Glatfelter 2nd Quarter Profit Up on Sales
Aug. 5, 2008 - Glatfelter today reported record quarterly net sales of $320.2 million for the second quarter ended June 30, 2008, an 11.2% increase compared with $288.1 million for the second quarter of 2007. Net income for the 2008 second quarter was $3.2 million, or $0.07 per diluted share, compared with a net income of $2.0 million, or a $0.04 per diluted share, for same quarter of last year.
Second quarter 2008 net income benefited from a $0.5 million reversal of a reserve associated with the sale of the Company’s Neenah facility, partially offset by $0.2 million in acquisition integration costs, each after taxes. The second-quarter 2007 results included $3.5 million in gains from the sale of timberlands and $0.7 million in acquisition integration costs, all after taxes. Excluding these items from each period’s results, second-quarter 2008 adjusted earnings, which constitute a non-GAAP financial measure, were $0.06 per diluted share, compared to a net loss of $0.02 per diluted share in the second quarter of 2007. For a reconciliation of adjusted earnings to GAAP earnings, refer to the tabular presentation at the end of this release.
“Each of our business units performed relatively well this quarter, particularly considering the unrelenting pressure from rising input costs that have outpaced our ability to increase selling prices,” said George H. Glatfelter II, Chairman and Chief Executive Officer.
“During the quarter, we successfully completed the annual maintenance outages at both Specialty Papers’ facilities and we continue to generate productivity improvements at our Chillicothe facility. The Composite Fibers business unit’s operating results were in line with last year despite increasing input costs and the completion of an upgrade to a paper machine to increase capacity to serve the growing food and beverage and technical specialties markets. Throughout our businesses, we remain focused on aggressively driving out costs to help offset the impact of rising input costs. We believe these actions will help sustain the Company’s progress despite the challenging environment.”
SECOND-QUARTER BUSINESS UNIT RESULTS
Second quarter 2008 net sales in the Company’s Specialty Papers business unit totaled $207.3 million, a 2.3% increase compared with $202.6 million in the year-earlier quarter. Specialty Papers’ operating loss for the 2008-second quarter totaled $0.7 million although this was a $1.6 million improvement compared to the same quarter of 2007.
The improvement in operating income reflects significant productivity improvements at the Chillicothe facility, as well as a $9.0 million increase in average selling prices across all product lines. The benefit of the price increases was offset by $11.6 million of higher energy and raw material costs. As expected, volumes shipped were essentially unchanged from the same period last year, and the product mix was slightly unfavorable due to an expected decline in the carbonless market.
During each of the second quarters of 2008 and 2007, the Company completed the annually scheduled maintenance outages at its Spring Grove, PA and Chillicothe, OH facilities. These required outages result in increased maintenance spending and reduced production leading to unfavorable manufacturing costs and lower product sales negatively affecting the second quarter results when compared to other quarters. The maintenance outages adversely impacted gross profit by approximately $15.6 million in the second quarter of 2008, which was at the low-end of the Company’s expectations, compared to $15.3 million in the same quarter a year ago. During the second quarter, the Company also incurred $0.4 million in severance costs related to its continuing initiatives to reduce the cost structure at the Chillicothe facility.
Net sales in the Composite Fibers business unit increased $27.4 million, or 32.1% to $112.9 million for the 2008 second quarter, largely due to the November 2007 Caerphilly acquisition and the impact of foreign currency translation. Operating income was in line with the second quarter of 2007 at $6.8 million despite a $1.0 million impact from lower production and accelerated depreciation associated with the paper machine upgrade in Gernsbach, Germany.
On a constant currency basis, higher average selling prices contributed $3.0 million to operating income in the 2008 second quarter. Volumes increased approximately 23.4% primarily due to shipments of metallized paper from Caerphilly (acquired in November 2007). The increased volumes also reflect greater shipments of composite laminates and food and beverage products. The cost of raw materials, primarily pulp and energy, was $4.9 million higher than a year ago. In addition, the Caerphilly acquisition was slightly dilutive to second quarter 2008 earnings and as previously announced, the Company continues to expect Caerphilly to be neutral to earnings for 2008 and slightly accretive in 2009.
Mr. Glatfelter added, “The sustained rising demand for our food and beverage products is creating exciting opportunities for Glatfelter’s Composite Fibers business unit. The investments we have made, such as the Lydney acquisition and upgrades to existing paper machines, have expanded our footprint and capabilities to better serve this high-growth, high-margin market. These actions will help ensure that we capitalize on these opportunities and drive value for Glatfelter’s shareholders and our customers.”
Other Financial Highlights
Selling, general and administrative (“SG&A”) expenses increased by $1.6 million in the quarter-to-quarter comparison and totaled $25.4 million in the second quarter of 2008. The increase was due to higher performance-based incentive compensation expenses, the effect of foreign currency translation adjustments and the inclusion of Caerphilly’s results in 2008.
Interest expense in the second quarter of 2008 totaled $5.8 million, a decline of $1.6 million compared with the same quarter of 2007. The decrease in interest expense was due to lower debt outstanding together with a lower interest rate environment.
For the second quarter of 2008, the Company recorded income taxes of $115,000 on adjusted earnings for an effective rate of 4.0%. The second quarter tax rate reflects a $0.9 million benefit from an adjustment recorded upon the filing of an international subsidiary’s tax return and the reversal of a tax reserve in a foreign jurisdiction where a statute expired.
Year to Date Results
For the first six months of 2008, the Company’s net income totaled $22.8 million or $0.50 per diluted share, compared to a net income of $5.3 million or $0.12 per diluted share in the same period of 2007. The year-to-date results for 2008 include $8.7 million in gains from the sale of timberlands, and a $0.5 million benefit from the reversal of a reserve associated with the 2006 shutdown of the Company’s Neenah facility, partially offset by $0.6 million in acquisition integration costs, all after taxes. Reported results for the first six months of 2007 include, all on an after-tax basis, $5.4 million in gains from the sale of timberlands, a $3.7 million charge for the Fox River environmental matter and $1.3 million in acquisition integration costs and shutdown and restructuring charges.
“Clearly we will confront a challenging business environment in the second half of the year,” said Mr. Glatfelter. “While we expect our average selling prices to increase across all product lines in the Specialty Papers business unit, we do not expect pricing to outpace rising input costs. Therefore, our commitment to aggressive cost reduction initiatives will continue in order to mitigate the remaining adverse effects of higher costs. During the second half of 2008, we expect shipment volume for this business unit to be in line with the same period of 2007.”
Mr. Glatfelter continued, “In the Composite Fibers business unit, cost pressure also remains a concern. However, higher average selling prices coupled with continuous improvement initiatives are expected to more than offset the impact of rising input costs. We expect to see solid demand in this business unit with shipping volume in the second half of 2008 at levels higher than the same period in 2007, reflecting additional volume attributable to the Caerphilly acquisition.”
In connection with the previously announced $38 million investment to install state-of-the-art inclined wire and through air-drying technology on a paper machine, the Company expects to record accelerated depreciation expense of $0.7 million per quarter through the third quarter of 2009, associated with the upgraded machine components. In addition, the start up of the machine upgrade completed in the second quarter of 2008 is expected to negatively impact earnings per share by up to $0.01 during the third quarter of 2008.
The Company also expects to record in the second half of 2008 charges estimated to total $0.5 million to $1.0 million associated with profit improvement initiatives at the Chillicothe facility.