10-K 1 glt-10k_20161231.htm FORM 10-K glt-10k_20161231.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2016

or

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

For the transition period from                  to

 

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   .

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  .

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      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      No  ☐.

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

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

Based on the closing price as of June 30, 2016, the aggregate market value of the Common Stock of the Registrant held by non‑affiliates was $839.8 million.

Common Stock outstanding on February 21, 2017 totaled 43,558,387 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 30, 2017 are incorporated by reference to Part III.

 

 

 

 

 

 


P. H. GLATFELTER COMPANY

ANNUAL REPORT ON FORM 10-K

For the Year Ended

DECEMBER 31, 2016

Table of Contents

 

 

 

Page

PART I

 

Item 1

 

Business

1

Item 1A

 

Risk Factors

6

Item 1B

 

Unresolved Staff Comments

11

Item 2

 

Properties

11

Item 3

 

Legal Proceedings

11

 

 

Executive Officers

11

Item 4

 

Mine Safety Disclosures

12

 

 

 

 

PART II

 

Item 5

 

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

12

 

 

Common Stock Prices and Dividends Declared Information

12

 

 

Stock Performance Graph

13

Item 6

 

Selected Financial Data

13

Item 7

 

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

14

 

 

Results of Operations

15

 

 

Liquidity and Capital Resources

23

 

 

Critical Accounting Policies and Estimates

24

Item 7A

 

Quantitative and Qualitative Disclosures about Market Risk

26

Item 8

 

Financial Statements and Supplementary Data

27

 

 

Report of Independent Registered Public Accountants

28

 

 

Statements of Income

30

 

 

Statements of Comprehensive Income

31

 

 

Balance Sheets

32

 

 

Statements of Cash Flows

33

 

 

Statements of Shareholders’ Equity

34

 

 

Notes to Consolidated Financial Statements

 

 

 

1.    Organization

35

 

 

2.    Accounting Policies

35

 

 

3.    Acquisitions

37

 

 

4.    Energy and Related Sales, Net

38

 

 

5.    Gain on Dispositions of Plant, Equipment and Timberlands

38

 

 

6.    Asset Impairment Charges

38

 

 

7.    Earnings Per Share

38

 

 

8.    Accumulated Other Comprehensive Income

39

 

 

9.    Income Taxes

40

 

 

 

 

Page

 

 

10.  Stock-Based Compensation

41

 

 

11.  Retirement Plans and Other Post-Retirement Benefits

43

 

 

12.  Inventories

47

 

 

13.  Plant, Equipment and Timberlands

47

 

 

14.  Goodwill and Intangible Assets

47

 

 

15.  Other Long-Term Assets

47

 

 

16.  Other Current Liabilities

47

 

 

17.  Long-Term Debt

47

 

 

18.  Fair Value of Financial Instruments

49

 

 

19.  Financial Derivatives and Hedging Activities

49

 

 

20.  Shareholders’ Equity

51

 

 

21.  Commitments, Contingencies and Legal Proceedings

51

 

 

22.  Segment and Geographic Information

53

 

 

23.  Condensed Consolidating Financial Statements

56

 

 

24.  Quarterly Results (Unaudited)

60

 

 

 

 

Item 9

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosures

61

Item 9A

 

Controls and Procedures

61

Item 9B

 

Other Information

61

 

 

 

 

PART III

 

Item 10

 

Directors, Executive Officers and Corporate Governance

61

Item 11

 

Executive Compensation

61

Item 12

 

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

61

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

61

Item 14

 

Principal Accountant Fees and Services

61

 

 

 

 

PART IV

 

Item 15

 

Exhibits, Financial Statement Schedules

62

 

 

 

 

Signatures

64

 

 

 

 

Schedule II

65

 

 

 


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. We are headquartered in York, Pennsylvania, and 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. We are constructing a new manufacturing facility in Arkansas which is expected to be operational by the end of 2017. Exclusive of Arkansas, our ten manufacturing facilities have a combined production capacity of approximately 1.1 million tons of specialty papers and airlaid products used in a wide array of applications.

Strategy   Our strategy is focused on growing, organically and by acquisition, in our key global growth markets including single-serve coffee and tea products, nonwoven wall cover materials, electrical products, hygiene and wipes products, and other technical engineered materials. We partner with leading consumer product companies and other market leaders to provide innovative solutions delivering 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 market demands and grow our revenue. 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, we are investing approximately $80 million to build a new advanced airlaid facility in Arkansas to service the North America market. Production at the new facility is expected to begin in late 2017 with annual production capacity of approximately 22,000 short tons. The investment increases our total global airlaid materials capacity to approximately 129,000 short tons.

New product development and new business development are critical components of our business.

During 2016, 2015 and 2014, we invested $10.3 million, $10.4 million and $12.3 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 and generating strong free cash flows driven by delivering on cost reduction and continuous improvement initiatives and by making strategic investments designed to improve our returns on invested capital.

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. Our acquisition strategy is focused on targeting investments in adjacent or closely related markets and which complement our long-term strategy of driving growth in core 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.

Business Units   We manage our company as three separate business units: Composite Fibers; Advanced Airlaid Materials; and Specialty Papers. 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

2016

 

 

 

2015

 

 

2014

 

 

Net sales

$

1,604,797

 

 

 

$

1,661,084

 

 

$

1,802,415

 

 

Business unit

   contribution

 

 

 

 

 

 

 

 

 

 

 

 

 

Composite Fibers

 

32.2

%

 

 

 

32.6

%

 

 

34.3

%

 

Advanced Airlaid

   Materials

 

15.2

 

 

 

 

14.7

 

 

 

15.6

 

 

Specialty Papers

 

52.6

 

 

 

 

52.7

 

 

 

50.1

 

 

Total

 

100.0

%

 

 

 

100.0

%

 

 

100.0

%

 

 

Net tons sold by each business unit for the past three years were as follows:

 

Short tons

2016

 

 

 

2015

 

 

2014

 

 

Composite Fibers

 

151,766

 

 

 

 

153,766

 

 

 

157,336

 

 

Advanced Airlaid

   Materials

 

99,037

 

 

 

 

95,957

 

 

 

99,667

 

 

Specialty Papers

 

794,318

 

 

 

 

802,188

 

 

 

802,878

 

 

Total

 

1,045,121

 

 

 

 

1,051,911

 

 

 

1,059,881

 

 

 

 

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

 

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

 

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

 

GLATFELTER 2016 FORM 10-K

1

 


 

Metallized products used in 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 applications such as electrical energy storage, transport and transmission, wipes, and other highly-engineered fiber-based applications.

We believe Composite Fibers maintains a market leadership position in the single-serve coffee and tea markets, nonwoven wallcover base material and many others of the products it produces. This business unit’s revenue composition by market consisted of the following for the years indicated:

 

In thousands

2016

 

 

 

2015

 

 

2014

 

 

Food & beverage

$

258,463

 

 

 

$

274,865

 

 

$

296,304

 

 

Wallcovering

 

90,767

 

 

 

 

91,620

 

 

 

149,957

 

 

Metallized

 

61,059

 

 

 

 

68,397

 

 

 

80,839

 

 

Composite laminates

 

35,107

 

 

 

 

34,897

 

 

 

38,159

 

 

Technical specialties

   and other

 

71,558

 

 

 

 

71,689

 

 

 

52,592

 

 

Total

$

516,954

 

 

 

$

541,468

 

 

$

617,851

 

 

 

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 2016 to 2015 by $11.1 million and by $75.8 million in the comparison of 2015 to 2014.

We believe many of the markets served by Composite Fibers present attractive growth opportunities due to evolving consumer preferences, new or emerging geographic markets, and increased market share through superior products and quality. We also believe growth opportunities exist as a result of new product innovations. Many of this business’ papers are extremely lightweight, technically sophisticated, require specialized fibers, and require specifically designed papermaking equipment and production processes. Our proven capability to produce these demanding products and our focus on customer relationships positions us well to compete in these global markets.

The primary raw materials used in the production of our lightweight papers are abaca pulp, wood pulp and synthetic fibers. Sufficient quantities of abaca pulp and its source abaca fiber are required to support growth in this business unit. Abaca pulp, a specialized pulp with limited sources of availability, is produced by our Philippine mill, which 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 five paper making facilities (Germany, France and England), two 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)

 

 

155,500 lightweight

   and other paper

 

Abaca pulp

 

 

14,500

 

 

 

 

Wood pulp

 

 

93,000

 

 

 

 

Synthetic fiber

 

 

22,000

 

 

28,000 metallized

 

Base stock

 

 

28,000

 

 

18,000 abaca pulp

 

Abaca fiber

 

 

25,800

 

 

 

Composite Fibers’ lightweight products are produced using highly specialized inclined wire paper machine technology. We believe we currently maintain approximately 25% of the global inclined wire capacity.

In addition to critical raw materials, Composite Fibers’ production cost is influenced by energy prices, particularly natural gas. The business unit generates all of its steam needed for production by burning natural gas. However, in 2016, it purchased approximately 75% of its electricity needs the cost of which is influenced by the natural gas markets.

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

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 consumer products;

 

optimizing 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;

2


 

maximize 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.

 

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. The markets served by Advanced Airlaid Materials include:

 

feminine hygiene;

 

specialty wipes;

 

adult incontinence;

 

home care; and

 

other consumer products.

Advanced Airlaid Materials serves customers who are industry leading consumer product companies as well as private label converters. 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

2016

 

 

 

2015

 

 

2014

 

 

Feminine hygiene

$

173,902

 

 

 

$

182,048

 

 

$

216,836

 

 

Specialty wipes

 

25,206

 

 

 

 

22,950

 

 

 

16,002

 

 

Adult incontinence

 

12,281

 

 

 

 

10,720

 

 

 

17,586

 

 

Home care

 

12,630

 

 

 

 

13,345

 

 

 

15,401

 

 

Other

 

20,243

 

 

 

 

15,526

 

 

 

15,848

 

 

Total

$

244,262

 

 

 

$

244,589

 

 

$

281,673

 

 

 

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 effect of currency changes was not material in 2016 compared with 2015.

The feminine hygiene category accounted for 71% of Advanced Airlaid Material’s revenue in 2016. 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 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. In addition, we are building a new production facility in Fort Smith, Arkansas which is expected to be operational in late 2017 with an annual capacity of approximately 22,000 short tons and will primarily serve the growing demand for wipes and hygiene airlaid products in North America.

The business unit’s two existing 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

 

 

81,000

 

 

 

In addition to the cost of critical raw materials, our cost to produce 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 cost of key raw materials.

Advanced Airlaid Materials continues to be a technology and product innovation leader in technically demanding segments of the airlaid market. 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

 

 

 

GLATFELTER 2016 FORM 10-K

3

 


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

2016

 

 

 

2015

 

 

2014

 

 

Carbonless & forms

$

319,648

 

 

 

$

349,831

 

 

$

376,959

 

 

Engineered products

 

189,463

 

 

 

 

190,943

 

 

 

194,189

 

 

Envelope & converting

 

173,362

 

 

 

 

178,067

 

 

 

183,194

 

 

Book publishing

 

157,541

 

 

 

 

152,647

 

 

 

144,744

 

 

Other

 

3,568

 

 

 

 

3,538

 

 

 

3,805

 

 

Total

$

843,582

 

 

 

$

875,026

 

 

$

902,891

 

 

 

Many of the market segments served by Specialty Papers are characterized by declining demand resulting in an industry with 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 these declining markets, in each of the past twelve 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 assets 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 papers, 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)

 

 

 

815,000

 

 

Pulpwood

 

 

2,340,000

 

 

 

 

 

 

Wood- and other pulps

 

 

730,000

 

 

 

This business unit’s pulp mills have a combined pulp making capacity of 620,000 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.

4


The Spring Grove facility includes four uncoated paper machines as well as an off-line 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 across the Ohio operations’ facilities 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. In 2016, the business unit generated all of its steam needed for production and generated more power than it consumes at the Spring Grove, PA facility, and it purchased approximately 25% of its electricity needed for the Chillicothe, OH mill. In connection with the conversion of the fuel source for its boilers from coal beginning in the fourth quarter of 2016, for the Chillicothe, OH mill and the first quarter of 2017, for the Spring Grove, PA mill, both facilities’ source of fuel is now predominantly natural gas.

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 and forms

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;

 

driving operational excellence by utilizing ongoing continuous improvement

 

methodologies to ensure 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 2016, 2015 and 2014.

Capital Expenditures   Our business is capital intensive and requires significant expenditures for equipment enhancements to support growth strategies, research and development initiatives, environmental compliance and for normal upgrades or replacements. Capital expenditures totaled $160.2 million, $99.9 million and $66.0 million in 2016, 2015 and 2014, respectively. For 2017, capital expenditures are estimated as follows:

 

In millions

Low

 

 

 

High

 

Normal capital expenditures

$

70

 

 

$

80

 

Major Projects

 

 

 

 

 

 

 

 

Airlaid capacity expansion

 

45

 

 

 

50

 

Specialty Papers' environmental

   compliance projects

 

10

 

 

 

10

 

Total

$

125

 

 

$

140

 

 

Environmental Matters   We are subject to various federal, state and local laws and regulations intended to protect the environment as well as human health and safety. At various times, we have incurred significant costs to comply with these regulations and we could incur additional costs as new regulations are developed or regulatory priorities change.

We have incurred 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). In order to comply with these rules, during 2015 and 2016 we completed process modifications on boilers at two of our facilities. We converted or replaced five coal-fired boilers to natural gas and upgraded site infrastructure to accommodate the new boilers, including connecting to a gas supply. The cost of these projects totaled approximately $113 million.

We are a defendant in the Fox River environmental site, a complex and significant matter. For a more

 

GLATFELTER 2016 FORM 10-K

5

 


complete discussion of this matter and our exposure to potential additional costs, see Item 8 – Financial Statements and Supplementary Data – Note 21.

Employees   As of December 31, 2016, we employed 4,346 people worldwide, of which approximately 67% are unionized. The United Steelworkers International Union and the Office and Professional Employees International Union represents approximately 1,440 hourly employees at our Chillicothe, OH and Spring Grove, PA facilities. We have separate labor agreements covering the Ohio and Pennsylvania operations. The three year agreement covering the Ohio operations expires in August 2019 and an agreement covering the Pennsylvania operations expired in February 2017 and is currently under negotiations. 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. 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 to curtail production to match demand. 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 $73.8 million of our revenue in 2016 was earned from customers located in Ukraine, Russia and members of the Commonwealth of Independent States (also known as “CIS”). Uncertain geo-political conditions, this region’s economic environment and weak currencies have caused and may continue to cause weak demand for our products and volatility in our customers buying patterns.

Approximately 28% of our net sales in 2016 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.

Our airlaid materials capacity expansion project may not be successful due to unanticipated costs, unforeseen delays in production of commercially saleable products or softness in the demand for airlaid products.

We are investing approximately $80 million to construct a new airlaid production facility in Fort Smith, Arkansas, to allow us to better meet the growing demands for airlaid materials. The success of our $80 million investment to expand capacity for airlaid materials is dependent on a variety of factors including, among others:

 

i.

our ability to complete the project, in all material respects, within budget and on schedule;

 

ii.

availability and costs of a qualified workforce;

 

iii.

qualification, and acceptance by, customers of products produced;

 

iv.

demand for airlaid materials and market growth rates; and

 

v.

technological changes and innovations.

If we incur significant unforeseen costs or delays or if we are unable to produce commercially acceptable airlaid materials to meet growing demands, our results of operations and/or financial position may be adversely affected.

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

A significant proportion of our revenue and earnings is generated from operations outside of the United States. In addition, 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 including

6


the euro, British pound, Canadian dollars and Philippine peso, among others. Our euro denominated revenue exceeds euro expenses by an estimated €130 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 than the euro. 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, actions of this region’s central banks and disunity within the European Union memberships 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 $73.8 million of our revenue in 2016 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, as well as access to reliable and abundant supply of water to support many of our production facilities.

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 Composite Fibers’ facilities. At certain times, the supply of abaca fiber has been constrained or the quality diminished 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. These factors have contributed to volatility in fiber prices or limited available supply.

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, we recently completed the conversion of Specialty Papers’ boilers to burn natural gas as opposed to coal. Natural gas is now the principal source of fuel for each of our facilities worldwide.

Government rules, regulations and policies have an impact on the cost of certain energy sources, particularly for our European operations. In Europe, 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. Furthermore, the European Commission is investigating certain energy programs in Germany from which we benefit as to whether the programs comply with European Union rules on state aid. The outcome of these investigations could require us to return certain benefits previously earned or reduce such benefits in the future and could impact our results of 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.

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

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

 

GLATFELTER 2016 FORM 10-K

7

 


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 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 or cost competiveness 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, 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;

 

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, has imposed significant compliance costs and

8


required significant capital expenditures. Compliance with the Clean Air Act resulted in significant process modifications to the boilers at two of our facilities.

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. As more fully discussed in Item 8 – Financial Statements and Supplementary Data – Note 21, in 2016 and 2015, we increased our reserve for potential liabilities by $40.0 million and $10 million, respectively. The increase recorded in 2016 was based on our current evaluation of recent developments, particularly a proposed consent decree between two other defendants and the government agencies. We have financial reserves for this matter but we cannot be certain that those reserves will be adequate to provide for future obligations related to this matter, that our share of costs and/or damages will not exceed our available resources, or that such obligations will not have a long-term, material adverse effect on our consolidated financial position, liquidity or results of operations.

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

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’ sales of hygiene products are to one customer. In addition, sales to the feminine hygiene market accounted for 71% of Advanced Airlaid Materials’ net sales in 2016 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.

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 sensitive to 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 production facilities 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.

 

GLATFELTER 2016 FORM 10-K

9

 


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 and/or power interruptions. The Mindanao mill supplies the abaca pulp used by our Composite Fibers business unit to manufacture 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 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 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.

10


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

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

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 24, 2017

 

Name

Age

Office with the Company

Dante C. Parrini

52

Chairman and Chief Executive Officer

John P. Jacunski

51

Executive Vice President,

    Chief Financial Officer

Christopher W. Astley

44

Senior Vice President & Business Unit

    President, Advanced Airlaid

    Materials

Timothy R. Hess

50

Senior Vice President & Business Unit

    President, Specialty Papers

Martin Rapp

57

Senior Vice President & Business Unit

    President, Composite Fibers

William T. Yanavitch II

56

Senior Vice President, Human

    Resources and Administration

David C. Elder

48

Vice President, Finance

Samuel L. Hillard

35

Vice President, Corporate Development & Strategy

Kent K. Matsumoto

57

Vice President, General Counsel and

    Corporate Secretary

 

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 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. From April 2016 through January 2017, Mr. Jacunski also served as President of the Specialty Papers business unit. 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.

 

GLATFELTER 2016 FORM 10-K

11

 


Timothy R. Hess was named Senior Vice President & Business Unit President, Specialty Papers in January 2017. Prior to this, Tim served as Vice President Sales & Marketing, Specialty Papers since 2014, and he was the General Manager – Engineered & Converting Products Division from 2008 - 2014. Since joining our company in 1994, Mr. Hess has held various technical, manufacturing, sales and business development positions within Glatfelter.

Martin Rapp serves as Senior Vice President & Business Unit President, Composite Fibers. Mr. Rapp joined us in August 2006 and has led 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 working for us he was with Dentsply International and Gould Pumps Inc. in various leadership capacities. Mr. Yanavitch will be retiring from Glatfelter effective March 31, 2017.

David C. Elder was named Vice President, Finance in December 2011 and serves as our chief accounting officer. Prior to his promotion, he was our Vice President, Corporate Controller, a position held since joining Glatfelter in January 2006. Mr. Elder was previously Corporate Controller for YORK International Corporation.

Samuel L. Hillard joined us in March 2016 as Vice President, Corporate Development & Strategy. Prior to joining us, Mr. Hillard was Vice President – Business Development for Dover Corporation from July 2014 until 2016 where he was responsible for strategy and mergers & acquisitions within the Fluids Business Segment. From February 2011 to 2014, he served as Vice President – Business Development for SPX Corporation where he was responsible for all M&A related strategy activity within the Flow Technology Segment. Additionally, he previously worked for Blackstone in their M&A group.

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.

 

ITEM 4

MINE SAFETY DISCLOSURES

Not Applicable

 

 

PART II

ITEM 5

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock Prices and Dividends Declared Information

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

 

Quarter

High

 

Low

 

Dividend

2016

 

 

 

 

 

Fourth

$25.49

 

$17.50

 

$0.125

Third

23.43

 

19.16

 

0.125

Second

23.81

 

18.50

 

0.125

First

20.94

 

14.09

 

0.125

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

 

As of February 24, 2017, we had 1,024 shareholders of record.

12


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., and Schweitzer-Mauduit International. 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, 2011 and charts it through December 31, 2016.

 

 

 

 

ITEM 6

SELECTED FINANCIAL DATA

 

As of or for the year ended December 31

Dollars in thousands, except per share

2016

 

 

 

2015

 

 

2014

 

 

2013

 

(1)

2012

 

 

Net sales

$

1,604,797

 

 

 

$

1,661,084

 

 

$

1,802,415

 

 

$

1,722,615

 

 

$

1,577,788

 

 

Energy and related sales, net

 

6,141

 

 

 

 

5,664

 

 

 

7,927

 

 

 

3,153

 

 

 

7,000

 

 

Total revenue

 

1,610,938

 

 

 

 

1,666,748

 

 

 

1,810,342

 

 

 

1,725,768

 

 

 

1,584,788

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Losses) gains on dispositions of plant, equipment

       and timberlands, net

 

(216

)

 

 

 

21,113

 

 

 

4,861

 

 

 

1,726

 

 

 

9,815

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

21,554

 

 

 

$

64,575

 

 

$

69,246

 

 

$

67,158

 

 

$

59,379

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.49

 

 

 

$

1.49

 

 

$

1.60

 

 

$

1.56

 

 

$

1.39

 

 

Diluted

 

0.49

 

 

 

 

1.47

 

 

 

1.57

 

 

 

1.52

 

 

 

1.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

1,521,259

 

 

 

$

1,500,416

 

(2)

$

1,557,710

 

(2)

$

1,674,010

 

(2)

$

1,238,187

 

(2)

Total debt

 

372,608

 

 

 

 

360,662

 

(2)

 

400,818

 

(2)

 

437,925

 

(2)

 

245,202

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

653,826

 

 

 

 

663,247

 

 

 

649,109

 

 

 

684,476

 

 

 

539,679

 

 

Cash dividends declared per common

   share

 

0.50

 

 

 

 

0.48

 

 

 

0.44

 

 

 

0.40

 

 

 

0.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, depletion  and

   amortization

 

65,826

 

 

 

 

63,236

 

 

 

70,555

 

 

 

68,196

 

 

 

69,500

 

 

Capital expenditures

 

160,158

 

 

 

 

99,889

 

 

 

66,046

 

 

 

103,047

 

 

 

58,752

 

 

Net tons sold

 

1,045,121

 

 

 

 

1,051,911

 

 

 

1,059,881

 

 

 

1,029,819

 

 

 

969,833

 

 

Number of employees

 

4,346

 

 

 

 

4,375

 

 

 

4,516

 

 

 

4,403

 

 

 

4,258

 

 

 

 

(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.

 

 

(2)

The amounts set forth for Total assets and Total debt as of December 31, 2015, 2014, 2013 and 2012 has been restated to retroactively adopt Accounting Standards Number 2015-03, Interest - Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs.

 

 

 

 

 

GLATFELTER 2016 FORM 10-K

13

 


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 Russia, Ukraine and Philippines;

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 or changes in pre-tax income and its impact on the valuation of deferred tax assets;

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 future acquisitions.

 

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

Composite Fibers with revenue from the sale of single-serve tea and coffee filtration papers, nonwoven wallcovering base materials, metallized products, composite laminate 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, specialty wipes, home care products 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 other niche specialty applications.

 

 

14


RESULTS OF OPERATIONS

2016 versus 2015

Overview Net income for the year ended December 31, 2016 was $21.6 million, or $0.49 per diluted share compared with $64.6 million, or $1.47 per diluted share in 2015. The GAAP-based results reflect the impact of significant unusual and non-recurring items including, among others, a $40.0 million charge to earnings to increase our reserve in the Fox River environmental matter, a pension settlement charge, and costs related to our environmental compliance initiative and a capacity expansion project. Excluding these items from reported results, adjusted earnings, a non-GAAP measure, was $60.7 million, or $1.38 per diluted share for 2016, compared with $58.9 million, or $1.34 per diluted share, a year ago.

We generated $116.1 million of cash flow from operations in 2016 compared with $133.7 million in 2015. During 2016, capital expenditures totaled $160.9 million primarily related to the environmental compliance project for Specialty Papers and a capacity expansion project for Advanced Airlaid Materials. We also returned additional cash to our shareholders in the form of a 4% increase in the quarterly dividend beginning with the 2016 first quarter dividend payment. This was the fourth consecutive year in which the dividend was increased.

The following table sets forth summarized consolidated results of operations:

 

 

Year ended

December 31

 

 

In thousands, except per share

2016

 

 

 

2015

 

 

Net sales

$

1,604,797

 

 

 

$

1,661,084

 

 

Gross profit

 

218,603

 

 

 

 

202,965

 

 

Operating income

 

27,693

 

 

 

 

96,372

 

 

Net income

 

21,554

 

 

 

 

64,575

 

 

Earnings per diluted share

 

0.49

 

 

 

1.47

 

 

 

Operating income from our business units increased $6.3 million in the year-over-year comparison. The Advanced Airlaid Materials and Specialty Papers businesses reported higher operating income in the comparison, driven by improved operations and lower input costs, partially offset by lower selling prices. However, Composite Fibers’ results were affected by excess capacity in the market, lower selling prices and changes in foreign exchange. Our continuous improvement initiatives and cost control actions during 2016 resulted in approximately $22.7 million of benefits on a consolidated basis.

In addition to the results reported in accordance with GAAP, we evaluate our performance using adjusted earnings and adjusted earnings per diluted share. We disclose this information to allow investors to evaluate our performance exclusive of certain items that impact the comparability of results from period to period and we believe it is helpful in understanding underlying operating trends and cash flow generation. Adjusted earnings consists of net income determined in accordance with GAAP adjusted to exclude the impact of the following:

Fox River environmental matter. This adjustment reflects charges incurred to increase our reserve for estimated costs related to government oversight, remediation activity and long term monitoring and maintenance at the Fox River site. These costs are irregular in timing and as such may not be indicative of our past or future performance.

Pension settlement charge. This adjustment reflects the one-time charge incurred during 2016 in connection with the settlement of certain pension liabilities as part of a voluntary offer to vested terminated participants. Our qualified pension plan is overfunded and this action did not require us to contribute any cash.

Specialty Papers environmental compliance. These adjustments reflect non-capitalized, one-time costs incurred by the business unit directly related to the compliance with the U.S. EPA Best Available Retrofit Technology rule and the Boiler Maximum Achievable Control Technology rule.  This adjustment includes costs incurred during the transition period in which the newly installed equipment was brought on-line.

Airlaid capacity expansion costs. These adjustments reflect non-capitalized, one-time costs incurred related to the start-up of a new airlaid production facility in Ft. Smith, Arkansas.

Cost optimization actions. This adjustment reflects charges incurred in connection with initiatives to optimize the cost structure of certain business units in response to changes in business conditions. The costs are primarily related to headcount reduction efforts, asset write-offs and certain contract termination costs.

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.

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 and future performance of the Company and therefore are excluded for comparability purposes.

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

Adjusted earnings and adjusted earnings per diluted share are considered measures not calculated in accordance with GAAP, and therefore are non-GAAP measures. The non-GAAP financial information should not be considered in isolation from, or as a substitute for,

 

GLATFELTER 2016 FORM 10-K

15

 


measures of financial performance prepared in accordance with GAAP. The following table sets forth the

reconciliation of net income to adjusted earnings for the years ended December 31, 2016 and 2015:

 

 

 

Year ended December 31

 

 

2016

 

 

2015

 

In thousands, except per share

Amount

 

 

Diluted EPS

 

 

Amount

 

 

Diluted EPS

 

Net income

$

21,554

 

 

$

0.49

 

 

$

64,575

 

 

$

1.47

 

Adjustments (pre-tax)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fox River environmental matter

 

40,000

 

 

 

 

 

 

 

10,000

 

 

 

 

 

Pension settlement charge

 

7,306

 

 

 

 

 

 

 

-

 

 

 

 

 

Specialty Papers' environmental compliance

 

8,348

 

 

 

 

 

 

 

-

 

 

 

 

 

Airlaid capacity expansion costs

 

2,661

 

 

 

 

 

 

 

50

 

 

 

 

 

Cost optimization actions

 

3,534

 

 

 

 

 

 

 

2,461

 

 

 

 

 

Asset impairment charge

 

-

 

 

 

 

 

 

 

1,201

 

 

 

 

 

Timberland sales and related costs

 

-

 

 

 

 

 

 

 

(20,867

)

 

 

 

 

Acquisition and integration related costs

 

-

 

 

 

 

 

 

 

178

 

 

 

 

 

Total adjustments (pre-tax)

 

61,849

 

 

 

 

 

 

 

(6,977

)

 

 

 

 

Income taxes (1) (2)

 

(22,719

)

 

 

 

 

 

 

1,328

 

 

 

 

 

Total after-tax adjustments

 

39,130

 

 

 

0.89

 

 

 

(5,649

)

 

 

(0.13

)

Adjusted earnings

$

60,684

 

 

$

1.38

 

 

$

58,926

 

 

$

1.34

 

 

(1)

Tax effect for adjustments calculated primarily based on the tax rate of the jurisdiction in which each adjustment originated.

(2)

Includes release of $1.4 million of tax reserves on timberland sales in 2015.

 

Business Unit Performance

 

Year ended December 31

 

 

 

Advanced Airlaid

 

 

 

 

 

Other and

 

 

 

 

Dollars in millions

Composite Fibers

 

 

Materials

 

 

Specialty Papers

 

 

Unallocated

 

 

Total

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net sales

$

517.0

 

 

$

541.5

 

 

$

244.3

 

 

$

244.6

 

 

$

843.6

 

 

$

875.0

 

 

$

 

 

$

 

 

$

1,604.8

 

 

$

1,661.1

 

Energy and related sales, net

 

 

 

 

 

 

 

 

 

 

 

6.1

 

 

 

5.7

 

 

 

 

 

 

 

 

 

6.1

 

 

 

5.7

 

Total revenue

 

517.0

 

 

541.5

 

 

 

244.3

 

 

 

244.6

 

 

 

849.7

 

 

 

880.7

 

 

 

 

 

 

 

 

 

1,610.9

 

 

 

1,666.7

 

Cost of products sold

 

416.4

 

 

 

434.4

 

 

 

209.5

 

 

 

215.7

 

 

 

752.6

 

 

 

804.5

 

 

 

13.9

 

 

 

9.2

 

 

 

1,392.3

 

 

 

1,463.8

 

Gross profit (loss)

 

100.6

 

 

 

107.1

 

 

 

34.8

 

 

 

28.9

 

 

 

97.1

 

 

 

76.2

 

 

 

(13.9

)

 

 

(9.2

)

 

 

218.6

 

 

 

203.0

 

SG&A

 

46.3

 

 

 

45.7

 

 

 

8.4

 

 

 

7.6

 

 

 

55.9

 

 

 

43.3

 

 

 

80.1