10-K 1 d123473d10k.htm 10-K 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, 2015

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.  þ Large accelerated filer  ¨ Accelerated filer  ¨ 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, 2015, the aggregate market value of the Common Stock of the Registrant held by non-affiliates was $940.3 million.

Common Stock outstanding on February 23, 2016 totaled 43,442,171 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 March 31, 2016 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, 2015

Table of Contents

 

         Page  

PART I

    

Item 1

 

Business

     1   

Item 1A

 

Risk Factors

     7   

Item 1B

 

Unresolved Staff Comments

     12   

Item 2

 

Properties

     12   

Item 3

 

Legal Proceedings

     13   
 

Executive Officers

     13   

Item 4

 

Mine Safety Disclosures

     14   

PART II

    

Item 5

 

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

     14   
 

Common Stock Prices and Dividends Declared Information

     14   
 

Stock Performance Graph

     14   

Item 6

 

Selected Financial Data

     15   

Item 7

 

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

     16   
 

Results of Operations

     17   
 

Liquidity and Capital Resources

     25   
 

Critical Accounting Policies and Estimates

     28   

Item 7A

 

Quantitative and Qualitative Disclosures about Market Risk

     29   

Item 8

 

Financial Statements and Supplementary Data

     30   
 

Report of Independent Registered Public Accountants

     31   
 

Statements of Income

     33   
 

Statements of Comprehensive Income

     34   
 

Balance Sheets

     35   
 

Statements of Cash Flows

     36   
 

Statements of Shareholders’ Equity

     37   
 

Notes to Consolidated Financial Statements

  
 

1.

  

Organization

     38   
 

2.

  

Accounting Policies

     38   
 

3.

  

Acquisitions

     40   
 

4.

  

Energy and Related Sales, Net

     41   
 

5.

  

Gain on Dispositions of Plant, Equipment and Timberlands

     42   
 

6.

  

Asset Impairment Charges

     42   
 

7.

  

Earnings Per Share

     42   
 

8.

  

Accumulated Other Comprehensive Income

     43   
 

9.

  

Income Taxes

     44   
 

10.

  

Stock-Based Compensation

     46   
 

11.

  

Retirement Plans and Other Post-Retirement Benefits

     47   
         Page  
 

12.

  

Inventories

     50   
 

13.

  

Plant, Equipment and Timberlands

     50   
 

14.

  

Goodwill and Intangible Assets

     50   
 

15.

  

Other Long-Term Assets

     50   
 

16.

  

Other Current Liabilities

     51   
 

17.

  

Long-Term Debt

     51   
 

18.

  

Asset Retirement Obligation

     52   
 

19.

  

Fair Value of Financial Instruments

     53   
 

20.

  

Financial Derivatives and Hedging Activities

     53   
 

21.

  

Shareholders’ Equity

     54   
 

22.

  

Share Repurchases

     55   
 

23.

  

Commitments, Contingencies and Legal Proceedings

     55   
 

24.

  

Segment and Geographic Information

     59   
 

25.

  

Condensed Consolidating Financial Statements

     62   
 

26.

  

Quarterly Results (Unaudited)

     66   

Item 9

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosures

     67   

Item 9A

 

Controls and Procedures

     67   

Item 9B

 

Other Information

     67   

PART III

    

Item 10

 

Directors, Executive Officers and Corporate Governance

     67   

Item 11

 

Executive Compensation

     67   

Item 12

 

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

     67   

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

     67   

Item 14

 

Principal Accountant Fees and Services

     67   

PART IV

    

Item 15

 

Exhibits, Financial Statement Schedules

     68   
Signatures        71   
Certifications        72   
Schedule II        74   
 


Table of Contents

PART I

P. H. Glatfelter Company makes regular filings with the Securities and Exchange Commission (“SEC”), including this Annual Report on Form 10-K, as well as 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’s 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 in Pennsylvania, Ohio, Canada, Germany, the United Kingdom, France, and the Philippines and we have sales and distribution offices in Russia and China.

Acquisitions    Over the past several years, we have completed a number of acquisitions that have diversified our revenue, expanded our geographic footprint and enhanced our asset base. The most recent transactions include the April 2013, $211 million acquisition of Dresden Papier GmbH (“Dresden”) and the October 2014, $8.0 million acquisition of Spezialpapierfabrik Oberschmitten GmbH (“SPO”). Dresden is a leading supplier of nonwoven wall covering products with annual revenues of approximately $160 million in the year of acquisition. SPO is a producer of highly technical papers for a wide range of electrical applications with annual sales of approximately $33 million. Both of these businesses operate within our Composite Fibers business unit.

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

 

   

Composite Fibers with revenue from the sale of single-serve tea and coffee filtration papers, nonwoven wall covering materials, metallized papers, composite laminates papers, and many technically special papers including substrates for electrical applications;

   

Advanced Airlaid Materials with revenue from the sale of airlaid nonwoven fabric-like materials used in feminine hygiene and adult incontinence products, wipes, and other airlaid applications; and

 

   

Specialty Papers with revenue from the sale of papers for carbonless and other forms, envelopes, book publishing, and engineered products such as papers for high-speed ink jet printing, office specialty products, greeting cards, packaging, casting, release, transfer, playing card, postal, FDA-compliant food and beverage applications, and other niche specialty applications.

The global growth markets served by the Composite Fibers and Advanced Airlaid Materials business units are characterized by attractive growth rates as the result of 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. Combined, these two business units comprised 47% of our total net sales in 2015 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   2015     2014     2013  

Net sales

  $ 1,661,084      $ 1,802,415      $ 1,722,615   

Business unit contribution

       

Composite Fibers

    32.6     34.3     32.9

Advanced Airlaid Materials

    14.7        15.6        15.6   

Specialty Papers

    52.7        50.1        51.5   

Total

    100.0     100.0     100.0

Strategy    Our strategy is focused on growing revenues, organically and by acquisition, in our key global growth markets including single-serve coffee and tea, nonwoven wall covering materials, electrical products, hygiene and wipes products, and other technical materials. We partner with leading consumer product companies and other market leaders to provide innovative products with outstanding performance to meet market requirements. Over the past several years, we have made investments to increase production capacity and improve our technical capabilities to ensure we are best positioned to serve the

 

 

GLATFELTER 2015 FORM 10-K        1


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market demands and grow our revenue. This includes a $50 million investment in 2013 to expand capacity and improve inclined wire paper machine capabilities in Composite Fibers. We are committed to growing in our key markets and expect to make additional investments to support our customers and satisfy market demands. Consistent with this strategy, in December 2015, we announced plans to invest approximately $80 million to build a new advanced airlaid facility in the southern U.S. to service the North America market. Production at the new facility is expected to start in two years with an annual capacity of approximately 22,000 short tons, increasing our total global airlaid materials capacity to approximately 129,000 short tons.

New product development and new business development is a critical component of our business strategy requiring a focus on product innovation. During 2015, 2014 and 2013, we invested $10.4 million, $12.3 million and $12.2 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.

In addition, our business strategy includes expanding product margins driven by cost reduction and continuous improvement initiatives, generating strong and reliable free cash flows and making strategic investments designed to improve our returns on invested capital.

And finally, the strength of our balance sheet and cash flow profile has allowed us to pursue strategic actions such as the Dresden and SPO acquisitions. Our acquisition strategy complements our long-term strategy of driving growth in core and adjacent markets. Since 2006, we have successfully completed six acquisitions demonstrating our ability to establish leading market positions through the successful acquisition and integration of complementary businesses.

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

 

    Short tons    2015     2014      2013  

Composite Fibers

     153,766        157,336         133,570   

Advanced Airlaid Materials

     95,957        99,667         96,098   

Specialty Papers

     802,188        802,878         800,151   

Total

     1,051,911        1,059,881         1,029,819   

Composite Fibers    Our Composite Fibers business unit 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;

 

   

Wallcovering base materials used by the world’s largest wallpaper manufacturers;

 

   

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

 

   

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

 

   

Technical Specialties a diverse line of special paper products used in electrical energy storage, transport, and transmission including batteries and capacitors, wipes and other home and hygiene products, and other highly-engineered fiber-based applications.

We believe this business unit maintains a market leadership position in the single-serve coffee and tea markets and nonwoven wallpaper materials markets. Composite Fibers’ revenue composition by market consisted of the following for the years indicated:

 

    In thousands    2015     2014      2013  

Food & beverage

   $ 274,865      $ 296,304       $ 302,738   

Wallcovering

     91,620        149,957         97,698   

Metallized

     68,397        80,839         83,949   

Composite laminates

     34,897        38,159         39,296   

Technical specialties and other

     71,689        52,592         42,679   

Total

   $ 541,468      $ 617,851       $ 566,360   

A significant portion of this business unit’s revenue is transacted in currencies other than the U.S. dollar and therefore the comparison from period to period reflects the impact of changes in currency exchange rates. Changes in exchange rates unfavorably affected the comparison of 2015 to 2014 by $75.8 million.

We believe many of the markets served by Composite Fibers present attractive growth opportunities by capitalizing on evolving consumer preferences, expanding into new or emerging geographic markets, and by gaining market share through superior products and quality. Many of this business’ papers are technically sophisticated, require specialized fibers, and many are extremely lightweight, requiring specifically designed papermaking equipment and production processes. Our proven

 

 

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capability to produce these demanding products and our customer orientation positions us well to compete in these global markets.

During 2013, we completed the acquisition of Dresden, a leading global supplier of nonwoven wallpaper base materials. The Dresden acquisition added another industry-leading nonwovens product line to our Composite Fibers business, and broadened our relationship with leading producers of consumer and industrial products. Dresden produces products with superior performance and characteristics such as dry strip-ability, higher tear resistance, and no material shrinkage or expansion when wet. However, since late 2014, demand for and pricing of Dresden’s products has been adversely impacted by the geopolitical and economic conditions in Russia and Ukraine, countries from which Dresden generates a significant portion of its revenue.

The primary raw materials used in the production of our lightweight papers are abaca pulp, wood pulp and synthetic fibers. Abaca pulp is a specialized pulp with limited sources of availability. Sufficient quantities of abaca pulp and its source fiber are required to support growth in this business unit. Our abaca pulp production process, fulfilled by our Philippine mill, provides a unique advantage to our Composite Fibers 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 four paper making facilities (Germany, France and England), a nonwoven wall cover base mill (Germany), metallizing operations (Wales and Germany) and a pulp mill (the Philippines). The combined attributes of the facilities are summarized as follows:

 

Production
Capacity
(short tons)
     Principal Raw
Material
(“PRM”)
   Estimated Annual
Quantity of PRM
(short tons)

154,000 lightweight
and other

     Abaca pulp    17,300
     Wood pulp    95,000
     Synthetic fiber    22,000

28,000 metallized

     Base stock    28,000

18,000 abaca pulp

     Abaca fiber    27,000

Composite Fibers’ lightweight products are produced using 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. Although the business unit generates all of its steam needed for production, in 2015, it purchased 75% 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. The following chart summarizes key competitors by market segment:

 

Market segment    Competitor

Single serve coffee & tea

   Ahlstrom, Purico, MB Papeles and Zhejiang Kan

Nonwoven wallcovering

   Ahlstrom, Technocell, Neu Kaliss, and Goznak

Composite laminates

   Schweitzer-Maudit, Purico, MB Papeles and Oi Feng

Metallized

   AR Metallizing, Torras Papel Novelis, Vaassen, Galileo Nanotech, and Wenzhou Protec Vacuum Metallizing Co.

Our strategy in Composite Fibers is focused on:

 

   

capitalizing on growing global markets in food & beverage, electrical products and dispersible wipes;

 

   

maximizing capacity utilization provided by the investment in state-of-the-art inclined wire technology to support consistent growth of key markets;

 

   

enhancing product mix across all 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, in 2013 we completed a $50 million investment to expand our inclined wire capacity by nearly 20%, or approximately 10,500 short tons. In addition, the 2014 acquisition of SPO furthers our strategy of capitalizing on the fast-growing electrical market by broadening our electrical papers platform and know-how.

 

 

GLATFELTER 2015 FORM 10-K        3


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Advanced Airlaid Materials    Our Advanced Airlaid Materials business unit is a leading global supplier of highly absorbent cellulose-based airlaid nonwoven materials primarily used to manufacture consumer products for growing global end-user markets. These products include:

 

   

feminine hygiene;

 

   

specialty wipes;

 

   

adult incontinence;

 

   

home care;

 

   

table top; and

 

   

food pads.

Advanced Airlaid Materials serves customers who are industry leading consumer product companies as well as private-label converters for feminine hygiene, adult incontinence and specialty wipes products. We believe this business unit holds leading market share positions in many of the markets it serves. Advanced Airlaid Materials has developed long-term customer relationships through superior quality, customer service, and a reputation for quickly bringing product and process innovations to market.

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

 

    In thousands    2015      2014      2013  

Feminine hygiene

   $ 182,048       $ 216,836       $ 219,222   

Wipes

     22,950         16,002         15,186   

Adult incontinence

     10,720         17,586         5,046   

Home care

     13,345         15,401         14,857   

Other

     15,526         15,848         14,085   

Total

   $ 244,589       $ 281,673       $ 268,396   

A significant portion of this business unit’s revenue is transacted in currencies other than the U.S. dollar and therefore the comparison from period to period reflects the impact of changes in currency exchange rates. Changes in exchange rates unfavorably affected the comparison of 2015 to 2014 by $25.1 million.

The feminine hygiene category accounted for 74% of Advanced Airlaid Material’s revenue in 2015. The majority of sales of this product are to a small group of large, leading global consumer products companies. These markets are considered to be more growth oriented due to population growth in certain geographic regions and changing consumer preferences. In developing regions, demand is also influenced by increases in disposable income and cultural preferences. The airlaid wipes market

presents attractive growth opportunities and as a result, we are investing approximately $80 million over the next two years to build a new advanced airlaid facility in the United States.

The Advanced Airlaid Materials business unit operates state-of-the-art facilities in Falkenhagen, Germany and Gatineau, 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 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      75,000   

In addition to the cost of critical raw materials, production cost is impacted by energy. Advanced Airlaid Materials purchases substantially all of the electricity and natural gas used in its operations. Approximately 90% of this business unit’s revenue is earned under contracts with pass-through provisions directly related to the price of key raw material 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. This business unit’s airlaid material production employs multi-bonded and thermal-bonded airlaid technologies as opposed to other methods such as hydrogen-bonding. 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 festooning technology provides converting and product packaging which supports efficiency optimization by the customers converting processes. 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 following summarizes this business unit’s key competitors:

 

Market segment    Competitor

Airlaid products

   Georgia-Pacific LLC, Fitesa, McAirlaid’s GmbH, Domtar
 

 

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The global 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 as well as companies distributing through private label arrangements;

 

   

capitalizing on our product and process innovation capabilities;

 

   

expanding geographic reach of markets served;

 

   

optimizing the use of existing production capacity; and

 

   

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

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

 

   

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

 

   

Engineered products for high speed ink jet printing, office specialty products, greeting cards, and other niche specialty applications;

 

   

Envelope and converting papers primarily utilized for transactional and direct mail envelopes; and

 

   

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

This business unit produces both commodity products and higher-value-added specialty products. Specialty Papers’ revenue composition by market consisted of the following for the years indicated:

 

    In thousands    2015     2014      2013  

Carbonless & forms

   $ 349,831      $ 376,959       $ 369,618   

Engineered products

     190,943        194,189         184,913   

Envelope & converting

     178,067        183,194         175,928   

Book publishing

     152,647        144,744         153,054   

Other

     3,538        3,805         4,346   

Total

   $ 875,026      $ 902,891       $ 887,859   

Many of the market segments served by Specialty Papers are characterized by declining demand resulting in excess capacity, lower operating rates and pricing pressure. As a result, over the past several years, certain producers have closed, reduced or repurposed production capacity in

an attempt to bring supply balance to the market. In addition, foreign producers have created additional imbalance by shipping product to the U.S. when market pricing is favorable or the U.S. dollar is stronger. Maintaining the supply and demand balance will require the industry to continually remove capacity sufficient to match declining demand.

Despite our exposure to declining markets, in each of the past eleven years, we have outperformed the broader uncoated free sheet market in terms of shipping volume. We have been successful at maintaining this business unit’s shipments by leveraging the flexibility of our asset base to respond to new product and new business development opportunities, efficiently responding to changing customer demands and delivering superior customer service.

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, business forms, and other value-added specialty engineered products. Specialty Papers’ envelope papers market is also declining, however we have leveraged our customer service capabilities and geographic locations to grow our market share in each of the last several years.

Specialty Papers’ highly technical engineered products include high speed ink jet printing products, office specialty products, greeting cards, packaging, casting, release, transfer, playing card, postal, FDA-compliant food and other niche specialty 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)

820,000

  Pulpwood   2,327,250
    Wood-and other pulps      708,000
 

 

GLATFELTER 2015 FORM 10-K        5


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This business unit’s pulp mills have a combined pulp making capacity of 615,000 tons of bleached pulp per year. The principal raw material used to produce 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.

The Spring Grove facility includes five uncoated paper machines as well as an off-line combi-blade coater and a Specialty Coater which together provide annual production capacity for coated paper of approximately 65,000 tons. 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 approximately 126,000 tons.

In addition to critical raw materials, the cost to produce Specialty Papers’ products is influenced by energy. 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, it purchased approximately 25% of its electricity needed for the Chillicothe, OH mill in 2015. The facilities’ source of fuel is primarily coal and, to a lesser extent, natural gas. As discussed more fully under “Environmental Matters,” in order to comply with new air quality regulations, we will be implementing modifications that will convert certain boilers to burn natural gas rather than coal. As a result, the consumption of natural gas will increase significantly in late 2016 and beyond.

In Specialty Papers’ markets, competition is product line specific due to the necessity for technical expertise and specialized manufacturing for certain products. The following chart summarizes key competitors by market segment:

 

Market segment    Competitor

Carbonless paper

   Appvion, Inc., and to a lesser extent, Fibria Celulose, Koehler Paper, Mitsubishi Paper, Nekoosa Coated Products and Asia Pulp and Paper Co.

Engineered products

   Specialty papers divisions of International Paper, Domtar Corp., Packaging Corp, and Sappi Limited, among others.

Envelope & converting

   Domtar and International Paper

Book publishing

   Domtar Corp., North Pacific Paper (NORPAC), Resolute Forest and others

Customer 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:

 

   

new product and new business development capabilities to ensure optimal utilization of our capacity and to maximize margins;

 

   

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

 

   

utilizing ongoing continuous improvement methodologies to ensure operational efficiencies and asset reliability; and

 

   

maintaining superior customer service.

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 24 including geographic revenue and long-lived asset financial information.

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 2015, 2014 and 2013.

Capital Expenditures    Our business is capital intensive and requires significant 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 $99.9 million, $66.0 million and $103.0 million, in 2015, 2014 and 2013, respectively. For 2016, capital expenditures are estimated as follows:

 

    In millions       

Normal capital expenditures

  $ 70             $ 80   

Major Projects

     

AMBU capacity expansion

    40               45   

SPBU environmental compliance

    40               45   

Total

  $ 150             $ 170   

Environmental Matters    We are subject to various federal, state and local laws and regulations intended to protect the environment as well as human

 

 

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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.

We have incurred and will incur additional material capital costs to comply with upcoming 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). These rules require process modifications and/or upgrades of air pollution controls on boilers at two of our facilities. We have begun converting or replacing five coal-fired boilers to natural gas and upgrading site infrastructure to accommodate the new boilers, including connecting to gas supply. The total cost of these projects is estimated at $85 million to $90 million, of which $33.0 million has been incurred through the end of 2015. The balance of the related spending should be substantially completed in 2016.

We are a defendant in the Fox River environmental matter. Although this matter is the subject of extensive and ongoing litigation, during 2015, we spent $9.7 million for remediation activities, and possibly may spend a similar amount in 2016. For a more complete discussion of this matter, see Item 8 – Financial Statements and Supplementary Data – Note 23.

Employees    As of December 31, 2015, we employed 4,375 people worldwide, of which approximately 75% are unionized. The United Steelworkers International Union and the Office and Professional Employees International Union represents 1,446 hourly employees at our Chillicothe, OH and Spring Grove, PA facilities under labor contracts expiring in August 2016 for Chillicothe and January 2017 for Spring Grove. 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 website includes the Company’s Governance Principles, Code of Business Conduct, and biographies of our Board of Directors and Executive Officers. In addition, the website includes charters of 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.

 

ITEM 1A RISK FACTORS

Our business and financial performance may be adversely affected by a weak 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. Our results could be adversely affected if economic conditions weaken or fail to improve. In the event of significant currency weakening in the countries into which our products are sold, demand for or pricing of our products could be adversely impacted. 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. As a result, we may be forced to take machine downtime. The economic environment may also cause customer insolvencies which may result in their inability to satisfy their financial obligations to us. These conditions are beyond our control and may have a significant impact on our sales and results of operations.

Approximately $75 million of our revenue in 2015 was earned from customers located in Ukraine, Russia and members of the Commonwealth of Independent States (also known as “CIS”). Uncertain geo-political and economic conditions in this region and weak currencies have and may continue to cause weak demand for our products as well as volatility in our customers buying patterns.

Approximately 28% of our net sales in 2015 were shipped to customers in Europe, the demand for which is dependent on economic conditions in this area, or to the extent such customers do business outside of Europe, in other regions of the world. Uncertain economic conditions in this region may cause weakness in demand for our products as well as volatility in our customers buying patterns.

 

 

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

A significant proportion of our revenue is generated from operations outside of the United States. We own and operate manufacturing facilities in Canada, Germany, France, the United Kingdom and the Philippines. A significant portion of our business is transacted in currencies other than the U.S. dollar such as euros, British pound, Canadian dollars or Philippine peso. Our euro denominated revenue exceeds euro expenses by approximately 120 million. With respect to the British pound, Canadian dollar, and Philippine peso, we have greater outflows than inflows of these currencies, although to a lesser degree. As a result, we are exposed to changes in currency exchange rates and such changes could be significant.

Economic weakness, the potential inability of certain European countries to continue to service their sovereign debt obligations, and the related actions of this region’s central banks has caused, and could continue to cause, the value of the euro to weaken. As a result, our operating results could be negatively impacted. 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. For example, approximately $75 million of our revenue in 2015 was earned from shipments to customers located in Ukraine, Russia and members of the CIS. Although these sales are denominated in euros, a significant weakening of the customers’ local currencies has and may continue to adversely affect our revenue, our customers’ credit risk and our results of operation.

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 Specialty Papers’ locations are vertically integrated manufacturing facilities that can generate approximately 85% of their annual pulp requirements.

Our Philippine mill purchases abaca fiber to produce abaca pulp, a key material used to manufacture paper for single-serve coffee, tea and technical specialty products at our Gernsbach, Scaër, and Lydney facilities. At certain times, 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, although we are currently converting our boilers to burn natural gas, coal is currently a principal source of fuel for both the Spring Grove and Chillicothe facilities. Natural gas is used as a source of fuel at Chillicothe and our Composite Fibers and Advanced Airlaid Materials business units’ facilities.

Government rules, regulations and policies have an impact on the cost of certain energy sources, particularly for our European operations. We currently benefit from a number of government sponsored programs related to, among others, green energy or renewable energy initiatives designed to mitigate the cost of electricity to larger industrial consumers of power. Any reduction in the extent of government sponsored incentives may adversely affect the cost ultimately borne by our operations.

Although we have contractual cost pass-through arrangements with certain Advanced Airlaid Materials’ 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 if existing agreements limit price increases. If price adjustments significantly trail increases in raw materials or energy prices, our operating results could be adversely affected.

 

 

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

Specialty Papers    The primary market for our Specialty Papers business unit is the United States, which has been adversely affected by capacity exceeding the demand for products, increased imports from foreign competitors and by declining uncoated free sheet demand. As a result, the industry has taken steps to reduce 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.

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 effect on our operating and financial results.

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

 

   

the entry of new competitors into the markets we serve;

 

   

the prevalence of imported product, particularly uncoated free sheet, into the U.S.;

 

   

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

 

   

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;

 

   

our inability to maintain the cost efficiency of our facilities; and

 

   

the cost of regulatory environmental compliance requirements.

Composite Fibers and Advanced Airlaid Materials    The global markets in which we compete, although growing, are not as large as the markets for Specialty Papers. As a result, our ability to compete is more sensitive to and may be adversely impacted by the following:

 

   

the entry of new competitors into the markets we serve;

 

   

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; and

 

   

technological advances or changes that impact production of our products.

The impact of any significant changes may result in our inability to effectively compete in the markets in which we operate, and as a result our sales and operating results would be adversely affected.

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

Our business strategy is market focused and includes investments in developing new products to meet the changing needs of our customers or serve new 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;

 

 

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

 

   

price our products competitively;

 

   

differentiate our products from our competitors’ products; and

 

   

invest efficiently in research and development activities.

Our inability to develop new products or new business opportunities 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. To comply with environmental laws and regulations, we have incurred, and will continue to incur, substantial capital and operating expenditures. The Clean Air Act, and similar regulations, will impose significant compliance costs or require significant capital expenditures. Compliance with the Clean Air Act will require process modifications and/or installation of air pollution controls on boilers at two of our facilities, as well as connecting to gas pipelines. Because of the complexities of this initiative, our inability to successfully complete all aspects of the project could adversely impact the expenditures required or our results of operations.

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. See Item 1 – Environmental Matters for an additional discussion of expected costs to comply with environmental regulations.

We have exposure to potential liability for remediation and other costs related to the presence of polychlorinated biphenyls (PCBs) in the lower Fox River on which our former Neenah, Wisconsin mill was located. During 2015, we incurred $9.7 million for remediation activities in the downstream portion of the river and it is possible we may incur a similar amount in 2016. While we believe this to be a reasonable estimation of our current exposure, there can be no assurance that we will not be required to provide significant contributions to fund remediation efforts in the near term and/or 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 23.

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.

The majority of Advanced Airlaid Materials’ net sales of hygiene products are from one customer. In addition, sales to the feminine hygiene market accounted for 74% of Advanced Airlaid Materials’ net sales in 2015 and sales are concentrated within a small group of large customers. The loss of the large customer or a decline in sales of hygiene products could have a material adverse effect on this business’s operating results. Our ability to effectively compete could be affected by technological production alternatives which could provide substitute products into this market segment. Customers in the airlaid nonwoven 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.

 

 

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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 any of our facilities, we could suffer significant lost production which could impair our ability to satisfy customer demands.

Natural disasters, such as earthquakes, hurricanes, typhoons, 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 two 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 or may substantially exceed the limits of our insurance 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 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 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. 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 the abaca pulp 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 affect our ability to meet customer demands for our products and 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, if at all, from alternative sources at a reasonable price. Further, there is no assurance the performance of such alternative materials will be satisfy customer performance requirements. 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.

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

 

 

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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.

We are subject to cyber-security risks related to unauthorized or malicious access to sensitive customer, vendor, company or employee information as well as to the technology that supports our operations and other business processes.

Our business operations rely upon secure systems for mill operations, and data capture, processing, storage and reporting. Although we maintain appropriate data security and controls, our information technology systems, and those of our third party providers, could become subject to cyber attacks. Systems such as ours are inherently exposed to cyber-security risks and potential attacks. The result of such attacks could result in a breach of data security and controls. Such a breach of our network, systems, applications or data could result in operational disruptions or damage or information misappropriation including, but not limited to, interruption to systems availability, denial of access to and misuse of applications required by our customers to conduct business with us, denial of access to the applications we use to plan our operations, procure materials, manufacture and ship products and account for orders, theft of intellectual knowhow and trade secrets, and inappropriate disclosure of confidential company, employee, customer or vendor information, could stem from such incidents.

Any of these operational disruptions and/or misappropriation of information could adversely affect our results of operations, create negative publicity and could have a material effect on our business.

We operate in and are subject to taxation from numerous U.S. and foreign jurisdictions.

The multinational nature of our business subjects us to taxation in the U.S and numerous foreign jurisdictions. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. Our effective tax rates could be affected by changes in tax laws or their interpretation or changes in the mix of earnings in jurisdictions with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities. For example, the European Commission has

opened formal investigations to examine whether decisions by the tax authorities in certain European countries comply with European Union rules on state aid. The outcome of the European Commission’s investigations could require changes to existing tax rulings that, in turn, could have an impact on our income taxes and results of operations.

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. During 2016, we expect our use of cash for capital expenditures, strategic investments and environmental compliance projects will exceed cash generated from operations. 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.

 

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 are under lease arrangements including our metallized paper production facility located in Caerphilly, Wales, office and warehouse space in Moscow, Russia, Souzou, China and our corporate offices in York, Pennsylvania. 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.

 

 

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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, except with respect to the Fox River matter referred to below, 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.

We are one of several defendants in a significant environmental matter relating to contamination in the Fox River and Bay of Green Bay in Wisconsin. For a discussion this matter, see Item 8 – Financial Statements and Supplementary Data – Note 23.

EXECUTIVE OFFICERS

The following table sets forth certain information with respect to our executive officers and senior management as of February 26, 2016.

 

Name    Age      Office with the Company
Dante C. Parrini      51      

Chairman and Chief Executive Officer

John P. Jacunski      50      

Executive Vice President and Chief Financial Officer

Christopher W. Astley      43      

Senior Vice President & Business Unit President, Advanced Airlaid Materials

Brian E. Janki      43      

Senior Vice President & Business Unit President, Specialty Papers

Martin Rapp      56      

Senior Vice President & Business Unit President, Composite Fibers

William T. Yanavitch II      55      

Senior Vice President, Human Resources and Administration

David C. Elder      47      

Vice President, Finance

Kent K. Matsumoto      56      

Vice President, General Counsel and Corporate Secretary

Mark A. Sullivan      60      

Vice President

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 was promoted to Executive Vice President and Chief Financial Officer in February 2014. He joined us in October 2003 and served as Vice President and Corporate Controller. In July 2006 he was promoted to Senior Vice President and Chief Financial Officer. 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 was named Senior Vice President & Business Unit President, Advanced Airlaid Materials in January 2015. He joined us in August 2010 as Vice President, Corporate Strategy and was promoted to Senior Vice President in February 2014. Prior to joining us, he was an entrepreneur leading a privately held business from 2004 until 2010. Prior to that Mr. Astley held positions with Accenture, a global management consulting firm, and The Coca-Cola Company.

Brian E. Janki serves as Senior Vice President & Business Unit President, Specialty Papers. Prior to joining us in August 2013 Mr. Janki was employed by Greif as their Vice President & General Manager, Rigid Industrial Packaging & Services. During his twelve years with Greif, Mr. Janki held leadership positions including profit/loss responsibilities for two business units, global responsibility for supply chain and sourcing, and transformational assignments including global oversight of the implementation of the Greif Business System.

Martin Rapp serves as Senior Vice President & Business Unit President, Composite Fibers. Mr. Rapp joined us in August 2006 and has lead the Composite Fibers business unit since that time. Prior to this, he was Vice President and General Manager of Avery Dennison’s Roll Materials Business in Central and Eastern Europe since August 2002.

William T. Yanavitch II was promoted to Senior Vice President Human Resources and Administration in February 2014. Since joining us in July 2000, he has served as Vice President, Human Resources. Prior to joining us he worked for Dentsply International and Gould Pumps Inc. in various leadership capacities.

David C. Elder was named 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

 

 

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Glatfelter in January 2006. Mr. Elder was previously Corporate Controller for YORK International Corporation.

Kent K. Matsumoto was appointed Vice President, General Counsel and Corporate Secretary in October 2013. Mr. Matsumoto joined us in June 2012 as Assistant General Counsel and also served as interim General Counsel from March 2013 to October 2013. From July 2008 until February 2012, he was Associate General Counsel for Wolters Kluwer.

Mark A. Sullivan serves as a Vice President. Previously, he was Vice President, Global Supply Chain and Information Technology since his promotion in November 2012. Mr. Sullivan joined us in December 2003 as Chief Procurement Officer and he was appointed Vice President, Global Supply Chain in February 2005.

 

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

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. We compare our stock performance to the S&P Small Cap 600 Paper Products index comprised of us, 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 in the peer group

(including reinvestment of dividends) was $100 on December 31, 2010 and charts it through December 31, 2015.

 

 

LOGO

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  

2015

        

Fourth

   $ 20.09       $ 16.28       $ 0.12   

Third

     22.47         16.56         0.12   

Second

     27.40         21.81         0.12   

First

     27.58         22.18         0.12   

2014

        

Fourth

   $ 27.18       $ 21.38       $ 0.11   

Third

     27.19         21.94         0.11   

Second

     27.54         24.07         0.11   

First

     32.00         26.52         0.11   

As of February 24, 2016, we had 1,064 shareholders of record.

 

 

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ITEM 6 SELECTED FINANCIAL DATA

 

 

 

As of or for the year ended December 31

Dollars in thousands, except per share

    2015         2014         2013 (1)        2012         2011   

Net sales

  $ 1,661,084       $ 1,802,415       $ 1,722,615      $ 1,577,788       $ 1,603,154   

Energy and related sales, net

    5,664         7,927         3,153        7,000         9,344   

Total revenue

    1,666,748         1,810,342         1,725,768        1,584,788         1,612,498   
            

Gains on dispositions of plant, equipment and timberlands, net

    21,113         4,861         1,726        9,815         3,950   
 

Net income

  $ 64,575       $ 69,246       $ 67,158      $ 59,379       $ 42,694   

Earnings per share

            

Basic

  $ 1.49       $ 1.60       $ 1.56      $ 1.39       $ 0.94   

Diluted

    1.47         1.57         1.52        1.36         0.93   
 

Total assets

  $ 1,503,624       $ 1,561,504       $ 1,678,410      $ 1,242,985       $ 1,136,925   

Total debt

    363,870         404,612         442,325        250,000         227,000   
 

Shareholders’ equity

    663,247         649,109         684,476        539,679         490,404   

Cash dividends declared per common share

    0.48         0.44         0.40        0.36         0.36   
 

Depreciation, depletion and amortization

    63,236         70,555         68,196        69,500         69,313   

Capital expenditures

    99,889         66,046         103,047        58,752         64,491   

Net tons sold

    1,051,911         1,059,881         1,029,819        969,833         960,915   

Number of employees

    4,375         4,516         4,403        4,258         4,274   

 

(1) On April 30, 2013, we acquired Dresden Papier GmbH, the results of which are included prospectively from the acquisition date, including $101.8 million of net sales and $18.3 million of operating income.

 

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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 unplanned market-related downtime, variations in product pricing, or product substitution;

 

ii. 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;

 

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

 

iv. geopolitical events, including the impact of conflicts such as Russia and Ukraine;

 

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

 

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

 

vii. changes in energy-related costs and commodity raw materials with an energy component;
viii. the impact of unplanned production interruption;

 

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

 

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

 

xi. the gain or loss of significant customers and/or on-going viability of such customers;

 

xii. 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;

 

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

 

xiv. the impact of war and terrorism;

 

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

 

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

 

xvii. our ability to finance, consummate and integrate acquisitions.

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

 

   

Composite Fibers with revenue from the sale of single-serve tea and coffee filtration papers, nonwoven wall covering materials, metallized papers, composite laminates papers, and many technically special papers including substrates for electrical applications;

 

   

Advanced Airlaid Materials with revenue from the sale of airlaid nonwoven fabric-like materials used in feminine hygiene and adult incontinence products, wipes, and other airlaid applications; and

 

   

Specialty Papers with revenue from the sale of papers for carbonless and other forms, envelopes, book publishing, and engineered products such as papers for high-speed ink jet printing, office specialty products, greeting cards, packaging, casting, release, transfer, playing card, postal, FDA-compliant food and beverage applications, and other niche specialty applications.

 

 

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RESULTS OF OPERATIONS

2015 versus 2014

Overview    Net income for 2015 was $64.6 million, or $1.47 per diluted share, compared with $69.2 million, or $1.57 per diluted share, in 2014. On an adjusted earnings basis, a non-GAAP measure that excludes non-core business items discussed below, earnings per share were $1.34 compared with $1.55 in 2014. The year-over-year comparison of results of operations reflects the adverse impact of i) the stronger U.S. dollar on our euro-denominated businesses; ii) weaker demand and pricing for nonwoven wallcover products primarily due to economic conditions in Russia and Ukraine; iii) pricing pressures in our Specialty Papers business; and iv) weaker demand for certain Advanced Airlaid Materials’ products in the first half of 2015.

During 2015, we implemented cost reduction and continuous improvement initiatives that generated $31 million of savings. Our workforce was reduced by 3.1%.

We generated $133.7 million of cash flow from operations compared with $99.6 million in 2014. We also returned additional cash to our shareholders in the form of a 9% increase in the quarterly dividend beginning with the 2015 first quarter dividend payment. This was the third consecutive year in which the dividend was increased.

We also announced a plan to invest $80 million to build a new production facility in the United States in the Advanced Airlaid Materials business (“AMBU”). Our plan to build this new facility is in direct response to customer needs for increased capacity in a tightening North American airlaid market.

On October 1, 2014, we completed the acquisition of Spezialpapierfabrik Oberschmitten GmbH (“SPO”) for $8.0 million in cash. SPO’s results are reported as part of the Composite Fibers business unit prospectively from the acquisition date. It primarily produces highly technical papers for use in a wide range of capacitors used in consumer and industrial products; insulation papers for cables and transformers; and materials for industrial power inverters, electromagnetic current filters and electric rail traction.

The following table sets forth summarized results of operations:

 

    Year ended December 31  

In thousands, except per share

    2015         2014   

Net sales

  $ 1,661,084       $ 1,802,415   

Gross profit

    202,965         235,154   

Operating income

    96,372         106,780   

Net income

    64,575         69,246   

Earnings per diluted share

    1.47         1.57   

Consolidated net sales for year ended December 31, 2015 were $1,661.1 million compared with $1,802.4 million for 2014. On a constant currency basis, net sales declined $40.3 million, or 2.2 percent. Shipping volumes declined less than one percent.

In addition to the results reported in accordance with GAAP, we evaluate our performance using adjusted net income and adjusted earnings per diluted share. We disclose this information so that investors can evaluate our performance exclusive of certain unique or unusual items that impact the comparability of results from period to period as it allows them to understand underlying operating trends and cash flow generation.

Adjusted earnings per diluted share is calculated by dividing adjusted net income by diluted weighted-average shares outstanding. Adjusted earnings and adjusted earnings per diluted share are considered measures not calculated in accordance with GAAP, and therefore are non-GAAP measures. These non-GAAP measures may differ from other companies. The non-GAAP financial information should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with GAAP. The following table sets for the reconciliation of net income to adjusted earnings for the years ended December 31, 2015 and 2014:

 

In thousands, except per share

    
 
After-tax
amounts
  
  
   
 
Diluted
EPS
  
  

2015

    

Net income

   $ 64,575      $ 1.47   

Timberland sales and related costs

     (14,652     (0.33

Fox River environmental matter

     6,222        0.14   

Workforce efficiency charges

     1,768        0.04   

Asset impairment charge

     857        0.02   

Acquisition and integration related costs

     126          

AMBU capacity expansion costs

     30          

Adjusted earnings (non-GAAP)

   $ 58,926      $ 1.34   
  

 

 

 

2014

    

Net income

   $ 69,246      $ 1.57   

Timberland sales and related costs

     (2,995     (0.07

Workforce efficiency charges

     373        0.01   

Asset impairment charge

     2,356        0.05   

Acquisition and integration related costs

     603        0.01   

Alternative fuel mixture/Cellulosic biofuel credits

     (1,115     (0.03

Adjusted earnings (non-GAAP)

   $ 68,468      $ 1.55   
 

 

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Table of Contents

The sum of individual per share amounts set forth above may not agree to adjusted earnings per share due to rounding.

Adjusted net income consists of net income determined in accordance with GAAP adjusted to exclude the impact of the following:

Timberland sales and related costs. These adjustments exclude gains from the sales of timberlands as these items are not considered to be part of our core business, ongoing results of operations or cash flows. These adjustments are irregular in timing and amount and may significantly impact our operating performance. As such, these items may not be indicative of past or future performance of the Company and therefore are excluded for comparability purposes.

Fox River environmental matter. This adjustment reflects a charge incurred to increase our reserve for estimated costs to remediate environmental contamination at the Fox River site. These costs are irregular in timing and as such may not be indicative of our past or future performance.

Workforce efficiency charges. These adjustments include costs that are directly related to

actions undertaken to reduce costs and improve operating efficiencies. Such costs were specifically incurred as part of our initiative to reduce global headcount as part of a more broad based cost reduction program announced at the end of 2014.

Asset impairment charges. This adjustment represents a non-cash charge required to adjust to its estimated fair value the carrying value of a trade name intangible asset. Charges of this nature are irregular in timing and as such may not be indicative of our past and future performance.

Acquisition and integration related costs. These adjustments include costs directly related to the consummation of the acquisition process and those related to integrating recently acquired businesses. These costs are irregular in timing and as such may not be indicative of our past or future performance.

Alternative fuel mixture/Cellulosic biofuel credits. These adjustments reflect the release of reserves for uncertain tax position due to the lapse of statutes of limitation.

AMBU capacity expansion costs. These adjustments reflect costs incurred directly related to the start-up of a new production facility for AMBU.

 

 

Business Unit Performance

 

    Year ended December 31  

Dollars in millions

    Composite Fibers        
 
Advanced Airlaid
Materials
  
  
     Specialty Papers        
 
Other and
Unallocated
  
  
     Total   
    2015      2014      2015      2014      2015      2014      2015      2014      2015      2014  

Net sales

  $ 541.5       $ 617.9       $ 244.6       $ 281.7       $ 875.0       $ 902.9       $       $       $ 1,661.1       $ 1,802.4   

Energy and related sales, net

                                    5.7         7.9                         5.7         7.9   

Total revenue

    541.5         617.9         244.6         281.7         880.7         910.8                         1,666.7         1,810.3   

Cost of products sold

    434.4         498.0         215.7         247.6         804.5         821.8         9.2         7.8         1,463.8         1,575.2   

Gross profit (loss)

    107.1         119.9         28.9         34.1         76.2         89.0         (9.2      (7.8      203.0         235.2   

SG&A

    45.7         51.6         7.6         8.8         43.3         50.4         31.0         22.4         127.7         133.2   

Gains on dispositions of plant, equipment and timberlands, net

                                                    (21.1      (4.9      (21.1      (4.9

Total operating income (loss)

    61.4         68.3         21.3         25.3         32.9         38.6         (19.1      (25.3      96.4         106.8   

Non-operating expense

                                                    (17.8      (19.4      (17.8      (19.4

Income (loss) before income taxes

  $ 61.4       $ 68.3       $ 21.3       $ 25.3       $ 32.9       $ 38.6       $ (36.9    $ (44.7    $ 78.6       $ 87.4   

Supplementary Data

                            

Net tons sold (thousands)

    153.8         157.3         96.0         99.7         802.2         802.9                         1,051.9         1,059.9   

Depreciation, depletion and amortization

  $ 26.2       $ 29.7       $ 8.8       $ 9.1       $ 26.0       $ 29.9       $ 2.2       $ 1.9       $ 63.2       $ 70.6   

Capital expenditures

    26.8         23.9         7.8         7.6         63.5         32.1         1.8         2.4         99.9         66.0   

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

 

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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.

Management evaluates the performance of the business units based on results of operations of the business units before pension expense, certain corporate level costs, and the effects of certain gains or losses not considered to be related to the core business operations. 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.” In the evaluation of business unit results, management does not use any measures of total assets. The information set forth above 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.

Sales and Costs of Products Sold

 

    Year ended December 31        

In thousands

    2015        2014        Change   

Net sales

  $ 1,661,084      $ 1,802,415      $ (141,331

Energy and related sales, net

    5,664        7,927        (2,263

Total revenues

    1,666,748        1,810,342        (143,594

Costs of products sold

    1,463,783        1,575,188        (111,405

Gross profit

  $ 202,965      $ 235,154      $ (32,189

Gross profit as a percent of Net sales

    12.2     13.0        

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

 

    Year ended December 31  
Percent of Total   2015     2014  

Business Unit

     

Composite Fibers

    32.6     34.3

Advanced Airlaid Material

    14.7        15.6   

Specialty Papers

    52.7        50.1   

Total

    100.0     100.0

Net sales    declined by $141.3 million and totaled $1,661.1 million and $1,802.4 million, in 2015 and 2014, respectively. Currency translation unfavorably impacted the year-over-year comparison by $101.0 million reflecting a significantly stronger U.S. dollar.

Composite Fibers’    net sales declined $76.4 million, or 12.4%, due to $75.8 million of unfavorable currency translation and $10.2 million from lower selling prices. Shipping volumes declined 2.2% due to a 19.8% decline in wallcover products which more than offset solid gains in all other segments The weakness in sales to the wallcover segment is directly related to economic conditions in Russia and Ukraine, a region that historically had accounted for approximately 50% of sales of this business unit’s wallcover products.

Composite Fibers’ operating income for 2015 decreased $6.9 million to $61.4 million. The primary drivers are summarized in the following chart:

 

 

 

LOGO

Advanced Airlaid Materials’    net sales decreased $37.1 million due to $25.1 million of unfavorable currency translation and a 3.7% decline in shipping volumes.

 

 

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Advanced Airlaid Materials’ operating income for 2015 declined $4.0 million compared to 2014. The primary drivers are summarized in the following chart:

 

 

LOGO

The adverse impact from lower shipping volumes reflects softer market demand in the first half of the year. The amount set forth for “Operations & other” includes general wage cost inflation, $2.6 million of market related downtime as well as lost production associated with machine upgrades.

Specialty Papers’    net sales declined $27.9 million, or 3.1% primarily due to $11.3 million from lower selling prices, slightly lower shipping volumes and unfavorable mix changes.

This business unit’s operating income totaled $32.9 million in 2015, a $5.7 million decline from $38.6 million a year ago. The primary drivers are summarized in the following chart:

 

 

LOGO

We sell excess power generated by the Spring Grove, PA facility. The following table summarizes this activity for 2015 and 2014:

 

    Year ended December 31      

In thousands

    2015         2014         Change   

Energy sales

  $ 5,315       $ 11,886       $ (6,571

Costs to produce

    (4,428      (6,204      1,776   

Net

    887         5,682         (4,795

Renewable energy credits

    4,777         2,245         2,532   

Total

  $ 5,664       $ 7,927       $ (2,263

Renewable energy credits (“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 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 additional sales of RECs in future periods.

Energy and related sales decreased $2.3 million in the comparison as severe weather conditions in early 2014 resulted in higher selling prices for excess power and a boiler outage in the first quarter of 2015 reduced power sales.

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 $40.2 million in 2015 compared with $30.2 million in 2014. The increase was primarily due to a $10.0 charge to increase our reserve for the Fox River environmental matter as well as related legal costs which were partially offset by benefits from corporate cost reduction initiatives.

Asset impairment charges    During 2015 and 2014, in connection with our annual test of potential impairment of indefinite lived intangible assets, we recorded a non-cash asset impairment charge of $1.2 million and $3.3 million, respectively, related to a trade name intangible asset acquired in connection with our Composite Fibers business unit’s 2013 Dresden acquisition. The charges were due to changes in the estimated fair value of the trade name, primarily driven by lower forecasted revenues associated with the business, an increase in discount rates related to Dresden’s business in Russia and Ukraine and this region’s political and economic instability. The charges are expenses not allocated to a business unit and are recorded in the accompanying consolidated statements of income under the caption “Selling, general and administrative expenses.”

 

 

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Pension Expense    Pension expenses are not allocated to a business unit. The following table summarizes the amounts of pension expense recognized for the periods indicated:

 

    Year ended December 31         

In thousands

    2015         2014         Change   

Recorded as:

       

Costs of products sold

  $ 7,043       $ 6,605       $ 438   

SG&A expense

    2,038         55         1,983   

Total

  $ 9,081       $ 6,660       $ 2,421   

The amount of pension expense recognized each year is dependent on various actuarial assumptions and certain other factors, including discount rates, mortality, and the fair value of our pension assets. Pension expense in 2016 is expected to be approximately $4.6 million compared with $9.1 million in 2015. The change is primarily due to higher discount rates partially offset by a lower assumed long term rate of return on plan assets.

Gain on Sales of Plant, Equipment and Timberlands, net    During the years ended December 31, 2015 and 2014, we completed the following sales of assets:

 

Dollars in thousands

     Acres        Proceeds         Gain   

2015

       

Timberlands

     15,628      $ 23,917       $ 20,867   

Other

     n/a        542         246   

Total

           $ 24,459       $ 21,113   

2014

       

Timberlands

     2,753      $ 5,062       $ 4,855   

Other

     n/a        10         6   

Total

           $ 5,072       $ 4,861   

Income taxes    For 2015, we recorded a provision for income taxes of $14.0 million on pretax income of $78.6 million. The comparable amounts in 2014 were an income tax provision of $18.1 million on $87.4 million of pretax income. The lower effective rate in 2015 is largely driven by a greater proportion of earnings generated in lower tax foreign jurisdictions relative to the U.S. due, in part, to a $10.0 million increase in our reserve for the Fox River matter. Income tax expense in 2014 includes a $4.2 million benefit from the reduction of deferred tax liabilities and release of valuation allowances related to the restructuring of non-U.S. legal entities.

Foreign Currency     We own and operate facilities in Canada, Germany, France, the United Kingdom and the Philippines. The functional currency of our Canadian operations is the U.S. dollar. However, in Germany and France it is the Euro, in the UK, it is the British Pound Sterling, and in the Philippines the functional

currency is the Peso. Our euro denominated revenue exceeds euro expenses by approximately 120 million. For the year ended December 31, 2015, the average currency exchange rate declined to 1.11 U.S. dollars to 1.00 euro compared with 1.33 to 1.00 for 2014. With respect to the British Pound Sterling, Canadian dollar, and Philippine Peso, we have greater outflows than inflows of these currencies, although to a lesser degree. As a result, particularly with respect to the euro, we are exposed to changes in currency exchange rates and such changes could be significant. 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 for 2015:

 

In thousands

   
 
Year ended
December 31, 2015
  
  
    Favorable
(unfavorable)
 

Net sales

  $ (104,996

Costs of products sold

    84,156   

SG&A expenses

    8,436   

Income taxes and other

    2,565   

Net income

  $ (9,839

The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2015 were the same as 2014. It does not include the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.

2014 versus 2013

Overview     Our net income in 2014 was $69.2 million, or $1.57 per diluted share, compared with $67.2 million, or $1.52 per diluted share, in 2013. On an adjusted earnings basis, a non-GAAP measure that excludes non-core business items discussed below, earnings per diluted share increased to $1.55 compared with $1.40 in 2013. Adjusted earnings per share increased 10.7% driven by improved results from our growth businesses, as well as lower pension expense. Our results were adversely impacted by significant costs related to pulp mill performance issues in Ohio, severe weather conditions and higher costs related to annual maintenance outages. In addition, our Composite Fibers business was adversely impacted by macro-level challenges, including the fluid economic and political situation in Russia and Ukraine, weak economic growth in Europe as well as increased competitive pressures and higher market related downtime.

 

 

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On October 1, 2014, we completed the acquisition of SPO for $8.0 million in cash. SPO’s results are reported as part of the Composite Fibers business unit prospectively from the acquisition date.

Effective April 30, 2013, we completed the acquisition of Dresden Papier GmbH (“Dresden”) for $211 million, net of cash acquired. Our reported results include Dresden for a full year of 2014 and, in 2013, only prospectively from the acquisition date.

The following table sets forth summarized results of operations:

 

    Year ended December 31  

In thousands, except per share

    2014        2013   

Net sales

  $ 1,802,415      $ 1,722,615   

Gross profit

    235,154        218,660   

Operating income

    106,780        86,519   

Net income

    69,246        67,158   

Earnings per diluted share

    1.57        1.52   

Our results reflect benefits from our two growth businesses as they delivered a combined 8% increase in net sales. Composite Fibers, driven by the previously acquired Dresden business, and Advanced Airlaid Materials reported improved operating profit of 9% and 18%, respectively, over the prior year period.

In addition to the results reported in accordance with GAAP, we evaluate our performance using adjusted net income and adjusted earnings per diluted share. We disclose this information so that investors can evaluate our performance exclusive of certain items that impact the comparability of results from period to period as it allows them to understand underlying operating trends and cash flow generation.

Adjusted earnings per diluted share is calculated by dividing adjusted net income by diluted weighted-average shares outstanding. Adjusted earnings and adjusted

earnings per diluted share are considered measures not calculated in accordance with GAAP, and therefore are non-GAAP measures. These non-GAAP measures may differ from other companies. The non-GAAP financial information should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with GAAP. The following table sets for the reconciliation of net income to adjusted earnings for the years ended December 31, 2014 and 2013:

 

In thousands, except per share

    
 
After-tax
amounts
  
  
   
 
Diluted
EPS
  
  

2014

    

Net income

   $ 69,246      $ 1.57   

Acquisition and integration related costs

     603        0.01   

Workforce efficiency charges

     373        0.01   

Asset impairment charge

     2,356        0.05   

Timberland sales and related costs

     (2,995     (0.07

Alternative fuel mixture/Cellulosic biofuel credits

     (1,115     (0.03
  

 

 

 

Adjusted earnings (non-GAAP)

   $ 68,468      $ 1.55   
  

 

 

 

2013

    

Net income

   $ 67,158      $ 1.52   

Acquisition and integration related costs

     6,079        0.14   

International legal entity restructuring

     630        0.01   

Timberland sales and related costs

     (1,725     (0.04

Alternative fuel mixture/Cellulosic biofuel credits

     (10,316     (0.23
  

 

 

 

Adjusted earnings (non-GAAP)

   $ 61,826      $ 1.40   

The sum of individual per share amounts set forth above may not agree to adjusted earnings per share due to rounding.

Our growth-oriented fiber-based engineered materials businesses reported improved results with operating profit increasing $9.7 million. However, Specialty Papers operating income declined $1.1 million reflecting the impact of operational issues and higher costs of maintenance outages nearly offset by higher selling prices.

 

 

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Business Unit Performance

 

    Year ended December 31  

Dollars in millions

    Composite Fibers        

 

Advanced Airlaid

Materials

  

  

     Specialty Papers        
 
Other and
Unallocated
  
  
     Total   
    2014      2013      2014      2013      2014      2013      2014      2013      2014      2013  

Net sales

  $ 617.9       $ 566.4       $ 281.7       $ 268.4       $ 902.9       $ 887.9       $       $       $ 1,802.4       $ 1,722.6   

Energy and related sales, net

                                    7.9         3.2                         7.9         3.2   

Total revenue

    617.9         566.4         281.7         268.4         910.8         891.1                         1,810.3         1,725.8   

Cost of products sold

    498.0         456.5         247.6         238.0         821.8         799.3         7.8         13.3         1,575.2         1,507.1   

Gross profit (loss)

    119.9         109.8         34.1         30.4         89.0         91.7         (7.8      (13.3      235.2         218.7   

SG&A

    51.6         47.4         8.8         8.9         50.4         52.0         22.4         25.5         133.2         133.9   

Gains on dispositions of plant, equipment and timberlands, net

                                                    (4.9      (1.7      (4.9      (1.7

Total operating income (loss)

    68.3         62.4         25.3         21.5         38.6         39.7         (25.3      (37.1      106.8         86.5   

Non-operating expense

                                                    (19.4      (17.3      (19.4      (17.3

Income (loss) before income taxes

  $ 68.3       $ 62.4       $ 25.3       $ 21.5       $ 38.6       $ 39.7       $ (44.7    $ (54.4    $ 87.4       $ 69.2   
 

 

 

 

Supplementary Data

                            

Net tons sold (thousands)

    157.3         133.6         99.7         96.1         802.9         800.2                         1,059.9         1,029.8   

Depreciation, depletion and amortization

  $ 29.7       $ 24.8       $ 9.1       $ 8.9       $ 29.9       $ 33.2       $ 1.9       $ 1.3       $ 70.6       $ 68.2   

Capital expenditures

    23.9         56.9         7.6         6.7         32.1         33.8         2.4         5.7         66.0         103.0   

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

    2014        2013        Change   

Net sales

  $ 1,802,415      $ 1,722,615      $ 79,800   

Energy and related sales, net

    7,927        3,153        4,774   

Total revenues

    1,810,342        1,725,768        84,574   

Costs of products sold

    1,575,188        1,507,108        68,080   

Gross profit

  $ 235,154      $ 218,660      $ 16,494   

Gross profit as a percent of Net sales

    13.0     12.7        

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

 

    Year ended
December 31
 
Percent of Total   2014     2013  

Business Unit

     

Composite Fibers

    34.3     32.9

Advanced Airlaid Material

    15.6        15.6   

Specialty Papers

    50.1        51.5   

Total

    100.0     100.0

Net sales    for 2014 totaled $1,802.4 million, a 4.6% increase compared with 2013. Excluding the Dresden and SPO acquisitions, organic growth totaled 1.5%.

Composite Fibers’ net sales totaled $617.9 million in 2014, an increase of $51.5 million or 9% compared to 2013, primarily due to the inclusion of a full year of

Dresden’s activity in 2014, compared with eight months in 2013, together with SPO’s results prospectively from the October 1, 2014 acquisition date. These factors were offset by lower selling prices and unfavorable currency translation of $11.9 million and $2.0 million, respectively. The lower selling prices primarily reflect the adverse impact of competitive pressures in certain market segments and weak economic conditions, particularly in Europe, Russia and Ukraine.

Composite Fibers’ operating income totaled $68.3 million in 2014, a $5.9 million increase from 2013. The primary drivers are summarized in the following chart:

 

 

LOGO

In Advanced Airlaid Materials, net sales totaled $281.7 million in 2014, an increase of $13.3 million or 5.0% compared to 2013, primarily due to a 3.7% increase in shipping volumes. Lower selling prices negatively affected the comparison by $1.1 million.

 

 

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Advanced Airlaid Materials’ operating income totaled $25.3 million in 2014, a $3.8 million increase from 2013. The primary drivers are summarized in the following chart:

 

 

LOGO

In the Specialty Papers business unit, net sales totaled $902.9 million in 2014, an increase of $15.0 million or 1.7% compared to 2013 due to higher selling prices. Higher selling prices favorably affected the comparison by $21.7 million.

Specialty Papers’ operating income totaled $38.6 million in 2014, a $0.9 million decrease from 2013. The primary drivers are summarized in the following chart:

 

 

LOGO

The decline of $22.3 million under the caption “Operations & Other” relates to higher costs from pulp mill performance issues, severe weather conditions and maintenance spending.

We sell excess power generated by the Spring Grove, PA facility. The following table summarizes this activity for 2014 and 2013:

 

    Year ended December 31      

In thousands

    2014         2013         Change   

Energy sales

  $ 11,886       $ 8,189       $ 3,697   

Costs to produce

    (6,204      (6,784      580   

Net

    5,682         1,405         4,277   

Renewable energy credits

    2,245         1,748         497   

Total

  $ 7,927       $ 3,153       $ 4,774   

Renewable energy credits (“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 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 additional sales of RECs in future periods.

Energy and related sales increased in the year-over-year comparison as severe weather conditions early in 2014 resulted in higher selling prices for excess power.

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 2014 compared with $38.8 million in 2013. The decrease was primarily due to lower pension expense, legal and professional fees, partially offset by the asset impairment charge.

Asset impairment charges    During 2014, in connection with our annual test of potential impairment of indefinite lived intangible assets, we recorded a non-cash asset impairment charge of $3.3 million related to a trade name intangible asset acquired in connection with our Composite Fibers business unit’s 2013 Dresden acquisition. The charge was primarily driven by an increase in discount rates related to Dresden’s business in Russia and Ukraine and this region’s political instability. The charge is not allocated to a business unit and is recorded in the accompanying consolidated statements of income under the caption “Selling, general and administrative expenses.”

Pension Expense    The following table summarizes the amounts of pension expense recognized for the periods indicated:

 

    Year ended December 31         

In thousands

    2014         2013         Change   

Recorded as:

       

Costs of products sold

  $ 6,605       $ 12,368       $ (5,763

SG&A expense

    55         1,849         (1,794

Total

  $ 6,660       $ 14,217       $ (7,557

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

 

 

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Gain on Sales of Plant, Equipment and Timberlands, net    During the years ended December 31, 2014 and 2013, we completed the following sales of assets:

 

Dollars in thousands

     Acres        Proceeds         Gain   

2014

       

Timberlands

     2,753      $ 5,062       $ 4,855   

Other

     n/a        10         6   

Total

           $ 5,072       $ 4,861   

2013

       

Timberlands

     876      $ 1,445       $ 1,410   

Other

     n/a        502         316   

Total

           $ 1,947       $ 1,726   

Income taxes    For 2014, we recorded a provision for income taxes of $18.1 million on pretax income of $87.4 million. The comparable amounts in 2013 were income tax expense of $2.0 million on $69.2 million of pretax income. Income tax expense in 2014 benefited by $4.2 million from the reduction of deferred tax liabilities and release of valuation allowances related to the restructuring of non-U.S. legal entities. Tax expense for 2013 benefited from a greater proportion of earnings generated in lower tax foreign jurisdictions relative to the U.S. and by an aggregate of $16.3 million from cellulosic biofuel production credits, research and development credits, reduction in reserves due to lapse of statutes of limitation and changes in international statutory rates.

Foreign Currency     We own and operate facilities in Canada, Germany, France, the United Kingdom and the Philippines. The functional currency of our Canadian operations is the U.S. dollar. However, in Germany and France it is the Euro, in the UK, it is the British Pound Sterling, and in the Philippines the functional currency is the Peso. Our euro denominated revenue exceeds euro expenses by approximately 120 million. With respect to the British Pound Sterling, Canadian dollar, and Philippine Peso, we have greater outflows than inflows of these currencies, although to a lesser degree. As a result, particularly with respect to the euro, we are exposed to changes in currency exchange rates and such changes could be significant. 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 for 2014

 

In thousands

   
 
Year ended
December 31, 2014
  
  
    Favorable
(unfavorable)
 

Net sales

  $ 2,298   

Costs of products sold

    (395

SG&A expenses

    (78

Income taxes and other

    307   

Net income

  $ 2,132   

The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2014 were the same as 2013. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.

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 including a recently announced plan to construct a new facility. In addition, we have mandatory debt service requirements of both principal and interest. The following table summarizes cash flow information for each of the periods presented:

 

     Year ended December 31  
In thousands    2015      2014  

Cash and cash equivalents at beginning of period

   $ 99,837       $ 122,882   

Cash provided (used) by

       

Operating activities

     133,743         99,577   

Investing activities

     (77,254      (69,589

Financing activities

     (48,016      (50,881

Effect of exchange rate changes on cash

     (3,006      (2,152

Net cash provided (used)

     5,467         (23,045

Cash and cash equivalents at end of period

   $ 105,304       $ 99,837   

At December 31, 2015, we had $105.3 million in cash and cash equivalents held by both domestic and foreign subsidiaries. Unremitted earnings of our foreign subsidiaries are deemed to be indefinitely reinvested; however, at the end of 2015, the majority of our cash and cash equivalents is either held by domestic entities or is available for use domestically. In addition to our cash and cash equivalents, $248.3 million is available under our revolving credit agreement, which matures in March 2020.

 

 

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Cash provided by operating activities totaled $133.7 million in 2015 compared with $99.6 million a year ago. The increase in cash from operations primarily reflects a benefit from a decrease in cash used for working capital primarily related to inventory and improved payment terms with suppliers. In 2015, we used less cash for income taxes, however this was offset by cash used for Fox River environmental remediation activities.

Net cash used by investing activities primarily consists of capital expenditures, cash used for acquisitions and proceeds from sales of assets, primarily timberlands. Net cash used for investing increased by $7.7 million in the year-over-year comparison primarily due to a $33.8 million increase in capital expenditures largely related to environmental compliance projects which was partially offset by a $19.4 million increase in proceeds from asset sales. Capital expenditures during 2015 and 2014, includes $26.9 million and $6.1 million, respectively, related to environmental compliance projects. For 2016, capital expenditures are expected to total $150 million to $170 million, including approximately $40 million to $45 million related to Specialty Papers’ environmental compliance projects and $40 million to $45 million for Advanced Airlaid Materials’ new airlaid facility.

Net cash used by financing activities totaled $48.0 million in 2015 compared with $50.9 million in 2014.

At December 31, 2015, our net debt (a non-GAAP measure and defined as total debt less cash) totaled $258.6 million compared to $304.8 million at the end of 2014.

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

 

     December 31  
In thousands    2015      2014  

Revolving credit facility, due Mar. 2020

   $ 58,792       $   

Revolving credit facility, due Nov. 2016

             90,555   

5.375% Notes, due Oct. 2020

     250,000         250,000   

2.40% Term Loan, due Jun. 2022

     10,109         12,155   

2.05% Term Loan, due Mar. 2023

     42,130         51,902   

1.55% Term Loan, due Sep. 2025

     2,839           

Total long-term debt

     363,870         404,612   

Less current portion

     (7,366      (5,734

Long-term debt, net of current portion

   $ 356,504       $ 398,878   

Our revolving credit facility contains a number of customary compliance covenants, the most restrictive of which is a maximum leverage ratio of 3.5x. As of December 31, 2015, the leverage ratio, as calculated in accordance with the definition in our credit agreement, was 1.6x. Based on our expectations of future results of operations and capital needs, we do not believe the debt

covenants will impact our operations or limit our ability to undertake financings that may be necessary to meet our capital needs.

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, 2015, 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 and Supplementary Data – Note 17.

Our long-term debt includes three term loans with mandatory principal repayments that used $5.2 million of cash in 2015. Principal repayments will total approximately $7.4 million 2016.

Cash used for financing activities includes cash used for common stock dividends, and, with respect to 2014, stock repurchases. In February 2015, our Board of Directors authorized a 9% increase in our quarterly cash dividend. During 2015, we used $20.4 million of cash for dividends on our common stock compared with $18.7 million in 2014. The Board of Directors 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.

On May 1, 2014, we announced that our Board of Directors approved a $25 million increase to our share repurchase program and extended the expiration date to May 1, 2016. Under the revised program, we may repurchase up to $50 million of our outstanding common stock of which $33.4 million remains available as of the end of 2015. No repurchases were made in 2015 and totaled $12.2 million in 2014.

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. We will incur material capital costs to comply with 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). These rules will require process modifications and/or installation of air pollution controls on boilers at two of our facilities. We

 

 

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have begun converting or replacing five coal-fired boilers to natural gas and upgrading site infrastructure to accommodate the new boilers, including connecting to gas pipelines. The total cost of these projects is estimated at $85 million to $90 million of which $33.0 million has been incurred through the end of 2015. The balance of the related spending will be substantially completed in 2016.

As more fully discussed in Item 8 – Financial Statements and Supplementary Data – Note 23 – Commitments, Contingencies and Legal Proceedings, we are involved in the Lower Fox River in Wisconsin (the “Fox River”), an EPA Superfund site for which we remain potentially liable for contributions to the clean-up activity. During 2015, we used $9.1 million for remediation activities and it is conceivable we may need to fund a portion of the on-going costs in 2016 or beyond. Although we are unable to determine with any degree of certainty the amount we may be required to fund for interim remediation work, such amounts could be significant. The ultimate allocation of such costs is the subject of extensive ongoing litigation amongst three potentially responsible parties. See Item 8 – Financial Statements and

Supplementary Data – Note 23 for a summary of significant environmental matters.

During 2016, we expect our use of cash for capital expenditures, strategic investments and environmental compliance projects will exceed cash generated from operations. 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. However, as discussed in Item 8 – Financial Statements and Supplementary Data – Note 23, an unfavorable outcome of the Fox River 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, 2015 and 2014, 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 consolidated balance sheets included herein in Item 8 – Financial Statements.

 

 

Contractual Obligations    The following table sets forth contractual obligations as of December 31, 2015:

 

           Payments Due During the Year Ended December 31,  
In millions   Total      2016      2017 to
2018
     2019 to
2020
     2021 and
beyond
 

Long-term debt (1)

  $ 445       $ 22       $ 44       $ 352       $ 27   

Operating leases (2)

    13         6         5         1         1   

Purchase obligations (3)

    129         75         54                   

Other long term obligations (4),(5)

    63         6         12         13         32   
       

Total

  $ 650       $ 109       $ 115       $ 366       $ 60   

 

(1) Represents principal and interest payments due on long-term debt, the significant terms of which are discussed in Item 8 – Financial Statements, Note 17, “Long-term Debt.” The amounts set forth above include expected interest payments of $81 million over the term of the underlying debt instruments based contractual rates or current market rates in the case of variable rate instruments. See Item 8 – Financial Statements, Note 17, “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, and forward purchases 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, 2015.

 

(4) Primarily represents expected benefits to be paid pursuant to post-retirement medical plans, nonqualified pension plans and the 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 9, “Income Taxes”, such amounts totaled $12 million at December 31, 2015.

 

 

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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-employment 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. Goodwill and non-amortizing tradename intangible assets are reviewed, on a discounted cash flow basis, during the third quarter of each year for impairment or more frequently if impairment indicators are present. Our evaluations include considerations of a variety of qualitative factors and 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-Employment 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, future compensation growth rates and mortality 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:

 

       2015        2014        2013   

Pension plans

      

Weighted average discount rate
for benefit expense

     4.21     5.20     4.28

for benefit obligation

     4.65        4.21        5.20   

Expected long-term rate of on plan assets(1)

     8.00        8.00        8.50   

Rate of compensation increase(2)

     4.00        4.00        4.00   

Post-employment medical

      

Weighted average discount rate
for benefit expense

     3.89        4.52        3.58   

for benefit obligation

     4.38        3.89        4.52   

Health care cost trend rate
assumed for next year

     6.80        7.46        7.46   

Ultimate cost trend rate

     4.50        4.50        4.50   

Year that the ultimate cost trend rate is reached

     2037        2028        2028   

 

(1) For 2016, the expected long-term rate of return on plan assets was reduced to 7.75%.

 

(2) For 2016, the rate of compensation increase was reduced to 3.50%.

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. 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.

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 consolidated 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

 

 

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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 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     December 31, 2015  
Dollars in thousands    2016     2017     2018     2019     2020     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       $ 250,938   

At fixed interest rates – Term Loans

     53,627        46,260        38,717        30,995        23,273        55,078         55,945   

At variable interest rates

     58,792        58,792        58,792        58,792        58,792        58,792         58,792   
            

 

 

 
             $ 363,870       $ 365,675   
            

 

 

 

Weighted-average interest rate

               

On fixed rate debt – Bond

     5.375     5.375     5.375     5.375     5.375     

On fixed rate debt – Term Loans

     2.08          2.09          2.08          2.08          2.07          

On variable rate debt

     1.50          1.50          1.50          1.50          1.50                      

 

The table above presents the average principal outstanding and related interest rates for the next five years for debt outstanding as of December 31, 2015. 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, 2015, we had $363.9 million of long-term debt, of which 16.2% was at variable interest rates. The fixed rate Term Loans and the variable rate debt are all euro-based borrowings and thus the value of which is also subject to currency risk. Variable-rate debt outstanding represents borrowings under our revolving credit agreement that accrues interest based on one month LIBOR plus a margin. At December 31, 2015, the interest rate paid was 1.50%. A hypothetical 100 basis point increase or decrease in the interest rate on variable rate debt would increase or decrease annual interest expense by $0.6 million.

As part of our overall risk management practices, we enter into financial derivatives primarily designed to either i) hedge 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 Suplementary Data – Note 20.

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. Our euro denominated revenue exceeds euro expenses by approximately 120 million. With respect to the British Pound Sterling, Canadian dollar, and Philippine Peso, we have greater outflows than inflows of these currencies, although to a lesser degree. As a result, particularly with respect to the euro, we are exposed to changes in currency exchange rates and such changes could be significant.

 

 

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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, 2015, 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 (2013) 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, 2015, 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, 2015, 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, 2015.

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 of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) 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, 2015, based on the criteria established in Internal Control – Integrated Framework (2013) 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, 2015 of the Company and our report dated February 26, 2016 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania

February 26, 2016

 

 

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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, 2015 and 2014, 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, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated 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, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents 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, 2015, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.

DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania

February 26, 2016

 

 

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P. H. GLATFELTER COMPANY and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

        Year ended December 31  

     In thousands, except per share

        2015        2014        2013   

Net sales

    $ 1,661,084      $ 1,802,415      $ 1,722,615   

Energy and related sales, net

      5,664        7,927        3,153   

Total revenues

      1,666,748        1,810,342        1,725,768   

Costs of products sold

      1,463,783        1,575,188        1,507,108   

Gross profit

      202,965        235,154        218,660   

Selling, general and administrative expenses

      127,706        133,235        133,867   

Gains on dispositions of plant, equipment and timberlands, net

      (21,113     (4,861     (1,726

Operating income

      96,372        106,780        86,519   

Non-operating income (expense)

         

Interest expense

      (17,464     (18,921     (17,965

Interest income

      283        159        310   

Other, net

      (615     (635     337   

Total other expense

      (17,796     (19,397     (17,318

Income before income taxes

      78,576        87,383        69,201   

Income tax provision

      14,001        18,137        2,043   

Net income

    $ 64,575      $ 69,246      $ 67,158   
 

 

 
 

Earnings per share

         

Basic

    $ 1.49      $ 1.60      $ 1.56   

Diluted

      1.47        1.57        1.52   
 

Cash dividends declared per common share

    $ 0.48      $ 0.44      $ 0.40   
 

Weighted average shares outstanding

         

Basic

      43,397        43,201        43,158   

Diluted

      43,942        44,066        44,299   

 

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   2015     2014     2013       
 

    Net income

  $ 64,575      $ 69,246      $ 67,158     
 

    Foreign currency translation adjustments

    (38,817     (49,365     14,826     

    Net change in:

         

Deferred gains (losses) on cash flow hedges, net of taxes of $880, $(1,281) and $178, respectively

    (2,581     3,297        (517  

Unrecognized retirement obligations, net of taxes of $(2,920), $20,730 and $(45,118), respectively

    5,782        (33,445     74,300     

Other comprehensive income (loss)

    (35,616     (79,513     88,609     

Comprehensive income (loss)

  $ 28,959      $ (10,267   $ 155,767     
 

 

 

 

 

 

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   2015     2014      
Assets        

Cash and cash equivalents

  $ 105,304      $ 99,837     

Accounts receivable (less allowance for doubtful accounts:
2015 – $2,239; 2014 – $2,703)

    167,199        163,760     

Inventories

    247,214        248,705     

Prepaid expenses and other current assets

    32,650        62,320     

Total current assets

    552,367        574,622     
 

Plant, equipment and timberlands, net

    698,864        697,608     

Goodwill

    76,056        84,137     

Intangible assets

    63,057        77,098     

Other assets

    113,280        128,039     

Total assets

  $ 1,503,624      $ 1,561,504     
 

 

 

   
Liabilities and Shareholders’ Equity        

Current portion of long-term debt

  $ 7,366      $ 5,734     

Accounts payable

    172,735        157,070     

Dividends payable

    5,231        4,775     

Environmental liabilities

    12,544        1,075     

Other current liabilities

    106,444        111,077     

Total current liabilities

    304,320        279,731     
 

Long-term debt

    356,504        398,878     

Deferred income taxes

    76,458        104,016     

Other long-term liabilities

    103,095        129,770     

Total liabilities

    840,377        912,395     

Commitments and contingencies

               
 

Shareholders’ equity

       

Common stock, $0.01 par value; authorized – 120,000,000; issued – 54,361,980 (including treasury shares: 2015 – 10,941,944; 2014 – 11,307,589)

    544        544     

Capital in excess of par value

    54,912        54,342     

Retained earnings

    963,143        919,468     

Accumulated other comprehensive loss

    (190,486     (154,870  
    828,113        819,484     

Less cost of common stock in treasury

    (164,866     (170,375  

Total shareholders’ equity

    663,247        649,109     

Total liabilities and shareholders’ equity

  $ 1,503,624      $ 1,561,504     
 

 

 

   

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 CASH FLOWS

 

    Year ended December 31      
      In thousands   2015     2014     2013       

Operating activities

         

Net income

  $ 64,575      $ 69,246      $ 67,158     

Adjustments to reconcile to net cash provided by operations:

         

Depreciation, depletion and amortization

    63,236        70,555        68,196     

Amortization of debt issue costs and original issue discount

    1,184        1,315        1,305     

Pension expense, net of unfunded benefits paid

    7,383        5,173        12,787     

Charge for impairment of intangible asset

    1,200        3,262            

Deferred income tax benefit

    (1,902     (9,419     (11,485  

Gains on dispositions of plant, equipment and timberlands, net

    (21,113     (4,861     (1,726  

Share-based compensation

    7,244        7,859        7,337     

Change in operating assets and liabilities

         

Accounts receivable

    (13,312     (5,404     (777  

Inventories

    (8,054     (21,456     2,704     

Prepaid and other current assets

    5,506        (3,521     7,965     

Accounts payable

    26,042        (4,175     24,822     

Accruals and other current liabilities

    (2,186     (12,802     3,140     

Other

    3,940        3,805        (7,791  

Net cash provided by operating activities

    133,743        99,577        173,635     

Investing activities

         

Expenditures for purchases of plant, equipment and timberlands

    (99,889     (66,046     (103,047  

Proceeds from disposals of plant, equipment and timberlands, net

    24,459        5,072        1,947     

Acquisition, net of cash acquired

    (224     (8,015     (210,911  

Other

    (1,600     (600     (425  

Net cash used by investing activities

    (77,254     (69,589     (312,436  

Financing activities

         

Net borrowings under (repayments of) revolving credit facility

    (22,294     (30,720     126,139     

Payments of borrowing costs

    (1,329            (419  

Proceeds from term loans

    2,873        12,592        56,091     

Repayment of term loans

    (5,229                

Repurchases of common stock

           (12,180         

Payments of dividends

    (20,443     (18,696     (16,965  

Payments related to share-based compensation awards and other

    (1,594     (1,877     (1,671  

Net cash (used) provided by financing activities

    (48,016     (50,881     163,175     

Effect of exchange rate changes on cash

    (3,006     (2,152     829     

Net increase (decrease) in cash and cash equivalents

    5,467        (23,045     25,203     

Cash and cash equivalents at the beginning of period

    99,837        122,882        97,679     

Cash and cash equivalents at the end of period

  $ 105,304      $ 99,837      $ 122,882     
 

 

 

Supplemental cash flow information

         

Cash paid for:

         

Interest, net of amounts capitalized

  $ 16,256      $ 17,643      $ 17,231     

Income taxes, net

    15,849        24,139        15,588     

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, 2015, 2014 and 2013

 

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, 2013

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

Net income

          67,158            67,158   

Other comprehensive income

            88,609          88,609   
             

 

 

 

Comprehensive income

                155,767   

Tax effect on exercise of stock awards

        1,451              1,451   

Cash dividends declared ($0.40 per share)

          (17,422         (17,422

Share-based compensation expense

        4,473              4,473   

Delivery of treasury shares

             

RSUs

        (1,763         1,234        (529

401 (k) plans

        1,099            1,791        2,890   

Employee stock options exercised – net

        (3,812         1,979        (1,833
  

 

 

 

Balance at December 31, 2013

     544         53,940        869,329        (75,357     (163,980     684,476   

Net income

          69,246            69,246   

Other comprehensive income

            (79,513       (79,513
             

 

 

 

Comprehensive income

                (10,267

Tax effect on exercise of stock awards

        (14           (14

Cash dividends declared ($0.44 per share)

          (19,107         (19,107

Share-based compensation expense

        4,738              4,738   

Repurchase of common shares

              (12,180     (12,180

Delivery of treasury shares

             

RSUs and PSAs

        (4,121         2,363        (1,758

401 (k) plans

        1,318            1,775        3,093   

Employee stock options exercised – net

        (1,519         1,647        128   
  

 

 

 

Balance at December 31, 2014

     544         54,342        919,468        (154,870     (170,375     649,109   

Net income

          64,575            64,575   

Other comprehensive income

            (35,616       (35,616
             

 

 

 

Comprehensive income

                28,959   

Tax effect on exercise of stock awards

        843              843   

Cash dividends declared ($0.48 per share)

          (20,900         (20,900

Share-based compensation expense

        4,403              4,403   

Delivery of treasury shares

             

RSUs and PSAs

        (5,078         3,102        (1,976

401 (k) plans

        838            2,010        2,848   

Employee stock options exercised – net

        (436         397        (39
  

 

 

 

Balance at December 31, 2015

   $ 544       $ 54,912      $ 963,143      $ (190,486   $ (164,866   $ 663,247   
  

 

 

 

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

 

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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, PA, U.S. operations include facilities in Spring Grove, PA and Chillicothe and Fremont, OH. International operations include facilities in Canada, Germany, France, the United Kingdom and the Philippines, and sales and distribution offices in Russia and China. 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

     15 – 45 Years   

Machinery and equipment

     5 – 40 Years   

Other

     3 – 25 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 and non-amortizing tradename intangible assets are 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.

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.

Revenue from renewable energy credits is recorded under the caption “Energy and related sales, net” 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. 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.

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

 

 

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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 February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The ASU will require organizations that lease assets – referred to as “lessees” – to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance will be effective for annual periods beginning after December 15, 2018, and interim periods therein. Early

adoption is permitted. We have yet to analyze or assess the impact this standard will have on us.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). This update requires debt issuance costs to be presented as a direct deduction from the carrying value of the related debt instrument rather than as a deferred asset except for costs associated with a revolving line of credit. The guidance in ASU 2015-03 is required for annual reporting periods beginning after December 15, 2015, including interim periods within the reporting period. This standard will be adopted in the first quarter of 2016 and will result in the reclassification of approximately $3.1 million of unamortized deferred debt issuance fees.

In May 2014, the FASB issued ASU No. 2014-09 - Revenue from Contracts with Customers which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards. The new standard is required to be adopted for fiscal years beginning after December 15, 2017 and early adoption is permitted only for reporting periods beginning after December 31, 2016. We are in the process of evaluating the impact this standard may have, if any, on our reported results of operations or financial position.

 

3. ACQUISITIONS

On October 1, 2014, we completed the acquisition of all of the outstanding equity of Spezialpapierfabrik Oberschmitten GmbH (“SPO”) from FINSPO Beteiligungs-GmbH for $8.0 million. SPO had annual sales of approximately $33 million in 2014. SPO, located near Frankfurt, Germany, primarily produces highly technical papers for a wide range of capacitors used in consumer and industrial products; insulation papers for cables and transformers; and materials for industrial power inverters, electromagnetic current filters and electric rail traction. SPO also produces glassine products, which are used in cosmetics packaging, food packaging, and pharmaceutical dosage bags. SPO is operated as part of the Composite Fibers business unit, and complements our technical specialties products.

On April 30, 2013, we completed the acquisition of all outstanding shares of Dresden Papier GmbH (“Dresden”) from Fortress Paper Ltd. for $211 million, net of cash acquired. Dresden, based in Heidenau, Germany, is the leading global supplier of nonwoven wallpaper base materials, and is a major supplier to most of the world’s

 

 

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largest wallpaper manufacturers. Dresden’s revenue for the full year 2013 was $158.6 million and it employed approximately 146 people at its state-of-the-art, 72,800 short-ton-capacity manufacturing facility. We financed the acquisition through a combination of cash on hand and borrowings under our Revolving Credit Facility.

The acquisition of Dresden added another industry-leading nonwovens product line to our Composite Fibers business unit, and broadened our relationship with leading producers of consumer and industrial products.

The allocation of the purchase price to assets acquired and liabilities assumed was as follows:

 

    In thousands    Final Allocation  

Assets

  

Cash and cash equivalents

   $ 12,227   

Accounts receivable

     23,870   

Inventory

     13,864   

Prepaid and other current assets

     8,060   

Plant, equipment and timberlands

     60,951   

Intangible assets

     87,596   

Goodwill

     74,870   

Total assets

     281,438   

Liabilities

  

Accounts payable

     20,253   

Deferred tax liabilities

     36,120   

Other long term liabilities

     1,927   

Total liabilities

     58,300   

Total

     223,138   

less cash acquired

     (12,227

Total purchase price

   $ 210,911   

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 relationships, technological know-how and trade name.

Acquired property, plant and equipment are being depreciated on a straight-line basis with estimated remaining lives ranging from 5 years to 30 years. Intangible assets are being amortized on a straight-line basis over an average estimated remaining life of 17 years reflecting the expected future value.

In connection with the Dresden acquisition we recorded $74.9 million of goodwill and $87.6 million of

intangible assets. The goodwill arising from the acquisition largely relates to strategic benefits, product and market diversification, assembled workforce, and similar factors. For tax purposes, none of the goodwill is deductible. Intangible assets consisted of $9.8 million of non-amortizing tradename, and the remainder consists of technology and customer relationships. Refer to Note 6 – Asset Impairment Charges for additional information.

Our results of operations include the results of Dresden prospectively since the acquisition was completed on April 30, 2013. All such results reported herein are included as part of the Composite Fibers business unit. Revenue and operating income of Dresden included in our consolidated results of operations for 2013 totaled $101.8 million and $18.3 million, respectively.

The table below summarizes pro forma financial information as if the acquisition and related financing transaction occurred as of January 1, 2013

 

    

Year ended
December 31

2013

 

In thousands, except per share

  

Pro forma

  

Net sales

   $ 1,779,434   

Net income

     80,381   

Diluted earnings per share

     1.82   

During 2013, we incurred legal, professional and advisory costs directly related to the Dresden acquisition totaling $3.2 million. For purposes of presenting the above pro forma financial information, such costs have been eliminated. All such costs are presented under the caption “Selling, general and administrative expenses” in the accompanying consolidated statements of income. In addition, the pro forma financial information excludes $1.1 million of charges to costs of products sold related to the write up of inventory to fair value and $2.0 million of integration related costs. This unaudited pro forma financial information above is not necessarily indicative of what the operating results would have been had the acquisition been completed at the beginning of the respective period nor is it indicative of future results.

 

4. ENERGY AND RELATED SALES, NET

We sell excess power generated by the Spring Grove, PA facility. 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.

 

 

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

 

     Year ended December 31  

In thousands

     2015        2014        2013   

Energy sales

   $ 5,315      $ 11,886      $ 8,189   

Costs to produce

     (4,428     (6,204     (6,784

Net

     887        5,682        1,405   

Renewable energy credits

     4,777        2,245        1,748   

Total

   $ 5,664      $ 7,927      $ 3,153   

 

5. GAIN ON DISPOSITIONS OF PLANT, EQUIPMENT AND TIMBERLANDS

During 2015, 2014 and 2013, we completed the following sales of assets:

 

Dollars in thousands

     Acres        Proceeds         Gain   

2015

       

Timberlands

     15,628      $ 23,917       $ 20,867   

Other

     n/a        542         246   

Total

           $ 24,459       $ 21,113   

2014

       

Timberlands

     2,753      $ 5,062       $ 4,855   

Other

     n/a        10         6   

Total

           $ 5,072       $ 4,861   

2013

       

Timberlands

     876      $ 1,445       $ 1,410   

Other

     n/a        502         316   

Total

           $ 1,947       $ 1,726   

 

6. ASSET IMPAIRMENT CHARGES

During 2015 and 2014, in connection with our annual test of potential impairment of indefinite lived intangible assets, we recorded $1.2 million and $3.3 million, respectively, of non-cash asset impairment charges. The trade name intangible asset was acquired in connection with our Composite Fibers business unit’s 2013 Dresden acquisition. The charges were due to changes in the estimated fair value of the trade name, primarily driven by lower forecasted revenues associated with the business,

an increase in discount rates related to Dresden’s business in Russia and Ukraine and this region’s political and economic instability. The fair value of the asset was estimated using a discounted cash flow model under a relief from royalty method. The significant assumptions used included projected financial performance and discount rates, which resulted in a Level 3 fair value classification.

The charge is recorded in the accompanying consolidated statements of income under the caption “Selling, general and administrative expenses.” For additional information on Goodwill and Intangible Assets, see Note 14.

 

7. EARNINGS PER SHARE

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

 

    Year ended December 31  

In thousands, except per share

    2015        2014        2013   

Net income

  $ 64,575      $ 69,246      $ 67,158   

Weighted average common shares outstanding used in basic EPS

    43,397        43,201        43,158   

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

    545        865        1,141   

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

    43,942        44,066        44,299   

Earnings per share

     

Basic

  $ 1.49      $ 1.60      $ 1.56   

Diluted

    1.47        1.57        1.52   

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 December 31  

In thousands

    2015        2014        2013   

Potential common shares