Glatfelter Reports Second Quarter Loss on Charges
Aug. 8, 2006 (Press Release) - Glatfelter today reported that its second quarter 2006 results were significantly impacted by its recent acquisitions, the shutdown of its Neenah facility and increased costs and reduced production volumes associated with annual maintenance outages at its U.S. facilities.
The Company reported a net loss of $20.7 million, or $0.46 per share, for the second quarter of 2006, compared to net income of $1.7 million, or $0.04 per diluted share, in the same quarter a year ago. The reported results for the current year's quarter include, all on an after-tax basis, Neenah related shutdown charges of $14.9 million, acquisition integration costs of $2.3 million and a $1.8 million charge for the early redemption of outstanding debt. These charges were partially offset by a $0.6 million after-tax gain on the sale of timberlands and $0.1 million of insurance recoveries. The 2005 second quarter results include a $1.4 million, after-tax, gain from insurance recoveries. Excluding these items from each period's results, adjusted earnings, which constitute a non-GAAP financial measure, were a loss of $2.4 million, or $0.05 per share in the second quarter of 2006 and earnings of $0.3 million or $0.01 per diluted share in the comparable quarter of 2005. For a reconciliation of this non-GAAP measure to earnings calculated in accordance with GAAP, see the tabular presentation at the end of this release.
"This has been a tremendously active period of transition for our Company. Our quarterly financial results were adversely impacted by the costs of significant actions to integrate recent acquisitions, annual maintenance outages, and a major papermaking machine upgrade," said George H. Glatfelter II, Chairman and Chief Executive Officer. "Meanwhile, business performance remains strong and continues to improve. The Specialty Papers business unit is benefiting from strong orders and a favorable pricing environment. Furthermore, our Composite Fibers business unit, formerly known as Long Fiber & Overlay Papers, also benefited from improving order patterns in many of its markets for the second consecutive quarter."
Significant Second Quarter Events
During the second quarter of 2006, the Company reported it had:
- Completed, on April 3, 2006, its previously announced acquisition of the carbonless paper operation of NewPage Corporation (Chillicothe), for $81.8 million in cash, subject to post-closing working capital adjustments, and accordingly, Chillicothe's results of operations are included since the date of acquisition;
- Ceased production, on June 30, 2006, at the Neenah, Wisconsin facility and recorded shutdown related charges of $14.9 million, after tax;
- Transferred production of approximately 125,000 tons (annually) of book publishing papers from Neenah to the Chillicothe, Ohio facility;
- Accomplished significant progress in the integration of Chillicothe;
- Successfully refinanced its bank credit facility with a $100 million term loan and a $200 million revolving credit facility in addition to issuing $200 million of bonds and redeeming $150 million outstanding bonds scheduled to mature in July 2007.
- Completed the regularly scheduled annual maintenance outages at the Chillicothe and Spring Grove facilities, and;
- Completed a $21 million upgrade to a papermaking machine at the Spring Grove facility.
Second Quarter Results
Net sales totaled $279.7 million for the second quarter of 2006, an increase of $134.4 million, or 92.5%, compared to the same quarter a year ago. Net sales from Chillicothe and the Lydney mill, which was acquired March 13, 2006, totaled $124.1 million. These acquisitions' results are reported in the Specialty Papers and Composite Fibers business units, respectively. Excluding the effect of Chillicothe in the comparison, Specialty Papers' net sales benefited from a $5.6 million impact of higher average selling prices but the comparison was adversely impacted by lost capacity, which totaled approximately 9,000 tons, associated with the upgrade of a papermaking machine at Spring Grove. Excluding results of the Lydney mill, Composite Fibers' volumes shipped increased approximately 20%. The translation of foreign currencies unfavorably impacted this business unit's 2006 second quarter net sales by $2.5 million and average selling prices declined $1.3 million compared to the same quarter a year ago.
Effective June 30, 2006, the Company permanently shutdown its Neenah, WI facility in connection with its Chillicothe acquisition. Products that had been manufactured at the Neenah facility have been transferred to Chillicothe. The results of operations for the second quarter of 2006 include related pre-tax charges of $23.2 million, of which $16.6 million is reflected in the consolidated income statement as components of cost of products sold and $6.6 million is reflected as "Shutdown charges." Additional Neenah shutdown related charges totaling approximately $2.5 million to $4.0 million are expected to be recorded in the third and fourth quarters of 2006.
Costs of products sold totaled $276.8 million for the second quarter of 2006, an increase of $148.7 million compared with the same quarter a year ago. As discussed above, the 2006 second quarter costs of products sold includes a $16.6 million pre-tax charge for inventory write-downs and accelerated depreciation on property and equipment to be abandoned in connection with the Neenah shutdown. Excluding these charges, the increase in costs of products sold was primarily due to the inclusion of the Chillicothe and Lydney operations, an $8.3 million effect of increased shipping volumes, as well as higher raw material and energy prices that increased costs of products sold by approximately $4.4 million. The translation of foreign currencies reduced costs of products sold by $2.1 million. During the second quarters of 2006 and 2005, the Company completed its annually scheduled maintenance outages of its Spring Grove, PA facility in addition to the previously discussed papermaking machine upgrade. Further, in the 2006 second quarter, the annual maintenance outage of the Chillicothe facility was completed. These actions result in increased maintenance spending and reduced production leading to unfavorable manufacturing variances that negatively affect costs of products sold. The maintenance outages had an estimated impact on gross profit of approximately $17.4 million in the second quarter of 2006 and $5.9 million in the comparable quarter a year ago. In addition, while all products have been successfully made at Chillicothe, the Company is now diligently focused on improving its productivity and efficiency over the results included in the 2006 second quarter.
Selling, general and administrative ("SG&A") expenses totaled $25.0 million in the second quarter of 2006 compared with $17.0 million in the year-earlier second quarter. The amounts reported for the second quarter of 2006 include approximately $3.7 million of acquisition integration related expenses. Excluding these non-recurring costs, the balance of the increase in SG&A expenses is primarily due to the inclusion of the Chillicothe and Lydney operations in the current quarter's results of operations.
During the quarter, the Company completed the placement of a $200 million bond offering, the proceeds of which were primarily used to redeem then outstanding $150 million notes scheduled to mature in July 2007. As a result the Company incurred a pre-tax charge of $2.9 million for an early redemption premium and the write-off of unamortized debt issuance costs, which is recorded in Consolidated Statement of Income under the caption "Other-net".
Year to Date Results
For the first six months of 2006, the Company's net loss totaled $32.6 million or $0.73 per share, compared to net income of $8.0 million and $0.18 per diluted share, respectively, in the same period of 2005. Reported results for the first six months of 2006 include, all on an after-tax basis, Neenah related shutdown charges of $32.5 million, acquisition integration costs of $3.3 million and a $1.8 million charge for the early redemption of outstanding debt. These charges were partially offset by a $0.6 million after-tax gain on the sale of timberlands and $0.1 million of insurance recoveries. The results for the first six months of 2005 benefited from insurance recoveries totaling $1.4 million, after tax.
Commenting on the outlook for remainder of 2006, Mr. Glatfelter stated, "Business conditions remain strong for our Specialty Papers business with prices rising in most of our markets. With our annual maintenance outages and the major machine upgrade now complete, we expect this business to maintain its strong operating rates for the remainder of the year. We also expect stable market conditions in most of our Composite Fibers markets."
Mr. Glatfelter added, "We have made great progress in executing integration plans at Chillicothe and we are continuing to work through the regulatory proceedings involving the Lydney, U.K. facility. With respect to the Chillicothe acquisition, we are focused on continuing the high level of service to the carbonless and book publishing markets, optimizing production of book paper and continuing integration efforts related to logistics and information technology, among other areas. I am very pleased with our accomplishments so far and we remain on track to achieve our objectives."