addition, we own and maintain four dams in York County, Pennsylvania, that were built to ensure a steady supply of water for the operation of our facility in Spring Grove which is a primary manufacturing location for our envelope papers and engineered products. Each of these dams is classified as “high hazard” by the Commonwealth of Pennsylvania because they are located in close proximity to inhabited areas. Any sudden failure of a dam, including as a result of natural disaster or act of terrorism or sabotage, would endanger occupants and residential, commercial and industrial structures, for which we could be liable. The failure of a dam could also be extremely disruptive and result in damage to or the shutdown of our Spring Grove mill. Any losses or liabilities incurred due to the failure of one of our dams may not be fully covered by our insurance policies or may substantially exceed the limits of our

policies, and could materially and adversely affect our operating results and financial condition.

In addition, many of our papermaking operations require a reliable and abundant supply of water. Such mills rely on a local water body or water source for their water needs and, therefore, are particularly impacted by drought conditions or other natural or manmade interruptions to its water supplies. At various times and for differing periods, each of our mills has had to modify operations due to water shortages, water clarity, or low flow conditions in its principal water supplies. Any interruption or curtailment of operations at any of our paper mills due to drought or low flow conditions at the principal water source or another cause could materially and adversely affect our operating results and financial condition.

Our pulp mill in Lanao del Norte on the Island of Mindanao in the Republic of the Philippines is located along the Pacific Rim, one of the world’s hazard belts. By virtue of its geographic location, this mill is subject to, among similar types of natural disasters discussed above, cyclones, typhoons, and volcanic activity. Moreover, the area of Lanao del Norte has been a target of suspected terrorist activities. The most common bomb targets in Lanao del Norte to date have been power transmission towers. Our pulp mill in Mindanao is located in a rural portion of the island and is susceptible to attacks or power interruptions. The Mindanao mill supplies approximately 85% of the abaca pulp that is used by our Composite Fibers business unit to manufacture our paper for single serve coffee and tea products and certain technical specialties products. Any interruption, loss or extended curtailment of operations at our Mindanao mill could materially affect our operating results and financial condition.

We have operations in a potentially politically and economically unstable location.

Our pulp mill in the Philippines is located in a region that is unstable and subject to political unrest. As discussed above, our Philippine pulp mill produces abaca pulp, a significant raw material used by our Composite Fibers business unit, and is currently our main provider of abaca pulp. There are limited suitable alternative sources of readily available abaca pulp in the world. In the event of a disruption in supply from our Philippine mill, there is no guarantee that we could obtain adequate amounts of abaca pulp from alternative sources at a reasonable price or at all. As a consequence, any civil disturbance, unrest, political instability or other event that causes a disruption in supply could limit the availability of abaca pulp and would increase our cost of obtaining abaca pulp. Such occurrences could adversely impact our sales volumes, revenues and operating results.

 

 

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Our international operations pose certain risks that may adversely impact sales and earnings.

We have significant operations and assets located in Canada, Germany, France, the United Kingdom, and the Philippines. Our international sales and operations are subject to a number of unique risks, in addition to the risks in our domestic sales and operations, including differing protections of intellectual property, trade barriers, labor unrest, exchange controls, regional economic uncertainty, differing (and possibly more stringent) labor regulation, risk of governmental expropriation, domestic and foreign customs and tariffs, differing regulatory environments, difficulty in managing widespread operations and political instability. These factors may adversely affect our future profits. Also, in some foreign jurisdictions, we may be subject to laws limiting the right and ability of entities organized or operating therein to pay dividends or remit earnings to affiliated companies unless specified conditions are met. Any such limitations would restrict our flexibility in using funds generated in those jurisdictions.

Foreign currency exchange rate fluctuations could adversely affect our results of operations.

As we diversify our business and expand our global footprint, an increasing proportion of our revenue is generated outside of the United States. We also own and operate manufacturing facilities in Canada, Germany, France, the United Kingdom and the Philippines. Currently, the majority of our business is transacted in U.S. dollars; however, an increasing portion of business is transacted in Euros, British Pound Sterling, Canadian dollars or Philippine Peso. With respect to the Euro, we generate substantially greater cash inflow in this currency than we do outflow. However, with respect to the British Pound Sterling, Canadian dollar, and Philippine Peso, we have greater outflows than inflows of these currencies. As a result of these positions, we are exposed to changes in currency exchange rates. Uncertainty with respect to the ability of certain European countries to continue to service their sovereign debt obligations and actions proposed to restructure such obligations may cause the value of the euro to fluctuate further. In the event that one or more European countries were to replace the euro with another currency, business may be adversely affected until stable exchange rates are established.

Our ability to maintain our products’ price competitiveness is reliant, in part, on the relative strength of the currency in which the product is denominated compared to the currency of the market into which it is sold and the functional currency of our competitors.

Changes in the rate of exchange of foreign currencies in relation to the U.S. dollar, and other currencies, may adversely impact our results of operations and our ability to offer products in certain markets at acceptable prices.

An IRS audit of our 2009 tax return could result in a change in the tax treatment of the alternative fuel mixture credits we claimed in 2009, which could have a material adverse effect on our results of operations and financial position.

The U.S. Internal Revenue Code, or the Code, provided a tax credit for companies that used alternative fuel mixtures to produce energy to operate their businesses on or prior to December 31, 2009. During 2009, we registered two of our facilities with the IRS as alternative fuel mixers based on their use of black liquor as an alternative fuel source. For the year ended December 31, 2009, we had substantial alternative fuel mixture credits relating to these facilities. Our results of operations in 2009 included, on a pre-tax basis, $107.8 million of alternative fuel mixture credits. During 2012, we amended our 2009 federal income tax return to convert a portion of the alternative fuel mixture credits for cellulosic biofuel production credits. In the event that the IRS audits our tax return for the year ended December 31, 2009, the IRS may conclude that some or all of the credits claimed are subject to federal income taxes, which would subject us to additional tax liabilities and could have a material adverse effect on our results of operations and financial position.

In the event any of the above risk factors impact our business in a material way or in combination during the same period, we may be unable to generate sufficient cash flow to simultaneously fund our operations, finance capital expenditures, satisfy obligations and make dividend payments on our common stock.

In addition to debt service obligations, our business is capital intensive and requires significant expenditures to support growth strategies, research and development initiatives, environmental compliance, and for normal upgrades or replacements. We expect to meet all of our near and long-term cash needs from a combination of operating cash flow, cash and cash equivalents, our existing credit facility and other long-term debt. If we are unable to generate sufficient cash flow from these sources, we could be unable to meet our near and long-term cash needs or make dividend payments.

 

 

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ITEM 1B UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2 PROPERTIES

We own substantially all of the land and buildings comprising our manufacturing facilities located in Pennsylvania; Ohio; Canada; the United Kingdom; Germany; France; and the Philippines; as well as substantially all of the equipment used in our manufacturing and related operations. Certain of our operations, particularly our metallized paper production facility located in Caerphilly, Wales, office and warehouse space in Moscow, Russia and our corporate offices located in York, Pennsylvania are under lease agreements. All of our properties, other than those that are leased, are free from any material liens or encumbrances. We consider all of our buildings to be in good structural condition and well maintained and our properties to be suitable and adequate for present operations.

 

ITEM 3 LEGAL PROCEEDINGS

We are involved in various lawsuits that we consider to be ordinary and incidental to our business. The ultimate outcome of these lawsuits cannot be predicted with certainty; however, we do not expect such lawsuits, individually or in the aggregate, will have a material adverse effect on our consolidated financial position, liquidity or results of operations.

For a discussion of commitments, legal proceedings and related contingencies, see Item 8 – Financial Statements and Supplementary Data – Note 21.

EXECUTIVE OFFICERS

The following table sets forth certain information with respect to our executive officers and senior management as of March 7, 2013.

 

Name    Age      Office with the Company
Dante C. Parrini      48      

Chairman and Chief Executive Officer

John P. Jacunski      47      

Senior Vice President and Chief Financial Officer

Christopher W. Astley      40      

Vice President, Corporate Strategy

Jonathan A. Bourget      48      

Vice President & General Manager, Advanced Airlaid Materials Business Unit

David C. Elder      44      

Vice President, Finance

Debabrata Mukherjee      43      

Vice President & General Manager, Specialty Papers Business Unit

Martin Rapp      53      

Vice President & General Manager, Composite Fibers Business Unit

Mark A. Sullivan      58      

Vice President, Global Supply Chain and Information Technology

William T. Yanavitch II      52      

Vice President, Human Resources and Administration

Officers are elected to serve at the pleasure of the Board of Directors. Except in the case of officers elected to fill a new position or a vacancy occurring at some other date, officers are generally elected at the organizational meeting of the Board of Directors held immediately after the annual meeting of shareholders.

Dante C. Parrini became Chief Executive Officer effective January 1, 2011 and Chairman of the Board in May 2011. Prior to this, he was Executive Vice President and Chief Operating Officer, a position he held since February 2005. Mr. Parrini joined us in 1997 and has previously served as Senior Vice President and General Manager, a position he held beginning in January 2003 and prior to that as Vice President responsible for Sales and Marketing.

John P. Jacunski became Senior Vice President and Chief Financial Officer in July 2006. From October 2003 until July 2006, he was Vice President and Corporate Controller. Mr. Jacunski was previously Vice President and Chief Financial Officer at WCI Steel, Inc. from June 1999 to October 2003. Prior to joining WCI, Mr. Jacunski was with KPMG, an international accounting and consulting firm, where he served in various capacities.

Christopher W. Astley joined us in August 2010 as Vice President, Corporate Strategy. He has over fifteen years experience as an advisor and practitioner leading critical strategic and tactical corporate initiatives for natural resource companies, with a focus since 1999 on the pulp, paper, and packaging industries. Mr. Astley previously held positions with Accenture, a global management consulting firm, and The Coca-Cola Company, as well as successfully leading a privately held business for several years.

Jonathan A. Bourget joined us in July 2010 as Vice President & General Manager, Advanced Airlaid Materials Business Unit. From 2008 until joining our Company, Mr. Bourget was Vice President & General Manager of European operations at Polymer Group Inc. Prior to this, he held various positions of increasing responsibility, including General Manager Specialties Division in Europe, with Alcoa Inc.

David C. Elder was promoted to Vice President, Finance in December 2011 and continues as our Chief Accounting Officer. Prior to his promotion, he was our Vice President, Corporate Controller, a position held since joining Glatfelter in January 2006. Mr. Elder was previously Corporate Controller for YORK International Corporation and prior to that he was the Director, Financial Planning and Analysis for that company.

 

 

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Debabrata Mukherjee was appointed Vice President & General Manager, Specialty Papers Business Unit in April 2008. Dr. Mukherjee joined our Company in 1998 and since then has held various operational, sales and technical leadership positions within the Specialty Papers Business Unit. From March 2006 through March 2008, Dr. Mukherjee served as Division Vice President, Engineered & Converting Products. From February 2004 through February 2006, Dr. Mukherjee served as Director, Engineered Products. Prior to joining Glatfelter, Dr. Mukherjee served in various capacities with Felix Schoeller, a Germany based global specialty paper manufacturer.

Martin Rapp joined Glatfelter in August 2006 and serves as Vice President and General Manager, Composite Fibers Business Unit. Prior to this, Mr. Rapp was Vice President and General Manager of Avery Dennison’s Roll Materials Business in Central and Eastern Europe since August 2002.

Mark A. Sullivan joined our Company in December 2003 and serves as Vice President, Global Supply Chain and Information Technology. Previously, he was our Chief Procurement Officer. Prior to joining Glatfelter, his experience included a broad array of operations and supply chain management responsibilities during twenty years with the DuPont Company.

William T. Yanavitch II was appointed Vice President, Human Resources and Administration in May 2005. Mr. Yanavitch briefly worked with Constellation Energy in Human Resources from February 2005 – May 2005. He served as our Vice President Human Resources from July 2000 until January 2005. Prior to joining us he worked for Dentsply International and Gould Pumps Inc. in various leadership capacities.

 

ITEM 4 MINE SAFETY DISCLOSURES

Not Applicable

PART II

 

ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock Prices and Dividends Declared Information

The following table shows the high and low prices of our common stock traded on the New York Stock Exchange under the symbol “GLT” and the dividend declared per share for each quarter during the past two years:

 

Quarter    High      Low      Dividend  

2012

        

Fourth

   $ 18.58       $ 15.31       $ 0.09   

Third

     18.25         15.43         0.09   

Second

     16.47         14.25         0.09   

First

     16.36         14.12         0.09   

2011

        

Fourth

   $ 15.79       $ 12.46       $ 0.09   

Third

     16.03         11.73         0.09   

Second

     15.51         12.65         0.09   

First

     13.40         11.00         0.09   

As of March 5, 2013, we had 1,282 shareholders of record.

STOCK PERFORMANCE GRAPH

The following graph compares the cumulative 5-year total return of our common stock with the cumulative total returns of both a peer group and a broad market index. For the year ended December 31, 2012, we compare our stock performance to the S&P Small Cap 600 Paper Products index comprised of us, Buckeye Technologies Inc., Clearwater Paper Corp., Kapstone Paper & Packaging Corp., Neenah Paper Inc., Schweitzer-Mauduit International and Wausau Paper Corp. In addition, the chart includes a comparison to the Russell 2000, which we believe is an appropriate benchmark index for stocks such as ours.

The following graph assumes that the value of the investment in our common stock, in each index, and the peer group (including reinvestment of dividends) was $100 on December 31, 2007 and charts it through December 31, 2012.

 

LOGO

 

 

 

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ITEM 6 SELECTED FINANCIAL DATA

 

As of or for the year ended December 31

Dollars in thousands, except per share

    2012        2011        2010 (3)        2009 (5)        2008   

Net sales

  $ 1,577,788      $ 1,603,154      $ 1,455,331      $ 1,184,010      $ 1,263,850   

Energy and related sales, net

    7,000        9,344        10,653        13,332        9,364   

Total revenue

    1,584,788        1,612,498        1,465,984        1,197,342        1,273,214   

Reversal of (charges for) shutdown and restructuring

                                856   

Gains on dispositions of plant, equipment and timberlands, net

    9,815        3,950        453        898        18,468   

Net income

  $ 59,379 (1)    $ 42,694 (2)    $ 54,434 (4)    $ 123,442      $ 57,888   
 

Earnings per share

         

Basic

  $ 1.39      $ 0.94      $ 1.19      $ 2.70      $ 1.28   

Diluted

    1.36        0.93        1.17        2.70        1.27   
 

Total assets

  $ 1,242,985      $ 1,136,925      $ 1,341,747      $ 1,190,294      $ 1,057,309   

Total debt

    250,000        227,000        333,022        254,583        313,285   

Shareholders’ equity

    539,679        490,404        552,442        510,704        342,707   
 

Cash dividends declared per common share

    0.36        0.36        0.36        0.36        0.36   

Depreciation, depletion and amortization

    69,500        69,313        65,839        61,256        60,611   

Capital expenditures

    58,752        64,491        36,491        26,257        52,469   

Shares outstanding

    42,784        42,650        45,976        45,706        45,434   

Net tons sold

    969,833        960,915        927,853        818,905        829,354   

Number of employees

    4,258        4,274        4,337        3,546        3,633   

 

(1) During 2012, we recorded after-tax charges totaling $4.8 million related to the write-off of unamortized deferred issuance costs and the early redemption premium in connection with the refinancing of $200 million of bonds. In addition, net income includes a $4.0 million benefit from the conversion of alternative fuel mixture credits for cellulosic biofuel production credits.

 

(2) During 2011, we recorded after-tax charges totaling $6.1 million related to the write-off of unamortized deferred issuance costs and original issue discount and the redemption premium in connection with the early redemption of $100 million of bonds.

 

(3) The information set forth above for 2010 includes the financial information for Concert Industries Corp. prospectively from the February 12, 2010 acquisition date.

 

(4) During 2010, net income included a $23.2 million tax benefit from cellulosic biofuel production credits.

 

(5) During 2009, we recognized $107.8 million of alternative fuel mixture credits, all of which were recorded as a reduction to cost of products sold.

 

 

 

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ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements    This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future consolidated financial position or results of operations, made in this Report on Form 10-K are forward looking. We use words such as “anticipates”, “believes”, “expects”, “future”, “intends” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from such expectations. The following discussion includes forward-looking statements regarding expectations of, among others, non-cash pension expense, environmental costs, capital expenditures and liquidity, all of which are inherently difficult to predict. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Accordingly, we identify the following important factors, among others, which could cause our results to differ from any results that might be projected, forecasted or estimated in any such forward-looking statements:

 

i. variations in demand for our products including the impact of any unplanned market-related downtime, or variations in product pricing;

 

ii. changes in the cost or availability of raw materials we use, in particular pulpwood, pulp, pulp substitutes, caustic soda, and abaca fiber;

 

iii. changes in energy-related costs and commodity raw materials with an energy component;

 

iv. our ability to develop new, high value-added products;

 

v. the impact of exposure to volatile market-based pricing for sales of excess electricity;

 

vi. the impact of competition, both domestic and international, changes in industry production capacity, including the construction of new mills or new machines, the closing of mills and incremental changes due to capital expenditures or productivity increases;

 

vii. the gain or loss of significant customers and/or on-going viability of such customers;
viii. cost and other effects of environmental compliance, cleanup, damages, remediation or restoration, or personal injury or property damages related thereto, such as the costs of natural resource restoration or damages related to the presence of polychlorinated biphenyls (“PCBs”) in the lower Fox River on which our former Neenah mill was located;

 

ix. risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates;

 

x. geopolitical events, including war and terrorism;

 

xi. disruptions in production and/or increased costs due to labor disputes;

 

xii. the impact of unfavorable outcomes of audits by various state, federal or international tax authorities;

 

xiii. enactment of adverse state, federal or foreign tax or other legislation or changes in government policy or regulation;

 

xiv. adverse results in litigation in the Fox River matter;

 

xv. our ability to finance, consummate and integrate acquisitions;

 

xvi. the cost, and successful design and construction, of the Composite Fibers capacity expansion project; and

 

xvii. the incurrence of unforeseen costs associated with the repair of equipment and clean-up of the Scäer facility, our ability to supply this facility’s customers, and the coverage provided by insurance.

Introduction    We manufacture a wide array of specialty papers and fiber-based engineered materials. We manage our company along three business units:

 

   

Specialty Papers with revenue from the sale of carbonless papers and forms, book publishing, envelope & converting papers, and fiber-based engineered products;

 

   

Composite Fibers with revenue from the sale of single-serve coffee and tea filtration papers, metallized papers, composite laminates used for decorative furniture and flooring applications, and other technical specialty papers; and

 

   

Advanced Airlaid Materials with revenue from the sale of airlaid non-woven fabric-like materials used in feminine hygiene products, adult incontinence products, cleaning pads, wipes, food pads, napkins, tablecloths, and baby wipes.

 

 

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Overview    For the year ended December 31, 2012, net income was $59.4 million, or $1.36 per diluted share, compared with net income of $42.7 million, or $0.93 per diluted share, in 2011. The amounts reported for 2012 include after-tax charges totaling $4.8 million incurred in connection with the refinancing of $200 million fixed-rate bonds for a new $250 million fixed-rate issuance, as well as a $4.0 million benefit from the conversion of alternative fuel mixture credits for cellulosic biofuel production credits. Results for 2011 include after-tax charges totaling $7.5 million for costs incurred to redeem $100 million of fixed-rate bonds, acquisition and integration expenses and work force efficiency actions. Reported results for both years included after-tax gains of $5.4 million and $4.2 million in 2012 and 2011, respectively, from the sales of timberlands and, in 2011, the release of tax reserves related to prior timberland sales. Unfavorable foreign currency translations affected the comparison of reported results for 2012 with 2011 by $5.7 million.

From an operating perspective, our businesses performed well during 2012 compared with 2011, evidenced by a $9.9 million, or 8.9%, increase in business unit operating income led by strong improvements from Specialty Papers and Advanced Airlaid Materials. Composite Fibers’ results were unfavorable in the comparison by $4.7 million.

Specialty Papers’ operating income totaled $67.3 million and $57.3 million for 2012 and 2011, respectively. Volumes shipped increased in the comparison to 2011 and this unit’s profitability was further favorably impacted by higher selling prices and slightly lower input costs partially offset by higher spending for maintenance and other costs.

Our Composite Fibers business unit’s operating income decreased to $36.1 million from $40.8 million in 2011. Volumes shipped decreased 3.2% compared to 2011 reflecting generally softer economic conditions in its market segments. Unfavorable foreign currency translations affected this unit’s operating income by $3.2 million.

Advanced Airlaid Materials’ operating income increased $4.6 million, or 34.3%, largely reflecting lower input costs and an increase in shipping volumes. Unfavorable foreign currency translations affected this unit’s operating income by $3.0 million.

During 2012, we generated significant operating cash flow of $112.8 million, and although lower than 2011, this was largely due to the year over year impact of receiving cash in 2011 compared with a net outflow of cash in 2012 related to cellulosic biofuel production and alternative fuel mixture credits.

RESULTS OF OPERATIONS

2012 versus 2011

The following table sets forth summarized consolidated results of operations:

 

    Year Ended December 31  

In thousands, except per share

    2012         2011   

Net sales

  $ 1,577,788       $ 1,603,154   

Gross profit

    213,649         206,193   

Operating income

    101,874         85,272   

Net income

    59,379         42,694   

Earnings per diluted share

    1.36         0.93   

The consolidated results of operations for 2012 and 2011 include the following items not considered to be part of our core business operations:

 

In thousands, except per share

   
 
After-tax
Gain (loss)
  
  
    Diluted EPS   

2012

   

Early redemption of $200 million bonds

  $ (4,784   $ (0.11

Conversion of alternative fuel mixture/Cellulosic biofuel credits

    4,020        0.09   

Timberland sales and related transaction costs

    5,388        0.12   

2011

   

Early redemption of $100 million bonds

  $ (6,065     (0.13

Charge for workforce efficiencies

    (652     (0.01

Acquisition and integration costs

    (792     (0.02

Timberland sales and related transaction costs

    4,160        0.09   

During 2012, the aggregate effect of the unusual items set forth above increased earnings by $4.6 million, or $0.10 per diluted share. In 2011, the items set forth above decreased earnings by $3.3 million, or $0.07 per diluted share.

Business Units    Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the business unit are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the Business Unit Performance table.

 

 

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Management evaluates results of operations of the business units before pension expense, alternative fuel mixture credits, debt redemption costs, restructuring related charges, certain corporate level costs, and the effects of certain asset dispositions. Management believes that this is a more meaningful representation of the operating performance of its core businesses, the

profitability of business units and the extent of cash flow generated from these core operations. Such amounts are presented under the caption “Other and Unallocated.” This presentation is aligned with the management and operating structure of our company. It is also on this basis that the Company’s performance is evaluated internally and by the Company’s Board of Directors.

 

 

Business Unit Performance

 

Year ended December 31

In millions

    Specialty Papers         Composite Fibers        
 
Advanced Airlaid
Materials
  
  
    
 
Other and
Unallocated
  
  
    Total   
    2012      2011      2012      2011      2012      2011      2012     2011     2012     2011  

Net sales

  $ 894.8       $ 875.1       $ 436.7       $ 476.0       $ 246.3       $ 252.0       $      $      $ 1,577.8      $ 1,603.2   

Energy and related sales, net

    7.0         9.3                                                       7.0        9.3   

Total revenue

    901.8         884.4         436.7         476.0         246.3         252.0                       1,584.8        1,612.5   

Cost of products sold

    779.5         775.7         362.6         395.7         218.7         227.7         10.3        7.2        1,371.1        1,406.3   

Gross profit (loss)

    122.3         108.7         74.2         80.3         27.6         24.3         (10.4     (7.2     213.6        206.2   

SG&A

    55.0         51.4         38.1         39.5         9.6         10.9         18.9        23.0        121.6        124.9   

Gains on dispositions of plant, equipment and timberlands, net

                                                    (9.8     (4.0     (9.8     (4.0

Total operating income (loss)

    67.3         57.3         36.1         40.8         18.0         13.4         (19.5     (26.2     101.9        85.3   

Non-operating expense

                                                    (22.9     (34.4     (22.9     (34.4

Income (loss) before income taxes

  $ 67.3       $ 57.3       $ 36.1       $ 40.8       $ 18.0       $ 13.4       $ (42.4   $ (60.7   $ 78.9      $ 50.8   

Supplementary Data

                         

Net tons sold (thousands)

    789.2         779.6         90.3         93.3         90.3         88.0                       969.8        960.9   

Depreciation, depletion and amortization

  $ 37.4       $ 36.0       $ 23.5       $ 24.8       $ 8.7       $ 8.5       $             $ 69.5      $ 69.3   

Capital expenditures

    23.1         31.4         31.4         22.5         3.9         10.6         0.3               58.8        64.5   

The sum of individual amounts set forth above may not agree to the consolidated financial statements included herein due to rounding.

 

Sales and Costs of Products Sold

 

    Year ended December 31        

In thousands

    2012        2011        Change   

Net sales

  $ 1,577,788      $ 1,603,154      $ (25,366

Energy and related sales – net

    7,000        9,344        (2,344

Total revenues

    1,584,788        1,612,498        (27,710

Costs of products sold

    1,371,139        1,406,305        (35,166

Gross profit

  $ 213,649      $ 206,193      $ 7,456   

Gross profit as a percent of Net sales

    13.5     12.9        

The following table sets forth the contribution to consolidated net sales by each business unit:

 

    Year ended
December 31
 
Percent of Total   2012     2011  

Business Unit

     

Specialty Papers

    56.7     54.6

Composite Fibers

    27.7        29.7   

Advanced Airlaid Material

    15.6        15.7   

Total

    100.0     100.0
 

 

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Net sales for 2012 decreased $25.4 million, or 1.6%, in the comparison to 2011 and totaled $1,577.8 million. The translation of foreign currencies unfavorably impacted net sales by $35.8 million more than offsetting a $3.5 million benefit from higher selling prices. Shipping volumes were up slightly as higher shipping volumes in both Specialty Papers and Advanced Airlaid Materials were offset by softer demand in Composite Fibers related to the weak European economy.

In the Specialty Papers business unit, net sales for 2012 increased $19.7 million, or 2.3%, to $894.8 million. The increase was primarily due to a $6.5 million benefit from higher selling prices and a 1.2% increase in shipping volumes.

Specialty Papers’ operating income in 2012 of $67.3 million was $10.0 million higher than 2011 reflecting the benefits from higher selling prices and shipping volumes, and a $5.7 million benefit from lower raw material costs. These factors were partially offset by higher maintenance and other cost inflation as well as $2.3 million of lower energy and related sales.

We sell excess power generated by the Spring Grove, PA facility. In addition, two of our facilities are registered generators of renewable energy credits (“RECs”). The following table summarizes this activity for 2012 and 2011:

 

    Year ended December 31      

In thousands

    2012         2011         Change   

Energy sales

  $ 5,284       $ 10,992       $ (5,708

Costs to produce

    (4,187      (9,319      5,132   

Net

    1,097         1,673         (576

Renewable energy credits

    5,903         7,671         (1,768

Total

  $ 7,000       $ 9,344       $ (2,344

RECs represent sales of certified credits earned related to burning renewable sources of energy such as black liquor and wood waste. We sell RECs into an emerging and somewhat illiquid market. The extent and value of future revenues from REC sales is dependent on many factors outside of management’s control. Therefore, we may not be able to generate consistent amounts of sales of RECs in future periods.

In Composite Fibers, net sales were $436.7 million, a decrease of $39.3 million, or 8.3%, primarily due to the translation of foreign currencies which unfavorably impacted the comparison by $24.4 million. Average selling prices were essentially unchanged and total shipping volumes were lower in the comparison by 3.2%.

 

Composite Fibers’ operating income in 2012 totaled $36.1 million, a $4.7 million decrease compared to 2011 primarily due to lower shipping volumes and a $3.2 million unfavorable effect from foreign currency translation.

On October 14, 2012, a fire was sustained by our Scäer, France facility, one of several facilities within the Composite Fibers business unit. The fire damaged the electrical system primarily servicing one of two papermaking machines at the facility as well as certain mill infrastructure. All customer orders were fulfilled by shipping products on hand or by utilizing assets at the business unit’s other facilities. The total cost of the fire in 2012 was $3.9 million which was offset by expected insurance recoveries, net of deductibles, of which $0.8 million was received in 2012 and the remainder is expected to be received in 2013.

In Advanced Airlaid Materials, net sales declined $5.7 million in the comparison of 2012 to 2011. The decline in net sales was due to the $11.5 million negative effect of foreign currency translation and a $2.7 million impact of lower selling prices. These factors were partially offset by the benefit from a 2.6% increase in shipping volumes.

Operating income in this business unit increased $4.6 million in 2012 compared to 2011 led by a $8.3 million benefit from lower raw material and energy costs in addition to continuous improvement initiatives including supply chain efficiencies, waste reduction and improved throughput, and benefits from a new festooner. The translation of foreign currencies negatively impacted operating income by $3.0 million.

Pension Expense    The following table summarizes the amounts of pension expense recognized for 2012 compared to 2011:

 

    Year ended December 31         

In thousands

    2012         2011         Change   

Recorded as:

       

Costs of products sold

  $ 9,148       $ 6,735       $ 2,413   

SG&A expense

    2,467         3,645         (1,178

Total

  $ 11,615       $ 10,380       $ 1,235   

The amount set forth above for pension expense recorded as selling, general and administrative (“SG&A”) expense in 2011 includes a $2.0 million one-time pension settlement charge recorded in connection with the retirement of our former Chief Executive Officer.

The amount of pension expense recognized each year is dependent on various actuarial assumptions and certain other factors, including discount rates and the fair value of our pension assets. Pension expense in 2013 is expected to

 

 

Glatfelter 2012 Form 10-K        17


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be approximately $15.7 million due to lower discount rates and the amortization of actuarial losses.

Gain on Sales of Plant, Equipment and Timberlands, net    During the years ended December 31, 2012 and 2011, we completed the following sales of assets:

 

Dollars in thousands

     Acres        Proceeds         Gain   

2012

       

Timberlands

     4,830      $ 9,494       $ 9,203   

Other

     n/a        778         612   

Total

           $ 10,272       $ 9,815   

2011

       

Timberlands

     942      $ 3,821       $ 3,590   

Other

     n/a        670         360   

Total

           $ 4,491       $ 3,950   

In connection with each of the asset sales set forth above, we received cash proceeds.

Other and Unallocated    The amount of net operating expenses not allocated to a business unit and reported as “Other and Unallocated” in our table of Business Unit Performance, excluding gains from sales of plant, equipment and timberlands, totaled $29.3 million in 2012 compared with $30.2 million in 2011. The amount reported for 2011 includes the $2.0 million one-time pension settlement charge discussed earlier. Excluding the one-time pension charge, net operating expenses not allocated to a business unit increased $1.1 million primarily due to higher professional services fees and other cost inflation.

Non-operating income (expense) as presented in the Business Unit Performance table includes $18.7 million of interest expense for 2012 and $31.8 million for 2011. In connection with debt refinancing or redemption initiatives, the reported amounts include $1.9 million and $5.9 million in 2012 and 2011, respectively, related to the write-off of unamortized issuance costs and original issue discount. Excluding these write-offs, interest expense declined to $16.8 million in 2012 compared to $25.9 million in 2011, primarily reflecting the 2011 redemption of $100 million of 7.125% notes.

Income taxes    In 2012, income tax expense totaled $19.6 million on pre-tax income of $78.9 million. The comparable amounts in 2011 were $8.2 million and $50.8 million, respectively. Tax expense in 2011 includes a net $5.2 million income tax benefit realized in connection with the resolution of certain foreign tax audits, and expiration of statutes of limitation, partially offset by an increase in the valuation allowance on certain net operating loss carryforwards.

In January 2013, the U.S. President signed legislation that retroactively extended the federal research and development tax credit for two years, from January 1, 2012 through December 31, 2013. As a result we expect that our income tax provision for the first quarter of 2013 will include a tax benefit of $1.2 million related to 2012 research and development credits.

Foreign Currency    We own and operate manufacturing facilities in Canada, Germany, France, the United Kingdom and the Philippines. The functional currency in Canada is the U.S. dollar, in Germany and France the Euro, in the UK it is the British Pound Sterling, and in the Philippines it is the Peso. During 2012, Euro functional currency operations generated approximately 25.3% of net sales and 24.2% of operating expenses and British Pound Sterling operations represented 7.5% of net sales and 7.6% of operating expenses. The translation of the results from international operations into U.S. dollars is subject to changes in foreign currency exchange rates. The table below summarizes the translation impact on reported results that changes in currency exchange rates had on our non-U.S. based operations from the conversion of these operation’s results:

 

In thousands

   
 
Year ended
December 31, 2012
  
  
    Favorable
(unfavorable)
 

Net sales

  $ (35,818

Costs of products sold

    26,828   

SG&A expenses

    2,813   

Income taxes and other

    514   

Net income

  $ (5,663

The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2012 were the same as 2011. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.

2011 versus 2010

The following table sets forth summarized consolidated results of operations:

 

    Year Ended December 31  

In thousands, except per share

    2011         2010   

Net sales

  $ 1,603,154       $ 1,455,331   

Gross profit

    206,193         186,247   

Operating income

    85,272         64,589   

Net income

    42,694         54,434   

Earnings per diluted share

    0.93         1.17   
 

 

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The consolidated results of operations for 2011 and 2010 include the following items not considered to be part of our core business operations:

 

In thousands, except per share

   

 

After-tax

Gain (loss)

  

  

   
 
Diluted
EPS
  
  

2011

   

Early redemption of $100 million bonds

  $ (6,065   $ (0.13

Charge for workforce efficiencies

    (652     (0.01

Acquisition and integration costs

    (792     (0.02

Timberland sales and related transaction costs

    4,160        0.09   

2010

   

Cellulosic biofuel/alternative fuel mixture credits

  $ 23,184      $ 0.50   

Acquisition and integration costs

    (9,073     (0.20

Foreign currency hedge on acquisition price

    (1,673     (0.04

Timberland sales and related transaction costs

    1,063        0.02   

During 2011, the aggregate effect of the unusual items set forth above decreased earnings by $3.3 million, or $0.07 per diluted share. In 2010, the items set forth above increased earnings by $13.5 million, or $0.28 per diluted share in 2010.

 

 

Business Unit Performance

 

    Year ended December 31  

In millions

    Specialty Papers         Composite Fibers        
 
Advanced Airlaid
Materials
  
  
    
 
Other and
Unallocated
  
  
    Total   
    2011      2010      2011      2010      2011      2010      2011     2010     2011     2010  

Net sales

  $ 875.1       $ 842.6       $ 476.0       $ 419.2       $ 252.0       $ 193.5       $      $      $ 1,603.2      $ 1,455.3   

Energy and related sales, net

    9.3         10.7                                                       9.3        10.7   

Total revenue

    884.4         853.3         476.0         419.2         252.0         193.5                       1,612.5        1,466.0   

Cost of products sold

    775.7         740.2         395.7         350.5         227.7         181.7         7.2        7.4        1,406.3        1,279.7   

Gross profit

    108.7         113.1         80.3         68.7         24.3         11.8         (7.2     (7.4     206.2        186.2   

SG&A

    51.4         54.7         39.5         35.8         10.9         7.4         23.0        24.3        124.9        122.1   

Gains on dispositions of plant, equipment and timberlands

                                                    (4.0     (0.5     (4.0     (0.5

Total operating income (loss)

    57.3         58.4         40.8         32.9         13.4         4.4         (26.2     (31.2     85.3        64.6   

Non-operating expense

                                                    (34.4     (31.1     (34.4     (31.1

Income (loss) before income taxes

  $ 57.3       $ 58.4       $ 40.8       $ 32.9       $ 13.4       $ 4.4       $ (60.7   $ (62.3   $ 50.8      $ 33.5   

Supplementary Data

                         

Net tons sold (thousands)

    779.6         764.7         93.3         90.4         88.0         72.8                       960.9        927.9   

Depreciation, depletion and amortization

  $ 36.0       $ 34.9       $ 24.8       $ 23.7       $ 8.5       $ 7.2       $      $      $ 69.3      $ 65.8   

Capital expenditures

    31.4         24.1         22.5         8.2         10.6         4.2                       64.5        36.5   

The sum of individual amounts set forth above may not agree to the consolidated financial statements included herein due to rounding.

 

Sales and Costs of Products Sold

 

    Year ended December 31        

In thousands

    2011        2010        Change   

Net sales

  $ 1,603,154      $ 1,455,331      $ 147,823   

Energy and related
sales – net

    9,344        10,653        (1,309

Total revenues

    1,612,498        1,465,984        146,514   

Costs of products sold

    1,406,305        1,279,737        126,568   

Gross profit

  $ 206,193      $ 186,247      $ 19,946   

Gross profit as a percent of Net sales

    12.9     12.8        

 

The following table sets forth the contribution to consolidated net sales by each business unit:

 

    Percent of total
Percent of Total   2011     2010       

Business Unit

       

Specialty Papers

    54.6     57.9  

Composite Fibers

    29.7        28.8     

Advanced Airlaid Materials

    15.7        13.3       

Total

    100.0     100.0    
 

 

Glatfelter 2012 Form 10-K        19


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Net sales for 2011 were $1,603.2 million, a 10.2% increase compared with $1,455.3 million for 2010, reflecting stronger business activity in the our Composite Fibers and Advanced Airlaid Materials business units together with more favorable selling prices in all businesses. Advanced Airlaid Materials business unit is included for a full year in 2011 compared with only prospectively from the February 12, 2010 acquisition date in the prior year amounts.

In the Specialty Papers business unit, net sales for 2011 increased $32.5 million, or 3.9%, to $875.1 million. The increase was primarily due to a $27.3 million benefit from higher selling prices and a 2.0% increase in volumes shipped.

Specialty Papers’ operating profit for 2011 declined by $1.1 million compared with 2010 primarily due to pressure on margins as higher input costs of $28.4 million offset benefits of higher selling prices. Net energy revenue declined in the comparison of 2011 to 2010 by $1.3 million.

We sell excess power generated by the Spring Grove, PA facility. In addition, two of our facilities are registered generators of renewable energy credits (“RECs”). The following table summarizes this activity for 2011 and 2010:

 

        Year ended December 31          

In thousands

    2011         2010         Change   

Energy sales

  $ 10,992       $ 14,296       $ (3,304

Costs to produce

    (9,319      (10,403      1,084   

Net

    1,673         3,893         (2,220

Renewable energy credits

    7,671         6,760         911   

Total

  $ 9,344       $ 10,653       $ (1,309

RECs represent sales of certified credits earned related to burning renewable sources of energy such as black liquor and wood waste. We sell RECs into an emerging and somewhat illiquid market. The extent and value of future revenues from REC sales is dependent on many factors outside of management’s control. Therefore, we may not be able to generate consistent amounts of sales of RECs in future periods.

In Composite Fibers, net sales for 2011 were $476.0 million, an increase of $56.8 million, or 13.5%, from 2010. The improvement primarily reflects growth in food & beverage market segment, particularly single-serve coffee products. Volumes shipped increased 3.3%, and on a constant currency basis, average selling prices benefitted the comparison by $13.0 million, and the translation of foreign currencies favorably affected net sales by approximately $17.0 million.

Composite Fibers’ operating profit increased $7.9 million, or 24.0%, in the year over year comparison. The improved performance was driven by higher selling prices as well as improved operating rates, efficiency gains related to continuous improvement initiatives and the impact of an improved mix of products sold. The combination of these factors more than offset the $10.0 million negative impact of higher input costs, primarily related to woodpulp, synthetic fibers and energy. Foreign currency translation unfavorably impacted operating income by $0.5 million.

In Advanced Airlaid Materials, net sales were $252.0 million, an increase of $58.5 million, due to including a full period’s results in 2011, higher selling prices and improved demand. The results for 2010 were included prospectively from the February 12, 2010 acquisition date. Higher selling prices benefited the comparison by $12.3 million but were offset by $12.1 million of higher input costs. Operating income increased $9.0 million primarily due to higher volumes shipped, increased selling prices, improved operating efficiencies and a benefit in the comparison of a non-recurring $1.4 million charge in 2010 to cost of products sold for the write up of acquired inventory to fair value. Foreign currency translation unfavorably impacted operating income by $0.4 million.

Pension Expense    The following table summarizes the amounts of pension expense recognized for 2011 compared to 2010:

 

        Year ended December 31         
 

 

 

    

In thousands

    2011         2010         Change   

Recorded as:

       

Costs of products sold

  $ 6,735       $ 7,056       $ (321

SG&A expense

    3,645         2,185         1,460   

Total

  $ 10,380       $ 9,241       $ 1,139   

The amount set forth above for pension expense recorded as selling, general and administrative (“SG&A”) expense in 2011 includes a $2.0 million one-time pension settlement charge recorded in connection with the retirement of our former Chief Executive Officer.

The amount of pension expense recognized each year is dependent on various actuarial assumptions and certain other factors, including discount rates and the fair value of our pension assets as of the beginning of the year.

 

 

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Gain on Sales of Plant, Equipment and Timberlands, net    During the years ended December 31, 2011 and 2010, we completed the following sales of assets:

 

Dollars in thousands

     Acres        Proceeds         Gain   

2011

       

Timberlands

     942      $ 3,821       $ 3,590   

Other

     n/a        670         360   

Total

     $ 4,491       $ 3,950   

2010

       

Timberlands

     164      $ 387       $ 373   

Other

     n/a        177         80   

Total

           $ 564       $ 453   

In connection with each of the asset sales set forth above, we received cash proceeds.

Other and Unallocated    The amount of net operating expenses not allocated to a business unit and reported as “Other and Unallocated” in our table of Business Unit Performance, excluding gains from sales of plant, equipment and timberlands, totaled $30.2 million in 2011 compared with $31.7 million in 2010.

Non-operating income (expense) includes $31.8 million of interest expense for 2011 and $25.5 million for 2010. For 2011, the amount includes $5.9 million related to the write-off of unamortized issuance costs and original issue discount in connection with the early redemption of $100 million of bonds.

Non-operating income (expense) for 2011 also includes a $3.6 million redemption premium incurred in connection with the bond retirement discussed above. In 2010, other non operating expense, net totaled $6.3 million and represented a $3.4 million loss on a series of forward foreign currency contracts to hedge the Concert acquisition’s Canadian dollar purchase price. In addition, in connection with purchase accounting for the Concert transaction, we recorded a $2.5 million reserve for tax risks, inclusive of accrued interest, existing at the time of the acquisition and at the same time recorded a $2.5 million receivable from the seller due to an indemnification agreement. During the fourth quarter, a tax ruling was issued that eliminated this tax risk and as a result we recognized an expense of $2.5 million which is presented under the caption “Other–net” in the accompanying consolidated statements of income to eliminate the receivable from the seller. We also recognized a $2.5 million tax benefit for this same item to eliminate the tax reserve previously established resulting in no net impact to earnings during 2010.

Income taxes    In 2011, income tax expense totaled $8.2 million on pre-tax income of $50.8 million. Tax expense in 2011 includes a net $5.2 million income tax benefit realized in connection with the resolution of certain foreign tax audits, and expiration of statutes of limitation, partially offset by an increase in the valuation allowance on certain net operating loss carryforwards. For 2010, we recorded income tax benefits of $20.9 million on $33.5 million of pretax income. The benefit in 2010 was due to $23.2 million of cellulosic biofuel credits, net, recorded as an income tax benefit in 2010 as discussed further below. We also recorded the $2.5 million tax benefit discussed above, as well as a $6.4 million adjustment to reduce tax liabilities resulting from the expiration of statutes of limitations on uncertain tax positions and other factors.

Foreign Currency    In 2011, we owned and operated manufacturing facilities in Canada, Germany, France, the United Kingdom and the Philippines. The functional currency in Canada is the U.S. dollar, in Germany and France the Euro, in the UK it is the British Pound Sterling, and in the Philippines it is the Peso. During 2011, Euro functional currency operations generated approximately 28.7% of our sales and 27.2% of operating expenses and British Pound Sterling operations represented 7.6% of net sales and 7.4% of operating expenses. The translation of the results from international operations into U.S. dollars is subject to changes in foreign currency exchange rates. The table below summarizes the translation impact on reported results that changes in currency exchange rates had on our non-U.S. based operations from the conversion of these operation’s results:

 

In thousands

   
 
Year Ended
December 31, 2011
  
  
    Favorable
(unfavorable)
 

Net sales

  $ 23,625   

Costs of products sold

    (22,380

SG&A expenses

    (2,117

Income taxes and other

    (352

Net income

  $ (1,224

The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2011 were the same as 2010. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.

 

 

Glatfelter 2012 Form 10-K        21


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LIQUIDITY AND CAPITAL RESOURCES

Our business is capital intensive and requires significant expenditures for new or enhanced equipment, to support our research and development efforts, for environmental compliance matters including, but not limited to, the Clean Air Act, and to support our business strategy. In addition, we have mandatory debt service requirements of both principal and interest. The following table summarizes cash flow information for each of the years presented:

 

     Year ended December 31  
In thousands    2012      2011  

Cash and cash equivalents at beginning of period

   $ 38,277       $ 95,788   

Cash provided (used) by

       

Operating activities

     112,846         140,307   

Investing activities

     (48,705      (16,830

Financing activities

     (5,489      (180,140

Effect of exchange rate changes on cash

     750         (848

Net cash provided (used)

     59,402         (57,511

Cash and cash equivalents at end of period

   $ 97,679       $ 38,277   

At the end of the 2012, we had $97.7 million in cash and cash equivalents and $344.8 million available under our revolving credit agreement, which matures in November 2016.

Operating cash flow declined in the year-over-year comparison by $27.5 million primarily due to the use of $6.7 million of cash in 2012, net of credits related to the conversion of alternative fuel mixture credits for cellulosic biofuel production credits. Comparatively, in 2011, we received $17.8 million of cellulosic biofuel credits.

Net cash used by investing activities increased $31.9 million in comparison of 2012 to 2011, largely due to the $43.2 million cash received in 2011 from proceeds under a timberland installment note receivable. Capital expenditures totaled $58.8 million in 2012 compared with $64.5 million in 2011 and are expected to approximate $90 million to $100 million in 2013, including $33.5 million to complete the $50 million investment to expand capacity to serve Composite Fibers’ growth markets.

Net cash used by financing activities totaled $5.5 million in 2012 and $180.1 million in 2011, primarily reflecting the net effects of debt repayments or refinancing and common share repurchases. In 2012, as discussed below, we issued $250.0 million of 5.375% bonds and used the proceeds to repay all amounts outstanding under our revolving credit agreement and to redeem $200.0 million of 7.125% notes together with a redemption premium and consent fee of $5.1 million. In 2011, we

redeemed $100.0 million of 7.125% bonds and paid an early redemption premium of $3.6 million, and repaid a $36.7 million term loan in connection with the collection of the installment note discussed above.

The following table sets forth our outstanding long-term indebtedness:

 

     December 31  
In thousands    2012      2011  

Revolving credit facility, due Nov. 2016

   $       $ 27,000   

5.375% Notes, due Nov 2020

     250,000           

7.125% Notes, due May 2016

             200,000   

Total long-term debt

     250,000         227,000   

Less current portion

               

Long-term debt, net of current portion

   $ 250,000       $ 227,000   

Our revolving credit facility contains a number of customary compliance covenants. In addition, the 5.375% Notes contain cross default provisions that could result in all such notes becoming due and payable in the event of a failure to repay debt outstanding under the credit agreement at maturity, or a default under the credit agreement, that accelerates the debt outstanding thereunder. As of December 31, 2012, we met all of the requirements of our debt covenants. The significant terms of the debt instruments are more fully discussed in Item 8 – Financial Statements – Note 15.

On October 3, 2012, we completed an offering of $250.0 million aggregate principal amount of 5.375% Senior Notes due 2020. The net proceeds from this offering totaled approximately $245.1 million, after deducting the commissions and other fees and expenses relating to the offering.

Cash used for common share repurchases totaled $5.7 million in 2012, and $48.0 million in 2011. The amount for 2012 includes $1.2 million under a $50 million program authorized in 2011. In May 2012, our Board of Directors authorized a second share repurchase program for up to $25.0 million, exclusive of commissions, of our outstanding common stock. The following table summarizes share repurchases made under this program through December 31, 2012:

 

      shares     (thousands)  

Authorized amount

     n/a      $ 25,000   

Repurchases

     291,120        (4,462

Remaining authorization

           $ 20,538   

During 2012 and 2011, cash dividends paid on common stock totaled $15.6 million and $16.6 million, respectively. The decline was due to the impact of our share repurchase programs. Our Board of Directors

 

 

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determines what, if any, dividends will be paid to our shareholders. Dividend payment decisions are based upon then-existing factors and conditions and, therefore, historical trends of dividend payments are not necessarily indicative of future payments.

We are subject to various federal, state and local laws and regulations intended to protect the environment as well as human health and safety. At various times, we have incurred significant costs to comply with these regulations and we could incur additional costs as new regulations are developed or regulatory priorities change. As a result of new air quality regulations including the U.S. EPA Best Available Retrofit Technology rule (BART; otherwise known as the Regional Haze Rule) and the Boiler Maximum Achievable Control Technology rule (Boiler MACT), we anticipate that we could incur material capital and operating costs. For example, on December 20, 2012, the Administrator of the U. S. Environmental Protection Agency signed new rules which could require process modifications and/or installation of air pollution controls on power boilers at two of our facilities. We are currently reviewing these rules to understand the effect they may have on our operations, such as reducing or curtailing boiler usage or modifying the types of boilers operated or fuel consumed. The cost of compliance is likely to be significant. Our current estimates to implement viable options could result in additional capital spending of approximately $45 million. The amount ultimately incurred may be less depending on our successful implementation

of appropriate available options. In addition, the timing of any additional capital spending is uncertain, although we currently expect to incur the expenditures generally in 2015 and 2016. Enactment of new environmental laws or regulations or changes in existing laws or regulations could significantly change our estimates.

In addition, we may incur obligations to remove or mitigate any adverse effects on the environment resulting from our operations, including the restoration of natural resources and liability for personal injury and for damages to property and natural resources. See Item 8 – Financial Statements and Supplementary Data – Note 21 for a summary of significant environmental matters.

We expect to meet all of our near and long-term cash needs from a combination of operating cash flow, cash and cash equivalents, and our existing credit facilities. However, an unfavorable outcome of various environmental matters could have a material adverse impact on our consolidated financial position, liquidity and/or results of operations.

Off-Balance-Sheet Arrangements    As of December 31, 2012 and 2011, we had not entered into any off-balance-sheet arrangements. Financial derivative instruments to which we are a party and guarantees of indebtedness, which solely consist of obligations of subsidiaries and a partnership, are reflected in the condensed consolidated balance sheets included herein in Item 8 – Financial Statements and Supplementary Data.

 

 

Contractual Obligations    The following table sets forth contractual obligations as of December 31, 2012:

 

          

Payments Due During the Year Ended

December 31,

 
In millions   Total      2013      2014 to
2015
     2016 to
2017
     2018 and
beyond
 

Long-term debt(1)

  $ 357       $ 13       $ 27       $ 27       $ 290   

Operating leases(2)

    21         5         6         4         6   

Purchase obligations(3)

    204         134         68         2         0   

Other long term obligations(4),(5)

    76         9         17         14         36   
       

Total

  $ 658       $ 161       $ 118       $ 47       $ 332   

 

(1) Represents principal and interest payments due on long-term debt, the significant terms of which are discussed in Item 8 – Financial Statements, Note 15, “Long-term Debt.”

 

(2) Represents rental agreements for various land, buildings, vehicles, and computer and office equipment.

 

(3) Represents open purchase order commitments and other obligations, primarily for raw material forward purchases and pulpwood contracts with minimum annual purchase obligations. In certain situations, prices are subject to variations based on market prices. In such situations, the information above is based on prices in effect at December 31, 2012 or expectations based on historical experience and/or current market conditions.

 

(4) Primarily represents expected benefits to be paid pursuant to retirement medical plans and nonqualified pension plans over the next ten years and expected costs of asset retirement obligations.

 

(5) Since we are unable to reasonably estimate the timing of ultimate payment, the amounts set forth above do not include any payments that may be made related to uncertain tax positions, including potential interest, accounted for in accordance with ASC 740-10-20. As discussed in more detail in Item 8 – Financial Statements, Note 7, “Income Taxes”, such amounts totaled $30.4 million at December 31, 2012.

 

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Critical Accounting Policies and Estimates     The preceding discussion and analysis of our consolidated financial position and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, long-lived assets, pension and post-retirement obligations, environmental liabilities and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

We believe the following represent the most significant and subjective estimates used in the preparation of our consolidated financial statements.

Long-lived Assets    We evaluate the recoverability of our long-lived assets, including plant, equipment, timberlands, goodwill and other intangible assets periodically or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Our evaluations include considerations of a variety of qualitative factors and, if warranted, analyses based on the cash flows generated by the underlying assets, profitability information, including estimated future operating results, trends or other determinants of fair value. If the value of an asset determined by these evaluations is less than its carrying amount, a loss is recognized for the difference between the fair value and the carrying value of the asset. Future adverse changes in market conditions or poor operating results of the related business may indicate an inability to recover the carrying value of the assets, thereby possibly requiring an impairment charge in the future.

Pension and Other Post-Retirement Obligations    Accounting for defined-benefit pension plans, and any curtailments thereof, requires various assumptions, including, but not limited to, discount rates, expected long-term rates of return on plan assets and future compensation growth rates. Accounting for our retiree medical plans, and any curtailments thereof, also requires various assumptions, which include, but are not limited to, discount rates and annual rates of increase in the per capita costs of health care benefits.

The following chart summarizes the more significant assumption used in the actuarial valuation of our defined-benefit plans for each of the past three years:

 

       2012        2011        2010   

Pension plans

      

Weighted average discount rate

     4.28     5.09     5.80

Expected long-term rate of return on plan assets

     8.50        8.50        8.50   

Rate of compensation increase

     4.00        4.00        4.00   

Post-retirement medical

      

Weighted average discount rate

     3.58        4.45        5.10   

Health care cost trend rate assumed for next year

     7.68        7.90        8.10   

Ultimate cost trend rate

     4.50        4.50        4.50   

Year that the ultimate cost trend rate is reached

     2028        2028        2021   

We evaluate these assumptions at least once each year or as facts and circumstances dictate and we make changes as conditions warrant. Changes to these assumptions will increase or decrease our reported net periodic benefit expense, which will result in changes to the recorded benefit plan assets and liabilities.

Environmental Liabilities    We maintain accruals for losses associated with environmental obligations when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing legislation and remediation technologies. These accruals are adjusted periodically as assessment and remediation actions continue and/or further legal or technical information develops. Such undiscounted liabilities are exclusive of any insurance or other claims against third parties. Recoveries of environmental remediation costs from other parties, including insurance carriers, are recorded as assets when their receipt is assured beyond a reasonable doubt.

Income Taxes    We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our balance sheets, as well as operating loss and tax credit carry forwards. These deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when such amounts are expected to reverse or be utilized. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If we are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase the valuation

 

 

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allowance against our deferred tax assets, which may result in a substantial increase in our effective tax rate and a material adverse impact on our reported results.

Significant judgment is required in determining our worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is less than certain. We and our subsidiaries are examined by various Federal, State and foreign tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining

the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current liability and deferred taxes in the period in which the facts that give rise to a revision become known.

Other significant accounting policies, not involving the same level of uncertainties as those discussed above, are nevertheless important to an understanding of the Consolidated Financial Statements. Refer to Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements for additional accounting policies.

 

 

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

     Year Ended December 31     At December 31, 2012  
Dollars in thousands    2013     2014     2015     2016     2017     Carrying Value      Fair Value  

Long-term debt

               

Average principal outstanding

               

At fixed interest rates – Bond

   $ 250,000      $ 250,000      $ 250,000      $ 250,000      $ 250,000      $ 250,000       $ 260,340   

At variable interest rates

                                                  
             $ 250,000       $ 260,340   

Weighted-average interest rate

               

On fixed rate debt – Bond

     5.375     5.375     5.375     5.375     5.375     

On variable rate debt

                                                    

 

The table above presents the average principal outstanding and related interest rates for the next five years for debt outstanding as of December 31, 2012. Fair values included herein have been determined based upon rates currently available to us for debt with similar terms and remaining maturities.

Our market risk exposure primarily results from changes in interest rates and currency exchange rates. At December 31, 2012, we had long-term debt outstanding of $250.0 million, all of which was at fixed rates.

As part of our overall risk management practices, we enter into financial derivatives primarily designed to either i) hedge foreign currency risks associated with forecasted transactions – “cash flow hedges”; or ii) mitigate the

impact that changes in currency exchange rates have on intercompany financing transactions and foreign currency denominated receivables and payables – “foreign currency hedges.” For a more complete discussion of this activity, refer to Item 8 – Financial Statements and Supplementary Data – Note 18.

We are subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. dollar. During 2012, Euro functional currency operations generated approximately 25.3% of net sales and 24.2% of operating expenses and British Pound Sterling operations represented 7.5% of net sales and 7.6% of operating expenses.

 

 

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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of P. H. Glatfelter Company (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the chief executive and chief financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States.

As of December 31, 2012, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has determined that the Company’s internal control over financial reporting as of December 31, 2012, is effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States.

The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures are being made only in accordance with authorizations of management; and provide reasonable

assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements.

The Company’s internal control over financial reporting as of December 31, 2012, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their reports appearing herein, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012.

The Company’s management, including the chief executive officer and chief financial officer, does not expect that our internal control over financial reporting will prevent or detect all errors and all frauds. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of P. H. Glatfelter Company

We have audited the internal control over financial reporting of P.H. Glatfelter Company and subsidiaries (the “Company”) as December 31, 2012, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that

(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2012 of the Company and our report dated March 7, 2013 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/ DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania

March 7, 2013

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

To the Board of Directors and Shareholders of P. H. Glatfelter Company

 

We have audited the accompanying consolidated balance sheets of P.H. Glatfelter Company and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of P. H. Glatfelter Company and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania

March 7, 2013

 

 

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P. H. GLATFELTER COMPANY and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

        Year ended December 31  

     In thousands, except per share

        2012        2011        2010   

Net sales

    $ 1,577,788      $ 1,603,154      $ 1,455,331   

Energy and related sales, net

      7,000        9,344        10,653   

Total revenues

      1,584,788        1,612,498        1,465,984   

Costs of products sold

      1,371,139        1,406,305        1,279,737   

Gross profit

      213,649        206,193        186,247   

Selling, general and administrative expenses

      121,590        124,871        122,111   

Gains on dispositions of plant, equipment and timberlands, net

      (9,815     (3,950     (453

Operating income

      101,874        85,272        64,589   

Non-operating income (expense)

         

Interest expense

      (18,694     (31,794     (25,547

Interest income

      460        666        808   

Other, net

      (4,699     (3,299     (6,321

Total other income (expense)

      (22,933     (34,427     (31,060

Income before income taxes

      78,941        50,845        33,529   

Income tax provision (benefit)

      19,562        8,151        (20,905

Net income

    $ 59,379      $ 42,694      $ 54,434   
 

Earnings per share

         

Basic

    $ 1.39      $ 0.94      $ 1.19   

Diluted

      1.36        0.93        1.17   
 

Weighted average shares outstanding

         

Basic

      42,851        45,228        45,922   

Diluted

      43,672        45,794        46,374   
 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

    Year ended December 31      
     In thousands   2012     2011     2010       

    Net income

  $ 59,379      $ 42,694      $ 54,434     

    Foreign currency translation adjustments

    11,358        (10,160     (17,227  

    Net change in:

         

Deferred gains (losses) on cash flow hedges, net of taxes of $638, $(464) and $0, respectively

    (1,609     1,185            

Unrecognized retirement obligations, net of taxes of $3,914, $22,672, and $(9,905), respectively

    (6,974     (36,519     15,865       

Other comprehensive income (loss)

    2,775        (45,494     (1,362    

Comprehensive income (loss)

  $ 62,154      $ (2,800   $ 53,072     
 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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P. H. GLATFELTER COMPANY and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

    December 31      
     In thousands   2012     2011      
Assets        

Cash and cash equivalents

  $ 97,679      $ 38,277     

Accounts receivable (less allowance for doubtful accounts:

    2012 – $2,858; 2011 – $2,861)

    139,904        135,412     

Inventories

    222,366        206,707     

Prepaid expenses and other current assets

    58,909        42,017     

Total current assets

    518,858        422,413     

Plant, equipment and timberlands, net

    621,186        601,950     

Other assets

    102,941        112,562     

Total assets

  $ 1,242,985      $ 1,136,925     
 

 

 

   
 
Liabilities and Shareholders’ Equity        

Accounts payable

  $ 133,389      $ 109,490     

Dividends payable

    3,905        3,902     

Environmental liabilities

    125        250     

Other current liabilities

    113,489        97,598     

Total current liabilities

    250,908        211,240     

Long-term debt

    250,000        227,000     

Deferred income taxes

    62,046        69,791     

Other long-term liabilities

    140,352        138,490     

Total liabilities

    703,306        646,521     
 

Commitments and contingencies

               
 
Shareholders’ equity        

Common stock, $0.01 par value; authorized – 120,000,000 shares; issued –

    54,361,980 shares (including shares in treasury: 2012 – 11,578,028;
2011 – 11,711,536)

    544        544     

Capital in excess of par value

    52,492        51,477     

Retained earnings

    819,593        775,825     

Accumulated other comprehensive loss

    (163,966     (166,741  
    708,663        661,105     

Less cost of common stock in treasury

    (168,984     (170,701  

Total shareholders’ equity

    539,679        490,404     

Total liabilities and shareholders’ equity

  $ 1,242,985      $ 1,136,925     
 

 

 

   

The accompanying notes are an integral part of these consolidated financial statements.

 

Glatfelter 2012 Form 10-K        31


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P.H. GLATFELTER COMPANY and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Year ended December 31      
      In thousands   2012     2011     2010       

Operating activities

         

Net income

  $ 59,379      $ 42,694      $ 54,434     

Adjustments to reconcile to net cash provided by operations:

         

Depreciation, depletion and amortization

    69,500        69,313        65,839     

Amortization of debt issue costs and original issue discount

    3,177        8,838        2,758     

Pension expense, net of unfunded benefits paid

    10,427        2,127        8,637     

Deferred income tax provision (benefit)

    (2,209     333        (16,815  

Gains on dispositions of plant, equipment and timberlands, net

    (9,815     (3,950     (453  

Share-based compensation

    6,520        5,762        5,767     

Change in operating assets and liabilities

         

Accounts receivable

    (3,379     3,771        (598  

Inventories

    (12,615     (7,280     (7,592  

Prepaid and other current assets

    (14,952     2,115        (13,318  

Accounts payable

    6,953        13,606        21,064     

Environmental matters

    (151     (57     (29  

Accruals and other current liabilities

    15,134        (2,516     (1,490  

Cellulosic biofuel and alternative fuel mixture credits

    (6,728     17,833        54,880     

Other

    (8,395     (12,282     (5,079    

Net cash provided by operating activities

    112,846        140,307        168,005     

Investing activities

         

Expenditures for purchases of plant, equipment and timberlands

    (58,752     (64,491     (36,491  

Proceeds from disposals of plant, equipment and timberlands, net

    10,272        4,491        564     

Proceeds from timberland installment sale note receivable

           43,170            

Acquisitions, net of cash acquired

                  (228,290  

Other

    (225                  

Net cash used by investing activities

    (48,705     (16,830     (264,217  

Financing activities

         

Proceeds from note offerings

    250,000               95,000     

Repayments of note offerings

    (205,131     (103,563         

Net borrowings under (repayments of) revolving credit facility

    (27,000     27,000            

Payments of note offering costs

    (4,748     (1,672     (5,340  

Repayment of term loans

           (36,695     (14,000  

Net repayments of other short term debt

           (798     (3,208  

Repurchases of common stock

    (5,675     (48,033         

Payments of dividends

    (15,608     (16,611     (16,746  

Proceeds from stock options exercised and other

    2,673        232        3,975       

Net cash (used) provided by financing activities

    (5,489     (180,140     59,681     

Effect of exchange rate changes on cash

    750        (848     (3,101    

Net increase (decrease) in cash and cash equivalents

    59,402        (57,511     (39,632  

Cash and cash equivalents at the beginning of period

    38,277        95,788        135,420       

Cash and cash equivalents at the end of period

  $ 97,679      $ 38,277      $ 95,788     
 

 

 

Supplemental cash flow information

         

Cash paid (received) for:

         

Interest, net of amounts capitalized

  $ 14,400      $ 24,191      $ 23,193     

Income taxes, net

    44,657        (8,344     (40,265    

The accompanying notes are an integral part of these consolidated financial statements.

 

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P. H. GLATFELTER COMPANY and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Years Ended December 31, 2012, 2011 and 2010

 

In thousands   Common
Stock
     Capital in
Excess of
Par Value
     Retained
Earnings
     Accumulated
Other
Comprehensive
Loss
   

Treasury

Stock

    Total
Shareholders’
Equity
 

Balance at January 1, 2010

  $ 544       $ 46,746       $ 711,765       $ (119,885)      $ (128,466)      $ 510,704   

Net income

          54,434             54,434   

Other comprehensive loss

             (1,362)          (1,362)   
              

 

 

 

Comprehensive income

                 53,072   

Tax effect on employee stock options exercised

       (50)                (50)   

Cash dividends declared ($0.36 per share)

          (16,746)             (16,746)   

Share-based compensation expense

       3,962                3,962   

Delivery of treasury shares

              

RSUs

       (2,152)              1,662        (490)   

401 (k) plans

       (318)              1,960        1,642   

Director compensation

       (16)              179        163   

Employee stock options exercised – net

       (27)              212        185   
 

 

 

 

Balance at December 31, 2010

    544         48,145         749,453         (121,247     (124,453     552,442   

Net income

          42,694             42,694   

Other comprehensive income

             (45,494)          (45,494)   
              

 

 

 

Comprehensive loss

                 (2,800)   

Tax effect on employee stock options exercised

       90                90   

Cash dividends declared ($0.36 per share)

          (16,322)             (16,322)   

Share-based compensation expense

       3,633                3,633   

Repurchase of common shares

               (48,904)        (48,904)   

Delivery of treasury shares

              

RSUs

       (215)              215          

401 (k) plans

       (141)              2,108        1,967   

Director compensation

       (13)              177        164   

Employee stock options exercised – net

       (22)              156        134   
 

 

 

 

Balance at December 31, 2011

    544         51,477         775,825         (166,741)        (170,701)        490,404   

Net income

          59,379             59,379   

Other comprehensive income

             2,775          2,775   
              

 

 

 

Comprehensive income

                 62,154   

Tax effect on employee stock options exercised

       631                631   

Cash dividends declared ($0.36 per share)

          (15,611)             (15,611)   

Share-based compensation expense

       3,970                3,970   

Repurchase of common shares

               (5,675)        (5,675)   

Delivery of treasury shares

              

RSUs

       (1,433)              1,096        (337)   

401 (k) plans

       234              2,212        2,446   

Employee stock options exercised – net

       (2,387)              4,084        1,697   
 

 

 

 

Balance at December 31, 2012

  $ 544       $ 52,492       $ 819,593       $ (163,966)      $ (168,984   $ 539,679   
 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

Glatfelter 2012 Form 10-K        33


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P. H. GLATFELTER COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION

P. H. Glatfelter Company and subsidiaries (“Glatfelter”) is a manufacturer of specialty papers and fiber-based engineered materials. Headquartered in York, Pennsylvania, our manufacturing facilities are located in Spring Grove, Pennsylvania; Chillicothe and Freemont, Ohio; Gatineau, Quebec, Canada; Lydney, England; Caerphilly, Wales; Gernsbach and Falkenhagen, Germany; Scaër, France; and the Philippines. Our products are marketed worldwide, either through wholesale paper merchants, brokers and agents, or directly to customers.

 

2. ACCOUNTING POLICIES

Principles of Consolidation    The consolidated financial statements include the accounts of Glatfelter and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

Accounting Estimates    The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Management believes the estimates and assumptions used in the preparation of these consolidated financial statements are reasonable, based upon currently available facts and known circumstances, but recognizes that actual results may differ from those estimates and assumptions.

Cash and Cash Equivalents    We classify all highly liquid instruments with an original maturity of three months or less at the time of purchase as cash equivalents.

Inventories    Inventories are stated at the lower of cost or market. Raw materials, in-process and finished inventories of our U.S. manufacturing operations are valued using the last-in, first-out (LIFO) method, and the supplies inventories are valued principally using the average-cost method. Inventories at our foreign operations are valued using the average cost method.

Plant, Equipment and Timberlands    For financial reporting purposes, depreciation is computed using the straight-line method over the estimated useful lives of the respective assets.

The range of estimated service lives used to calculate financial reporting depreciation for principal items of plant and equipment are as follows:

 

Buildings

     10 – 45 Years   

Machinery and equipment

     7 – 35 Years   

Other

     4 – 40 Years   

Maintenance and Repairs    Maintenance and repairs costs are charged to income and major renewals and betterments are capitalized. At the time property is retired or sold, the net carrying value is eliminated and any resultant gain or loss is included in income.

Valuation of Long-lived Assets, Intangible Assets and Goodwill    We evaluate long-lived assets for impairment when a specific event indicates that the carrying value of an asset may not be recoverable. Recoverability is assessed based on estimates of future cash flows expected to result from the use and eventual disposition of the asset. If the sum of expected undiscounted cash flows is less than the carrying value of the asset, the asset’s fair value is estimated and an impairment loss is recognized for any deficiencies. Goodwill is reviewed, on a discounted cash flow basis, during the third quarter of each year for impairment or more frequently if impairment indicators are present. Impairment losses, if any, are recognized for the amount by which the carrying value of the reporting unit exceeds its fair value. The carrying value of a reporting unit is defined using an enterprise premise which is generally determined by the difference between the unit’s assets and operating liabilities.

Asset Retirement Obligations    In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 410, Asset Retirement and Environmental Obligations, we accrue asset retirement obligations in the period in which obligations relating to future asset retirements are incurred and when a reasonable estimate of fair value can be determined. Under these standards, costs are to be accrued at estimated fair value, and a related long-lived asset is capitalized. Over time, the liability is accreted to its settlement value and the capitalized cost is depreciated over the useful life of the related asset for which the obligation exists. Upon settlement of the liability, we recognize a gain or loss for any difference between the settlement amount and the liability recorded.

 

 

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Income Taxes    Income taxes are determined using the asset and liability method of accounting for income taxes in accordance with FASB ASC 740 Income Taxes (“ASC 740”). Under ASC 740, tax expense includes U.S. and international income taxes plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested. Tax credits and other incentives reduce tax expense in the year the credits are claimed. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported in deferred income taxes. Deferred tax assets are recognized if it is more likely than not that the assets will be realized in future years. We establish a valuation allowance for deferred tax assets for which realization is not more likely than not.

Income tax contingencies are accounted for in accordance with FASB ASC 740-10-20 Income Taxes. Significant judgment is required in determining our worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is less than certain. We and our subsidiaries are examined by various Federal, State, and foreign tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and record any necessary adjustments in the period in which the facts that give rise to a revision become known.

Treasury Stock    Common stock purchased for treasury is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on the weighted-average cost basis.

Foreign Currency Translation    Foreign currency translation gains and losses and the effect of exchange rate changes on transactions designated as hedges of net foreign investments are included as a component of other comprehensive income (loss). Transaction gains and losses are included in income in the period in which they occur.

Revenue Recognition    We recognize revenue on product sales when the customer takes title and assumes the risks and rewards of ownership. Estimated costs for sales incentives, discounts and sales returns and allowances are recorded as sales deductions in the period in which the related revenue is recognized.

Revenue from energy sales is recognized when electricity is delivered to the customer. Certain costs

associated with the production of electricity, such as fuel, labor, depreciation and maintenance are netted against energy sales for presentation on the Consolidated Statements of Income. Our fixed-price contract to sell electricity generated in excess of our own use expired March 31, 2010. Subsequent to the expiration, we now sell excess power at market-rates.

Revenue from renewable energy credits is recorded under the caption “Energy and related sales” in the Consolidated Statements of Income and is recognized when all risks, rights and rewards to the certificate are transferred to the counterparty.

Environmental Liabilities    Accruals for losses associated with environmental obligations are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing legislation and remediation technologies. Costs related to environmental remediation are charged to expense. These accruals are adjusted periodically as assessment and remediation actions continue and/or further legal or technical information develops. Such undiscounted liabilities are exclusive of any insurance or other claims against third parties. Environmental costs are capitalized if the costs extend the life of the asset, increase its capacity and/or mitigate or prevent contamination from future operations. Recoveries of environmental remediation costs from other parties, including insurance carriers, are recorded as assets when their receipt is assured beyond a reasonable doubt.

Earnings Per Share    Basic earnings per share is computed by dividing net income by the weighted-average common shares outstanding during the respective periods. Diluted earnings per share is computed by dividing net income by the weighted-average common shares and common share equivalents outstanding during the period. The dilutive effect of common share equivalents is considered in the diluted earnings per share computation using the treasury stock method.

Financial Derivatives and Hedging Activities     We use financial derivatives to manage exposure to changes in foreign currencies. In accordance with FASB ASC 815 Derivatives and Hedging (“ASC 815”), we record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.

 

 

Glatfelter 2012 Form 10-K        35


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Cash Flow Hedges    The effective portion of the gain or loss on those derivative instruments designated and qualifying as a hedge of the exposure to variability in expected future cash flows related to forecasted transactions is deferred and reported as a component of accumulated other comprehensive income (loss). Deferred gains or losses are reclassified to our results of operations at the time the hedged forecasted transaction is recorded in our results of operations. The effectiveness of cash flow hedges is assessed at inception and quarterly thereafter. If the instrument becomes ineffective or it becomes probable that the originally – forecasted transaction will not occur, the related change in fair value of the derivative instrument is also reclassified from accumulated other comprehensive income (loss) and recognized in earnings.

Fair Value of Financial Instruments    Under the accounting for fair value measurements and disclosures, a fair value hierarchy was established that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are described below:

 

Level 1 – 

  Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 – 

  Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including
  quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – 

  Inputs that are both significant to the fair value measurement and unobservable.

Recently Issued Accounting Pronouncements

In June 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, Presentation of Comprehensive Income.” This ASU is designed to improve the comparability and transparency of other comprehensive income components. The guidance provides an option to present total comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement or two separate but consecutive statements. This ASU eliminates the option to present other comprehensive income components as part of the statement of changes in shareholders’ equity. We have adopted this standard by presenting a separate consecutive statement of comprehensive income.

In February 2013, the FASB issued ASU 2013-02 –”Comprehensive Income (Topic 220): Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income” which will require new disclosures about items reclassified out of accumulated other comprehensive income. The new standard is required to be adopted in fiscal years, and interim periods within those years, beginning after December 15, 2012. This standard is not expected to have a material impact on us.

In September 2011, the FASB updated FASB ASC 350, Intangibles – Goodwill and Other to provide an entity the option, when evaluating goodwill and other assets for possible impairment, to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after completing this assessment, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. We adopted this standard in the third quarter of 2012 and it did not have a material impact on us. This update became effective for us beginning January 1, 2012.

 

3. ACQUISITIONS

On February 12, 2010, we completed the acquisition of all the issued and outstanding stock of Concert Industries Corp. (“Concert”), a manufacturer of highly absorbent cellulose based airlaid non-woven materials, for cash totaling $231.1 million based on the currency exchange rates on the closing date, and net of post-closing working capital adjustments. Concert had operations located in Gatineau, Quebec, Canada and Falkenhagen, Brandenburg, Germany.

 

 

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The following summarizes the final purchase price allocation:

 

In thousands

        

Assets

  

Cash

   $ 2,792   

Accounts receivable

     24,120   

Inventory

     28,034   

Prepaid and other current assets

     4,625   

Plant, equipment and timberlands

     186,354   

Intangible assets

     5,040   

Deferred tax assets and other assets

     14,908   

Total

     265,873   

Liabilities

  

Accounts payable and accrued expenses

     25,933   

Deferred tax liabilities

     5,336   

Other long term liabilities

     3,522   

Total

     34,791   

Total purchase price

   $ 231,082   

For purposes of allocating the total purchase price, assets acquired and liabilities assumed are recorded at their estimated fair market value. The allocation set forth above is based on management’s estimate of the fair value using valuation techniques such as discounted cash flow models, appraisals and similar methodologies. The amount allocated to intangible assets represents the estimated value of customer sales contracts and relationships. Deferred tax assets reflect the estimated value of future tax deductions acquired in the transaction.

Our results of operations for 2010 include the results of Concert prospectively from the February 12, 2010 date of acquisition. All such results are reported herein as the Advanced Airlaid Materials business unit, a new reportable segment. Revenue and operating income of this operation included in our consolidated statements of income totaled $246.3 million and $18.0 million, respectively, in 2012, $252.0 million and $13.4 million, respectively, in 2011 and $193.5 million and $4.4 million, respectively, in 2010.

The unaudited pro forma results for 2010 include the amortization associated with the acquired intangible assets and interest expense associated with debt used to fund the acquisition, as well as fair value adjustments for plant, equipment and timberlands. To better reflect the combined operating results, material non-recurring charges directly attributable to the acquisition have been excluded. The unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved.

 

In thousands, except per share

    
 
 
Year ended
December 31
2010
  
  
  

Pro forma

  

Net sales

   $ 1,480,980   

Net income

     69,116   

Diluted earnings per share

     1.49   

 

4. ENERGY AND RELATED SALES, NET

We sell excess power generated by the Spring Grove, PA facility. Prior to the March 31, 2010 expiration of a long-term contract, all sales were at a fixed price. Subsequently, we sell excess power at prevailing market rates. We also sell renewable energy credits generated by the Spring Grove, PA and Chillicothe, OH facilities representing sales of certified credits earned related to burning renewable sources of energy such as black liquor and wood waste.

The following table summarizes this activity for each of the past three years:

 

In thousands

    2012        2011        2010   

Energy sales

  $ 5,284      $ 10,992      $ 14,296   

Costs to produce

    (4,187     (9,319     (10,403

Net energy sales

    1,097        1,673        3,893   

Renewable energy credits

    5,903        7,671        6,760   

Total energy and related sales, net

  $ 7,000      $ 9,344      $ 10,653   
 

 

Glatfelter 2012 Form 10-K        37


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5. GAIN ON DISPOSITIONS OF PLANT, EQUIPMENT AND TIMBERLANDS

During 2012, 2011 and 2010, we completed the following sales of assets:

 

Dollars in thousands

     Acres        Proceeds         Gain   

2012

       

Timberlands

     4,830      $ 9,494       $ 9,203   

Other

     n/a        778         612   

Total

           $ 10,272       $ 9,815   

2011

       

Timberlands

     942      $ 3,821       $ 3,590   

Other

     n/a        670         360   

Total

           $ 4,491       $ 3,950   

2010

       

Timberlands

     164      $ 387       $ 373   

Other

     n/a        177         80   
             $ 564       $ 453   

 

6. EARNINGS PER SHARE

The following table sets forth the details of basic and diluted earnings per share (EPS):

 

    Year ended Decmber 31,  

In thousands, except per share

    2012        2011        2010   

Net income

  $ 59,379      $ 42,694      $ 54,434   

Weighted average common shares outstanding used in basic EPS

    42,851        45,228        45,922   

Common shares issuable upon exercise of dilutive stock options and PSAs / RSUs

    821        566        452   

Weighted average common shares outstanding and common share equivalents used in diluted EPS

    43,672        45,794        46,374   

Earnings per share

       

Basic

  $ 1.39      $ 0.94      $ 1.19   

Diluted

    1.36        0.93        1.17   

The following table sets forth the potential common shares outstanding for stock options and restricted stock units that were not included in the computation of diluted EPS for the period indicated, because their effect would be anti-dilutive:

 

        Year ended Decmber 31,  
     in thousands   2012     2011     2010  

Potential common shares

    8        891        1,405   

 

7. INCOME TAXES

Income taxes are recognized for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. The effects of income taxes are measured based on enacted tax laws and rates.

The provision/(benefit) for income taxes from operations consisted of the following:

 

    Year Ended December 31  
     In thousands   2012      2011     2010  

Current taxes

      

Federal

  $ 8,869       $ 6,943      $ (8,238

State

    3,386         (1,762     (392

Foreign

    9,516         2,637        4,540   
    21,771         7,818        (4,090

Deferred taxes and other

      

Federal

    (5,456      (3,908     (17,530

State

    (920      (286     (131

Foreign

    4,167         4,527        846   
    (2,209      333        (16,815

Income tax provision/(benefit)

  $ 19,562       $ 8,151      $ (20,905

The amounts set forth above for total deferred taxes and other included a deferred tax benefit of $2.3 million, $1.5 million and $17.6 million in 2012, 2011 and 2010, respectively. Other taxes totaled an expense of $0.1 million, $1.8 million, and $0.8 million in 2012, 2011 and 2010, respectively, associated with the deferred tax impact of uncertain tax positions.

The following are the domestic and foreign components of pretax income from operations:

 

    Year Ended December 31  
     In thousands   2012      2011     2010  

United States

  $ 24,525       $ (991   $ 2,384   

Foreign

    54,416         51,836        31,145   

Total pretax income

  $ 78,941       $ 50,845      $ 33,529   

A reconciliation between the income tax provision, computed by applying the statutory federal income tax rate of 35% to income before income taxes, and the actual income tax provision/(benefit) is as follows:

 

    Year Ended December 31  
     2012     2011     2010  

Federal income tax provision at statutory rate

    35.0     35.0     35.0

State income taxes, net of federal income tax benefit

    1.3        0.7        1.4   

Foreign income tax rate differential

    (3.9     (6.8     (4.9

Change in statutory tax rates

    (0.8     0.9        1.5   

Tax credits

    (0.5     (2.0     (7.8

Change in unrecognized tax benefits, net

    0.4        (11.6     (12.4

Cellulosic biofuel credit, net of incremental state tax and manufacturing deduction benefit

    (6.1            (69.3

Adjustment for prior year estimates

                  (6.8

Valuation allowance

           3.2          

Other

    (0.6     (3.4     1.0   

Provision/(benefit) for income taxes

    24.8 %      16.0     (62.3 )% 
 

 

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Table of Contents

The sources of deferred income taxes were as follows at December 31:

 

    2012     2011  

In thousands

   
 
 
Current
Asset
(Liability)
  
  
  
   
 
 
 
Non
current
Asset
(Liability)
  
  
  
  
   
 
 
Current
Asset
(Liability)
  
  
  
   
 
 
 
Non
current
Asset
(Liability)
  
  
  
  

Reserves

  $ 6,871      $ 8,095      $ 5,908      $ 10,595   

Compensation

    3,332        5,034        3,481        5,064   

Post-retirement benefits

    1,285        22,642        1,325        18,467   

Property

           (92,144            (96,798

Pension

    508        (14,681     342        (18,190

Inventories

    1,447               125          

Other

    204        975        (246     1,985   

Tax carryforwards

    5,218        43,409        3,313        47,294   

Subtotal

    18,865        (26,670     14,248        (31,583

Valuation allowance

    (3,233     (27,266     (1,586     (25,946

Total

  $ 15,632      $ (53,936   $ 12,662      $ (57,529

Current and non-current deferred tax assets and liabilities are included in the following balance sheet captions:

 

    December 31  

In thousands

    2012         2011   

Prepaid expenses and other current assets

  $ 16,319       $ 12,662   

Other long term assets

    8,110         12,262   

Other current liabilities

    687           

Deferred income taxes

    62,046         69,791   

At December 31, 2012 we had state and foreign tax net operating loss (“NOL”) carryforwards of $68.7 million and $247.9 million, respectively. These NOL carryforwards are available to offset future taxable income, if any. The state NOL carryforwards expire between 2014 and 2031; certain foreign NOL carryforwards expire between 2013 and 2032.

In addition, we had federal foreign tax credit carryforwards of $0.3 million, which expire in 2013, various state tax credit carryforwards totaling $0.4 million, which expire between 2014 and 2027, and foreign investment tax credits of $3.8 million which expire between 2019 and 2032.

We have established a valuation allowance of $30.5 million against the net deferred tax assets, primarily due to the uncertainty regarding the ability to utilize state and foreign tax NOL carryforwards and certain deferred foreign tax credits.

Tax credits and other incentives reduce tax expense in the year the credits are claimed. We recorded tax credits of $0.4 million, $1.0 million and $2.6 million in 2012, 2011 and 2010, respectively, related to research and development credits and the fuels tax credits.

At December 31, 2012 and 2011, unremitted earnings of subsidiaries outside the United States deemed to be permanently reinvested totaled $236.3 million and $197.4 million, respectively. Because the unremitted earnings of subsidiaries are deemed to be permanently reinvested as of December 31, 2012 and because we have no need for or plans to repatriate such earnings, no deferred tax liability has been recognized in our consolidated financial statements. The determination of additional taxes that have not been provided is not practicable.

In March 2010, our application to be registered as a cellulosic biofuel producer was approved by the Internal Revenue Service. The U.S. Internal Revenue Code provides a non refundable tax credit equal to $1.01 per gallon for taxpayers that produce cellulosic biofuel. In a memorandum issued in July 2010, the Internal Revenue Service issued guidance concluding that black liquor sold or used before January 1, 2010, qualifies for the cellulosic biofuel producer credit (“CBPC”) and no further certification of eligibility was needed.

In connection with the filing of our 2009 income tax return, we claimed $23.2 million, net of taxes, of CBPC. The CBPC claimed is attributable to black liquor produced and burned from January 1, 2009 through February 19, 2009, after which we began mixing black liquor and diesel fuel to qualify for alternative fuel mixture credits.

In 2012, we made the decision to convert a portion of the previously utilized refundable alternative fuel mixture credit, which was equal to $0.50 per gallon, to the non refundable CBPC. The conversion to the CBPC resulted in a net benefit for income taxes in 2012 of $4.0 million. During 2012, we amended our 2009 federal income tax return to claim the credit and this required us to return to the Internal Revenue Service $14.1 million, net of credits