GLATFELTER CORP MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
The following discussion should be read in conjunction with the information contained in the unaudited condensed consolidated financial statements and accompanying notes included herein and Glatfelter’s financial statements and MD&A and discussion of financial condition and results operations included in our 2021 Annual Report on Form 10-K (“2021 Form 10-K”).
Forward-Looking Statements This Quarterly Report on Form 10-Q 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-Q 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 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.risks related to the military conflict betweenRussia andUkraine and its impact on our production, sales, supply chain, cost of energy, and availability of energy due to potential natural gas supply issues intoEurope from theNord Stream 1 pipeline; ii.risks associated with the impact of the COVID-19 pandemic, including global and regional economic conditions, changes in demand for our products, interruptions in our global supply chain, ability to continue production by our facilities, credit conditions of our customers or suppliers, or potential legal actions that could arise due to our operations during the pandemic; iii.disruptions of our global supply chain, including the availability of key raw materials and transportation for the delivery of critical inputs and of products to customers, and the increase in the costs of transporting materials and products; iv.risks associated with our ability to increase selling prices quickly or sufficiently enough to recover rapid cost inflation in our raw materials, energy, freight and other costs; v.variations in demand for our products, including the impact of unplanned market-related downtime, variations in product pricing, or product substitution; vi.the impact of competition, changes in industry production capacity, including the construction of new facilities or new machines, the closing of facilities and incremental changes due to capital expenditures or productivity increases; vii.risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates; viii.our ability to develop new, high value-added products; ix.changes in the price or availability of raw materials we use, particularly woodpulp, pulp substitutes, synthetic pulp, other specialty fibers and abaca fiber; x.changes in energy-related prices and commodity raw materials with an energy component; xi.the impact of unplanned production interruption at our facilities or at any of our key suppliers; xii.disruptions in production and/or increased costs due to labor disputes; xiii.the gain or loss of significant customers and/or on-going viability of such customers; 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 taxes; xvi.enactment of adverse state, federal or foreign tax or other legislation or changes in government legislation, policy or regulation; and xvii.our ability to finance, consummate and integrate acquisitions, including our acquisitions ofMount Holly andJacob Holm .
Introduction We manufacture a wide range of engineered materials and manage our business through three operating segments:
•Composite Fibers with sales of single-serve tea and coffee filtration papers,
wallcovering base materials, composite laminate papers, technical specialties
including substrates for electrical applications, and metallized products;
•Airlaid Materials with sales of airlaid nonwoven fabric-like materials used in
feminine hygiene products, adult incontinence products, tabletop, specialty
wipes, home care products and other airlaid applications; and
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•Spunlace with the sale of premium quality spunlace nonwovens for critical cleaning, high performance materials, personal care, hygiene and medical applications.
The operating results and financial position of the former Specialty Papers business are presented as discontinued operations. The following is a discussion and analysis primarily of the financial results of operations and the financial condition of our continuing operations.
Acquisition As discussed in Item 1 - Financial Statements and Supplementary Data, Note 3 "Acquisitions," we completed our acquisitions ofGeorgia-Pacific's U.S. nonwovens business ("Mount Holly ") onMay 13, 2021 for$170.9 million and the acquisition of all outstanding equity ofPMM Holdings (Luxembourg) AG ("Jacob Holm") onOctober 29, 2021 for$304.0 million . Refer to Note 3 - "Acquisitions""for additional information about these transactions.
RESULTS OF OPERATIONS
Six months ended
Overview For the first six months of 2022, we reported a loss from continuing operations of$110.8 million , or$2.47 per share compared with income of$9.9 million and$0.22 per diluted share in the year earlier period. The following table sets forth summarized consolidated results of operations: Six months ended June 30, In thousands, except per share 2022 2021 Net sales$ 745,643 $ 470,585 Gross profit 69,062 74,850 Operating income (loss) (106,965) 25,442 Continuing operations Income (loss) (110,750) 9,886 Earnings per share (2.47) 0.22 Net income (loss) (110,379) 9,804 Earnings per share (2.46) 0.22 The reported results are in accordance with generally accepted accounting principles inthe United States ("GAAP") and reflect the impact of a number of significant items including a goodwill and other asset impairment charge related to our Dresden operations and Composite Fibers segment, strategic initiatives, corporate headquarters relocation and cost optimization, among others. On an adjusted earnings basis, a non-GAAP measure, we had a loss from continuing operations of$7.8 million , or$0.17 per share for the first six months of 2022, compared with income of$16.5 million , or$0.37 per diluted share, a year ago. Our operating results for the first six months of 2022 reflect: i) the impact ofRussia /Ukraine military conflict which commenced onFebruary 24, 2022 and the compounding impacts, including sanctions on the sale of certain products intoRussia , adversely impacted sales, prices paid for energy, production and collection of receivables and resulted in the recording of a$117.3 million asset impairment charge; ii) the completion of two significant acquisitions in 2021, which collectively added$246.9 million of net sales; iii) the adverse impact of significant inflationary pressures, particularly energy costs, which outpaced our efforts to realize higher selling prices; and iv) interest expense increased reflecting the acquisition financing. In addition to the results reported in accordance with GAAP, we evaluate our performance using adjusted earnings and adjusted earnings per 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 include net earnings determined in accordance with GAAP adjusted to exclude the impact of the following items:
Strategic initiatives. These adjustments primarily reflect professional and legal fees incurred directly related to the evaluation and execution of certain strategic initiatives, including costs associated with acquisitions, related integrations and charges incurred to return acquired inventory to fair value. .
- 29 - -------------------------------------------------------------------------------- Corporate headquarters relocation. These adjustments reflect costs incurred in connection with the strategic relocation of the Company's corporate headquarters toCharlotte, NC . The costs are primarily related to employee relocation costs and exit costs at the former corporate headquarters. Cost optimization actions. These adjustments reflect charges incurred in connection with initiatives to optimize the cost structure of the Company, improve efficiencies or other objectives. Such actions may include asset rationalization, headcount reductions or similar actions. These adjustments, which have occurred at various times in the past, are irregular in timing and relate to specific identified programs to reduce or optimize the cost structure of a particular operating segment or the corporate function.Goodwill and other asset impairment charges. This adjustment represents a non-cash charge recorded to reduce the carrying amount of certain long-lived assets, intangible assets and goodwill of our Dresden facility and the Composite Fibers reporting segment. The impairment was directly related to the adverse impact of theRussia /Ukraine military conflict on our projected revenue and EBITDA.
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 benefit our operating results.
Coronavirus Aid, Relief, and Economic Security (CARES) Act 2020. This adjustment
reflects taxes recorded in connection with passage of the Coronavirus Aid,
Relief, and Economic Security Act ("CARES") related to provisions that modified
the "net operating loss" provisions of previous law to allow certain losses to
be carried back five years.
These adjustments are each unique and not considered to be on-going in nature.
The transactions are irregular in timing and amount and may significantly impact
our operating performance. As such, these items may not be indicative of our
past or future performance and therefore are excluded for comparability
purposes.
Adjusted earnings and adjusted earnings per 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, measures of financial performance prepared in accordance with
GAAP.
The following table presents the reconciliation of net earnings and adjusted earnings for the period indicated:
Six
months ended
2022 2021 In thousands, except per share Amount EPS Amount EPS Net income (loss)$ (110,379) $ (2.46) $ 9,804 $ 0.22 Exclude: Loss (income) from discontinued operations, net of tax (371) (0.01) 82 - Income (loss) from continuing operations (110,750) (2.47) 9,886 0.22 Adjustments (pre-tax): Goodwill and other asset impairment charges (1) 117,349 - Russia/Ukraine conflict charges (2) 3,948 - Strategic initiatives (3) 2,488 8,434 Corporate headquarters relocation 223 361 Cost optimization actions (4) 941 - Timberland sales and related costs (2,962) (2,403) Total adjustments (pre-tax) 121,987 6,392 Income taxes (5) (19,167) 31 CARES Act of 2020 tax provision (6) 175 183 Total after-tax adjustments 102,995 2.30 6,606 0.15 Adjusted earnings (loss) from continuing operations$ (7,755) $
(0.17)
(1)Reflects goodwill impairment charge of$56.1 million and other asset impairment charges of$61.3 million . Refer to Note 6,Goodwill and Other Asset Impairment, for details of this item. (2)Reflects bad debt expense charges of$2.9 million and inventory reserves charges$1.0 million . Refer to Note 6,Goodwill and Other Asset Impairment, for details of this item. (3)For 2022, primarily reflects professional services fees (including legal, audit, valuation specialists and consulting) of$1.7 million , employee separation and other costs of$0.8 million and other costs, all of which are directly related to acquisitions. For 2021, primarily reflects - 30 - -------------------------------------------------------------------------------- professional services fees related to acquisitions (including legal, audit and valuation specialists) of$7.1 million , employee separation and other costs of$0.6 million , inventory valuation step-up costs of$0.5 million and other costs, all of which are directly related to acquisitions. (4)Primarily reflects employee separation costs of$0.4 million , equipment write-down of$0.4 million and other costs of$0.1 million directly associated with closure of synthetic fiber production facility in theU.K. . (5)Tax effect on adjustments calculated based on the incremental effective tax rate of the jurisdiction in which each adjustment originated. For items originating in theU.S. , no tax effect is recognized due to the previously established valuation allowance on the net deferred tax assets. No tax effects were recognized on the goodwill impairment as there were no related deferred taxes. (6)Reflects the tax effect of applying certain provisions of the CARES Act of 2020.
Sector financial performance
Six months ended June 30, Dollars in thousands 2022 2021Net Sales Composite Fibers$ 259,167 $ 282,847 Airlaid Material 293,172 187,738 Spunlace 193,304 - Total$ 745,643 $ 470,585 Operating income (loss) Composite Fibers$ 5,444 $ 27,128 Airlaid Material 24,165 15,628 Spunlace (3,380) - Other and unallocated (133,194) (17,314) Total$ (106,965) $ 25,442 Depreciation and amortization Composite Fibers$ 11,315 $ 13,981 Airlaid Material 15,171 12,615 Spunlace 5,859 - Other and unallocated 2,591 1,870 Total$ 34,936 $ 28,466 Capital expenditures Composite Fibers$ 10,258 $ 5,655 Airlaid Material 5,532 3,036 Spunlace 3,886 - Other and unallocated 3,021 2,520 Total$ 22,697 $ 11,211 Tons shipped (metric) Composite Fibers 52,457 68,611 Airlaid Material 83,733 63,179 Spunlace 40,094 - Total 176,284$ 131,790 Segments Results of individual operating segments 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 inthe United States of America ; therefore, the financial results of individual segments are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the segments. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not - 31 - -------------------------------------------------------------------------------- directly aligned with the segment are allocated primarily based on an estimated utilization of support area services or are included in "Other and Unallocated" in the table set forth above. Management evaluates results of operations of the operating segments before 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 the segments 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 operating segments results, management does not use any measures of total assets. This presentation is aligned with the management and operating structure of our company. It is also on this basis that the Company's performance is evaluated internally and by the Company's Board of Directors.
Sales and cost of goods sold
Six months ended June 30, In thousands 2022 2021 Change Net sales$ 745,643 $ 470,585 $ 275,058 Costs of products sold 676,581 395,735 280,846 Gross profit$ 69,062 $ 74,850 $ (5,788) Gross profit as a percent of Net sales 9.3 % 15.9
%
The following table sets forth the contribution to consolidated net sales by
each segment:
Six months ended June 30,
Percent of Total 2022 2021
Segment
Composite Fibers 34.8 % 60.1 %
Airlaid Materials 39.3 39.9
Spunlace 25.9 -
Total 100.0 % 100.0 %
Net sales totaled
Composite Fibers' net sales decreased$23.7 million or 8.4% in the first six months of 2022, compared to the year-ago quarter. Wallcover shipments were below prior year by 49% due to lower shipments to customers inRussia andUkraine , resulting from the continuation of the military conflict in this region and prohibition of the export of sanctioned wallcover base paper and tea filter products toRussia . Lower shipments were partially offset by higher selling prices of$32.0 million . Currency translation was unfavorable$18.0 million . Composite Fibers had operating income of$5.4 million in the first six months of 2022 compared with$27.1 million in the year-ago period. Higher selling prices and energy surcharges of$32.0 million fell$14.0 million short of recovering continued inflation in energy and raw material. Lower shipments and market related downtime, primarily in our Dresden facility, negatively impacted results by$12.2 million . The impact of currency and related hedging positively impacted earnings by$4.5 million . The primary drivers of the change in Composite Fibers' operating income are summarized in the following chart (presented in millions): - 32 - -------------------------------------------------------------------------------- [[Image Removed: glt-20220630_g2.jpg]] Airlaid Materials' net sales increased$105.4 million in the year-over-year comparison driven by higher shipments in all major product categories and higher selling prices from cost-pass-through arrangements with customers. Shipments were 32.5% higher driven by strong growth in the tabletop, wipes, and hygiene product categories, including the benefit from a full six months ofMount Holly in 2022. Currency translation was$14.1 million unfavorable. Airlaid Materials' operating income, for the first six months of 2022, of$24.2 million was$8.5 million higher than the same period in 2021. Higher shipments and product mix positively impacted results by$11.9 million . Selling price increases of$36.4 million was$2.4 million short of offsetting the higher raw material prices and energy inflation costs. Operations were favorable$1.6 million driven by higher production, which offset other general inflationary pressures. The impact of currency and related hedging negatively impacted earnings by$2.5 million . The primary drivers are summarized in the following chart (presented in millions): [[Image Removed: glt-20220630_g3.jpg]] Spunlace net sales for the first six months were approximately$193.3 million . An operating loss of$3.4 million was mainly driven by higher raw material and energy costs only partially offset by higher selling prices and energy surcharges. Asset Impairment During the first quarter of 2022, in connection with an assessment of potential impairment of long-lived and indefinite-lived intangible assets stemming from the compounding impacts resulting from theRussia /Ukraine military conflict and related sanctions, we recorded a$117.3 million non-cash asset impairment charge related to Composite Fibers' Dresden facility and an impairment of Composite Fibers' goodwill. Dresden is a single-line facility that produces wallcover base paper, the majority of which is directly sold into the Russian and Ukrainian markets. As a direct - 33 - -------------------------------------------------------------------------------- result of the economic impacts from the conflict, including disruptions in the underlying financial systems and prohibition of the export of sanctioned wallcover base paper toRussia , management expects a significant reduction in wallcover revenues and associated cash flows for the foreseeable future. In addition, the conflict is expected to significantly impact energy prices and also impact other Composite Fibers products that are subject to export sanctions intoRussia . During the year endedDecember 31, 2021 , we had total net sales of wallcover and other products to customers inRussia andUkraine totaling approximately$95 million . We do not expect significant sales to customers in this region for the foreseeable future as a result of the military conflict, its impact on Ukrainian customers, and the economic sanctions on sales of certain products to customers inRussia . Accordingly, a charge was recorded to reduce the carrying value of the Dresden fixed assets and intangible assets (technological know-how, customer relationships, and an indefinite-lived trade name), along with Composite Fiber's goodwill to fair value. In addition, as a result of economic sanctions and disruptions to the financial markets, certain customers are not able to satisfy outstanding accounts receivables. As such, during the first quarter of 2022, we recognized bad debt expense of approximately$2.9 million directly related to Russian and Ukrainian customers which is included in "Selling, general and administrative expenses" in the accompanying condensed consolidated statements of income for the six months endedJune 30, 2022 . AtJune 30, 2022 , we had accounts receivable, net of reserves, from customers in this region totaling approximately$2.6 million which we expect to collect in normal course. However, if circumstances change such that some customers are unable to satisfy their obligations, we may be required to recognize additional bad debt expense in future periods. Furthermore, during the first quarter of 2022, we increased inventory reserves by approximately$1.0 million , primarily related to wallcover products. The charge related to inventory reserves is included in "Cost of products sold" in the accompanying condensed consolidated statements of income for the six months endedJune 30, 2022 . Substantially all other products which we will no longer be able to export toRussia due to sanctions can be sold to existing customers outside theRussia /Ukraine region. Other and Unallocated The amount of operating expense not allocated to a reporting segment in the Segment Financial Information totaled$133.2 million in the first six months of 2022 compared with$17.3 million in the same period a year ago. Excluding the items identified to present "adjusted earnings," unallocated expenses for the first six months of 2022 decreased$0.3 million compared to the same period in 2021. Income taxes In the first six months of 2022, our loss from continuing operations totaled$124.2 million and we recorded an income tax benefit of$13.5 million . On adjusted pre-tax loss of$2.3 million , income tax provision was$5.5 million in the first six months of 2022, which primarily related to reserves for uncertain tax positions and valuation allowances for losses for which no tax benefit could be recognized. The comparable amounts in the first six months of 2021 were adjusted pre-tax income of$27.5 million and income tax expense of$11.0 million , respectively. Foreign Currency We own and operate facilities inCanada ,Germany ,France , theUnited Kingdom ,Spain , andthe Philippines . The functional currency of our Canadian operations is theU.S. dollar. However, inGermany ,France andSpain , it is the euro, in theUK , it is the British pound sterling, and inthe Philippines the functional currency is the peso. On an annual basis, our euro denominated net sales exceeds euro expenses by an estimated €150 million. For the first six months of 2022, the average currency exchange rate was1.09 dollar /euro compared with 1.20 in the same period of 2021. With respect to the British pound sterling, Canadian dollar, and Philippine peso, we have differing amounts of inflows and outflows 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. The translation of the results from international operations intoU.S. dollars is subject to changes in foreign currency exchange rates.
The table below summarizes the translation impact on reported results that changes in exchange rates have had on our
In thousands Six months ended June 30,
Favorable
(unfavorable)
Net sales $ (32,135)
Costs of products sold 31,774
SG&A expenses 2,010
Income taxes and other 241
Net loss $ 1,890
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-------------------------------------------------------------------------------- The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2022 were the same as 2021. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.
Three months completed
Overview For the second quarter of 2022, we reported a loss from continuing operations of
Three months ended June 30, In thousands, except per share 2022 2021 Net sales$ 363,963 $ 244,911 Gross profit 37,397 35,554 Operating income 8,924 8,123 Continuing operations: Income (loss) (2,460) 1,492 Earnings per share (0.05) 0.03 Net income (loss) (2,052) 1,410 Earnings per share (0.05) 0.03 The reported results are in accordance with generally accepted accounting principles inthe United States ("GAAP") and reflect the impact of significant items including strategic initiatives and corporate headquarters relocation costs, among others. On an adjusted earnings basis, a non-GAAP measure, we had a loss from continuing operations of$1.6 million , or$0.04 per share for the second quarter of 2022, compared with income of$8.0 million , or$0.18 per diluted share, a year ago. Our second quarter of 2022 operating results reflect: i) the continuation of the compounding impacts of theRussia /Ukraine military conflict commencing onFebruary 24, 2022 including the adverse impact of the prohibition of the export of sanctioned products intoRussia ; ii) the completion of two significant acquisitions in 2021, which collectively added$123.2 million of net sales; iii) the adverse impact of significant inflationary pressures, particularly energy costs, which outpaced our efforts to realize higher selling prices; and iv) interest expense increased reflecting the acquisition financing.
The following table presents the reconciliation of net earnings and adjusted earnings for the period indicated:
Three
months ended
2022 2021 In thousands, except per share Amount EPS Amount EPS Net income (loss)$ (2,052) $ (0.04) $ 1,410 $ 0.03 Exclude: Income from discontinued operations, net of tax (408) (0.01) 82 - Income (loss) from continuing operations (2,460) (0.05) 1,492 0.03 Adjustments (pre-tax): Strategic initiatives (1) 653 7,831 Corporate headquarters relocation 135 206 Timberland sales and related costs - (1,553) Total adjustments (pre-tax) 788 6,484 Income taxes (2) (20) (50) CARES Act of 2020 tax provision (3) 96 90 Total after-tax adjustments 864 0.01 6,524 0.15 Adjusted earnings (loss) from continuing operations$ (1,596) $
(0.04)
(1)For 2022, primarily reflects professional services fees (including legal, audit, valuation specialists and consulting) of$0.5 million , employee separation and other costs of$0.4 million and other costs, all of which are directly related to acquisitions. For 2021, reflects professional services fees related to acquisitions (including transaction advisory, legal, audit and valuation specialists) of$6.5 million , employee separation and other costs of$0.6 million , inventory valuation step-up costs of$0.5 million and other costs all of which are directly related to acquisitions. (2)Tax effect on adjustments calculated based on the incremental effective tax rate of the jurisdiction in which each adjustment originated. For items originating in theU.S. , no tax effect is recognized due to the previously established valuation allowance on the net deferred tax assets. (3)Reflects the tax effect of applying certain provisions of the CARES Act of 2020. - 35 - --------------------------------------------------------------------------------
Sector financial performance
Three months ended June 30, Dollars in thousands 2022 2021 Net sales Composite Fibers$ 123,338 $ 141,598 Airlaid Material 143,708 103,313 Spunlace 96,917 - Total$ 363,963 $ 244,911 Operating income (loss) Composite Fibers$ 5,779 $ 11,063 Airlaid Material 11,944 8,431 Spunlace (1,808) - Other and unallocated (6,991) (11,371) Total$ 8,924 $ 8,123 Depreciation and amortization Composite Fibers$ 4,796 $ 7,000 Airlaid Material 7,542 6,767 Spunlace 2,945 - Other and unallocated 1,169 966 Total$ 16,452 $ 14,733 Capital expenditures Composite Fibers$ 4,131 $ 2,882 Airlaid Material 2,064 1,297 Spunlace 1,801 - Other and unallocated 2,353 1,653 Total$ 10,349 $ 5,832 Tons shipped (metric) Composite Fibers 24,246 34,471 Airlaid Material 40,681 34,315 Spunlace 19,358 - Total 84,285$ 68,786 Segments Results of individual operating segments 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 inthe United States of America ; therefore, the financial results of individual segments are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the segments. 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 segment are allocated primarily based on an estimated utilization of support area services or are included in "Other and Unallocated" in the table set forth above. Management evaluates results of operations of the operating segments before 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 the segments - 36 - -------------------------------------------------------------------------------- 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 operating segments results, management does not use any measures of total assets. This presentation is aligned with the management and operating structure of our company. It is also on this basis that the Company's performance is evaluated internally and by the Company's Board of Directors.
Sales and cost of goods sold
Three months ended June 30, In thousands 2022 2021 Change Net sales$ 363,963 $ 244,911 $ 119,052 Costs of products sold 326,566 209,357 117,209 Gross profit$ 37,397 $ 35,554 $ 1,843 Gross profit as a percent of Net sales 10.3 %
14.5%
The following table sets forth the contribution to consolidated net sales by
each segment:
Three months ended June 30,
Percent of Total 2022 2021
Segment
Composite Fibers 33.9 % 57.8 %
Airlaid Materials 39.5 42.2
Spunlace 26.6 -
Total 100.0 % 100.0 %
Net sales totaled $364.0 million and $244.9 million in the second quarter of
2022 and 2021, respectively. Net sales for Composite Fibers and Airlaid
Materials (including Mount Holly ) decreased by 4.4% and increased by 47.7%,
respectively, on a constant currency basis. The Spunlace segment, formed in
connection with the Jacob Holm acquisition, had net sales of approximately $96.9
million in the second quarter of 2022.
Composite Fibers' net sales decreased $18.3 million or 12.9% in the second
quarter of 2022, compared to the year-ago quarter. Higher selling prices of
$14.4 million were more than offset by lower shipments of 29.7%. Wallcover
shipments were below prior year by 62% due to lower shipments to customers in
Russia and Ukraine , resulting from the continuation of the geopolitical conflict
in this region and prohibition of the export of sanctioned wallcover and tea
filter products into Russia . Currency translation was unfavorable $12.0 million .
Composite Fibers had operating income for the second quarter of $5.8 million
compared with $11.1 million operating income in the second quarter of 2021.
Lower shipments and market-related downtime, primarily in our Dresden facility,
negatively impacted results by $6.4 million . Higher selling prices and energy
surcharges of $14.4 million fell $2.5 million short of fully recovering
continued inflation in energy, raw material and freight of $16.9 million . The
impact of currency and related hedging positively impacted earnings by $3.6
million mainly driven by weakening of the British Pound. The primary drivers of
the change in Composite Fibers' operating income are summarized in the following
chart (presented in millions):
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[[Image Removed: glt-20220630_g4.jpg]]
Airlaid Materials' net sales increased $40.4 million in the year-over-year
comparison driven by the Mount Holly acquisition, higher shipments in all major
product categories, and higher selling prices from cost-pass-through
arrangements with customers. Shipments were 18.6% higher driven by strong growth
in the wipes, tabletop, and hygiene product categories. Currency translation was
$8.9 million unfavorable.
Airlaid Materials' second quarter operating income of $11.9 million was $3.5
million higher when compared to the second quarter of 2021. Higher shipments
positively impacted results by $3.9 million . Selling price increases and energy
surcharges of $18.0 million fully offset the higher raw material and energy
costs which improved results by $0.8 million . Operations were slightly favorable
by $0.3 million as higher production was mostly offset by general inflationary
pressures. The impact of currency and related hedging negatively impacted
earnings by $1.5 million due to a weakening Euro. The primary drivers are
summarized in the following chart (presented in millions):
[[Image Removed: glt-20220630_g5.jpg]]
Spunlace net sales for the second quarter were approximately
Other and Unallocated The amount of operating expense not allocated to a reporting segment in the Segment Financial Information totaled$7.0 million in the second quarter of 2022 compared with$11.4 million in the same period a year ago. Excluding the items identified to present "adjusted earnings," unallocated expenses for the second quarter of 2022 increased$1.3 million compared to the second quarter of 2021. - 38 - -------------------------------------------------------------------------------- Income taxes In the second quarter of 2022, our income from continuing operations totaled$0.8 million and we recorded an income tax provision of$3.3 million . On adjusted pre-tax income of$1.6 million , the income tax expense was$3.2 million in the second quarter of 2022, which primarily related to reserves for uncertain tax positions and valuation allowances for losses for which no tax benefit could be recognized. The comparable amounts in the same quarter of 2021 were adjusted pre-tax income of$12.0 million and income tax expense of$4.0 million , respectively. Foreign Currency We own and operate facilities inCanada ,Germany ,France , theUnited Kingdom ,Spain , andthe Philippines . The functional currency of our Canadian operations is theU.S. dollar. However, inGermany ,France andSpain , it is the Euro, in theUK , it is the British pound sterling, and inthe Philippines the functional currency is the peso. On an annual basis, our euro denominated net sales exceeds euro expenses by an estimated €150 million. For the three months endedJune 30, 2022 , the average currency exchange rate was1.07 dollar /euro compared with 1.19 in the same period of 2021. With respect to the British pound sterling, Canadian dollar, and Philippine peso, we have differing amounts of inflows and outflows 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. The translation of the results from international operations intoU.S. dollars is subject to changes in foreign currency exchange rates.
The table below summarizes the translation impact on reported results that changes in exchange rates have had on our
In thousands Three months ended June 30, 2022
Favorable
(unfavorable)
Net sales $ (20,875)
Costs of products sold 21,553
SG&A expenses 1,384
Income taxes and other 190
Net loss $ 2,252
The above table only presents the financial reporting impact of foreign currency
translations assuming currency exchange rates in 2022 were the same as 2021. It
does not present the impact of certain competitive advantages or disadvantages
of operating or competing in multi-currency markets.
CASH AND CAPITAL RESOURCES
Our business requires significant expenditures for new or enhanced equipment, to
support our research and development efforts, and to support our business
strategy. In addition, we have mandatory debt service requirements of both
principal and interest. The following table summarizes cash flow information for
each of the periods presented:
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Six months ended June 30,
In thousands 2022 2021
Cash, cash equivalents and restricted cash at the beginning of
period $ 148,814 $ 111,665
Cash provided (used) by
Operating activities (79,535) 1,365
Investing activities (18,136) (181,136)
Financing activities 33,546 165,138
Effect of exchange rate changes on cash (3,587) (1,432)
Change in cash and cash equivalents from discontinued operations (231) (238)
Net cash used (67,943) (16,303)
Cash, cash equivalents and restricted cash at the end of period 80,871 95,362
Less: restricted cash in Prepaid and other current assets (2,000) (2,000)
Less: restricted cash in Other assets (7,395) (9,197)
Cash and cash equivalents at the end of period $
71,476
AtJune 30, 2022 , we had$71.5 million in cash and cash equivalents ("cash") held by both domestic and foreign subsidiaries. Approximately 89.3% of our cash and cash equivalents is held by our foreign subsidiaries but could be repatriated without incurring a significant amount of additional taxes. Cash used by operating activities in the first six months of 2022 totaled$79.5 million compared with cash provided by operating activities of$1.4 million in the same period a year ago. The increase was primarily due to an increase in working capital usage, primarily accounts receivable, inventory and the termination of a factoring arrangement previously utilized by certain formerJacob Holm entities, an$11.5 million reduction in adjusted EBITDA, a$7.6 million increase in income taxes paid and a$13.0 million increase in interest paid. Adjusted EBITDA Six months ended June 30, In thousands 2022 2021 Net income (loss)$ (110,379) $ 9,804 Exclude: Income (loss) from discontinued operations, net of tax (371) 82 Add back: Taxes on Continuing operations (13,489) 11,211 Depreciation and amortization 34,936 28,466 Interest expense, net 15,479 3,272 EBITDA (73,824) 52,835
Adjustments:
Goodwill and other asset impairment charges 117,349 - Russia/Ukraine conflict charges 3,948 - Strategic initiatives 2,488 8,434 Share-based compensation (1) 2,419 2,537 Corporate headquarters relocation 223 361 Cost optimization actions 589 - Timberland sales and related costs (2,962) (2,403) Adjusted EBITDA$ 50,230 $ 61,764
(1) Adjusted EBITDA for 2021 has been restated to add share-based compensation in accordance with our amended credit agreement. The stock-based compensation adjustment represents the non-cash amount of stock-based compensation expense included in results of operations.
EBITDA is a measure used by management to assess our operating performance and
is calculated using income (loss) from continuing operations and excludes
interest expense, interest income, income taxes and depreciation and
amortization. Adjusted EBITDA is calculated using EBITDA and further excludes
certain items management considers to be unrelated to the company's core
operations. The adjustments include asset impairment charges, costs of strategic
initiatives, certain cost optimization and restructuring activities, corporate
headquarters relocation expenses, as well as the elimination of gains
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from the sale of woodlots. Adjusted EBITDA is a performance measure that excludes costs that we do not consider to be indicative of our ongoing operating performance.
Net cash used by investing activities was$18.1 million compared with$181.1 million in the same period a year ago. During the six months endedJune 30, 2021 , we used$172.3 million for theMount. Holly acquisition. Capital expenditures totaled$22.7 million and$11.2 million for the six months endedJune 30, 2022 and 2021, respectively, and are expected to be$45 million to$50 million , including$7 million to$8 million for Spunlace integration, for the full year 2022. Net cash provided by financing activities totaled$33.5 million in the first six months of 2022 compared with$165.1 million in the same period of 2021. The change in financing activities primarily reflects a decrease in borrowings under our revolving credit agreement. In 2021, we used borrowings under the revolving credit facility to pay for theMount Holly acquisition. As discussed in Item 1 - Financial Information, Note - 16, our Credit Agreement contains a number of customary compliance covenants. As ofJune 30, 2022 , the leverage ratio, as calculated in accordance with the definition in our Credit Agreement, was 5.3x, well within the maximum limit allowed under our Credit Agreement. A breach of these requirements would give rise to certain remedies under the Revolving Credit Facility, among which are the termination of the agreement and accelerated repayment of the outstanding borrowings plus accrued and unpaid interest under the Credit Agreement. As discussed in Note 16 - "Long Term Debt," onMay 9, 2022 , we amended our Credit Agreement to increase the maximum leverage ratio to 6.75 to 1.0 until the quarter endedDecember 31, 2023 , after which the maximum ratio will step down to 4.0 to 1.0.
Details of our outstanding long-term debt are presented in Section 1 – Financial Statements – Note 16 – “Long-term debt”.
Financing activities include cash used for common stock dividends. In the first six months of 2022 and 2021, we used$12.5 million and$12.0 million , respectively, of cash for dividends on our common stock. Our 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. 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. AtJune 30, 2022 , we had ample liquidity consisting of$71.5 million of cash on hand and$131.6 million of capacity under our revolving credit facility. 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. Off-Balance-Sheet Arrangements As ofJune 30, 2022 andDecember 31, 2021 , 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, are reflected in the condensed consolidated balance sheets included herein in Item 1 - Financial Statements. - 41 -
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