Glatfelter Reports Increase in 4Q Earnings
Feb. 11, 2010 - Glatfelter today reported results for the fourth quarter and full year ended December 31, 2009.
“2009 proved to be a very successful and momentous year for Glatfelter,” said George H. Glatfelter II, Chairman and Chief Executive Officer. “Despite difficult global economic conditions, we were able to generate strong financial results, while creating additional financial flexibility by reducing net debt by $128 million.
“In the fourth quarter, with shipment levels up over 2 percent, the Specialty Papers business unit continued to outperform the broader North American uncoated free sheet market which experienced a decrease of approximately 2 percent in shipments. In addition, the Composite Fibers business unit’s top-line improved after a difficult year due to the stabilization of its core food & beverage papers markets and growth in its other product lines. These results, coupled with free cash flow generation of $138 million during the year, demonstrate the strength and resiliency of our business model and the dedication of our people around the world.”
Fourth-Quarter Consolidated Results
Net sales for the fourth quarter of 2009 rose slightly to $301.1 million, compared with $298.3 million for the fourth quarter of 2008. Net income for the 2009 fourth quarter totaled $46.0 million, or $1.00 per diluted share, compared with 2008 fourth-quarter net income of $13.4 million, or $0.29 per diluted share. The 2009 fourth-quarter results benefited from $32.5 million of alternative fuel mixture credits partially offset by $1.8 million of costs, after-tax, related to the recently announced agreement to acquire Concert Industries Corp. The 2008 fourth-quarter results included $0.1 million of acquisition integration related costs for previously completed acquisitions.
Adjusted earnings for the fourth quarter of 2009, which exclude the items discussed above, were $15.3 million, or $0.33 per diluted share, compared with $13.5 million or $0.30 per diluted share for the fourth quarter of 2008. Adjusted earnings is a non-GAAP measure that excludes from the company’s GAAP-based results certain non-core business items. For a reconciliation of adjusted earnings to GAAP earnings, refer to the tabular presentation at the end of this release.
The company generated $34.8 million of free cash flow (defined as cash from operations less capital expenditures) during the fourth quarter of 2009, compared with $24.0 million in free cash flow during the same quarter of 2008. For the full year 2009, free cash flow totaled $137.6 million.
FOURTH-QUARTER BUSINESS UNIT RESULTS
Specialty Papers’ net sales declined $3.3 million, or 1.7 percent, to $196.3 million in the fourth quarter of 2009, compared with approximately $199.6 million in the fourth quarter of 2008. While the total tons shipped in the quarter was 2.2 percent above 2008, the overall decline in net sales for the fourth quarter 2009 compared to 2008 was primarily driven by lower average selling prices, impacting sales by $2.2 million, and changes in product mix.
Specialty Papers’ 2009 fourth-quarter operating profit increased 48.1 percent to $23.1 million, compared with $15.6 million in the fourth quarter of 2008. Operating results benefited by $2.9 million from overall operating efficiencies, $2.7 million of inventory valuation adjustments and by $1.0 million from product mix. In addition, higher energy and related sales, net of costs, contributed $5.4 million to Specialty Papers’ operating profit in the 2009 fourth quarter compared with the year-earlier quarter primarily due to $5.1 million from the sales of renewable energy credits related to burning renewable energy sources such as black liquor and wood waste.
Net sales in the Composite Fibers business unit increased $6.1 million, or 6.2 percent, to $104.8 million in the fourth quarter of 2009, compared with $98.7 million in the fourth quarter of 2008. On a constant currency basis, lower average selling prices adversely affected net sales by $1.0 million; however, the translation of foreign currencies favorably affected net sales by approximately $8.9 million.
The Composite Fibers business unit was favorably impacted by lower energy and net raw material costs, totaling approximately $2.0 million. In addition, this business unit’s results benefited from lower freight and other costs, as well as a $1.1 million net benefit from the translation of foreign currencies. As a result, Composite Fibers’ operating profit increased $3.4 million in the quarter-to-quarter comparison.
Other Financial Highlights
Pension expense totaled $1.5 million in the fourth quarter of 2009, compared with net pension income of $4.1 million in the same quarter a year ago. This decline negatively impacted earnings by $0.08 per share in the quarter-over-quarter comparison and is directly related to the decline in the value of the company’s pension assets during 2008. Cash contributions to the company’s qualified defined benefit pension plans were not required during 2009 and are not expected to be required during 2010.
For the fourth quarter of 2009, selling, general and administrative (“SG&A”) expenses totaled $29.9 million, a $6.3 million increase compared with the 2008 fourth quarter. The increase was primarily due to recording pension expense in 2009 compared with pension income in 2008 together with higher legal and professional fees, in part related to the agreement to acquire Concert Industries, which was announced in the company’s January 5, 2010 news release.
Results of operations for the fourth quarter of 2009 reflect an effective tax rate of 10.0 percent on pre-tax income of $51.2 million compared with 12.8 percent and $15.4 million, respectively, in the same period a year ago. The lower tax rate in 2009 was primarily due to $32.3 million of alternative fuel mixture credits included in pretax income that are not subject to income tax. On adjusted earnings, the effective tax rate was 25.4 percent for the fourth quarter of 2009 compared with 12.5 percent for the fourth quarter of 2008.
Alternative Fuel Credits
The U.S. Internal Revenue Code provides a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses. The credit, equal to $0.50 per gallon of alternative fuel contained in the mixture, is refundable to the taxpayer and expired on December 31, 2009. On May 11, 2009, the company was notified by the Internal Revenue Service that its application to be registered as an alternative fuel mixer was approved. The company received a payment from the Internal Revenue Service on June 30, 2009 in the amount of $29.7 million for the alternative fuel mixture consumed at its Spring Grove, PA and Chillicothe, OH facilities during the period February 20, 2009 through May 17, 2009. For the fourth quarter of 2009, the company earned $32.3 million of alternative fuel mixture credits for which no cash was received as the company intends to claim a refundable income tax credit in connection with the filing of its 2009 federal corporate income tax return.
Since the company began mixing and burning eligible alternative fuels, the company has earned $107.8 million of alternative fuel mixture credits, of which $29.7 million has been received in cash, $20.1 million was used to reduce estimated interim tax payments, and $58.0 million will be claimed as refundable income tax credits and is expected to be realized in cash primarily during the first half of 2010. The company records all alternative fuel mixture credits as a reduction to cost of products sold.
For the full year ended December 31, 2009, the company’s net sales totaled $1,184 million compared to $1,264 million in 2008. Net income in 2009 totaled $123.4 million, or $2.70 per diluted share compared with $57.9 million and $1.27, respectively, in 2008. Adjusted earnings (a non-GAAP measure) for 2009 totaled $29.4 million, or $0.64 per diluted share, compared with $47.3 million, or $1.04 per diluted share in 2008. The 2009 full-year results include, on an after-tax basis, $95.8 million from alternative fuel mixture credits and $1.8 million, after tax, of costs related to the previously announced agreement to acquire Concert Industries. Reported results for 2008 included $11.0 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 $0.8 million in acquisition integration costs, all of which are after taxes.
Balance Sheet and Other Information
During the fourth quarter of 2009, capital expenditures declined to $9.6 million compared with $11.6 million in the fourth quarter of 2008, reflecting the decision to significantly reduce discretionary spending due to the economic environment. Capital expenditures totaled $26.3 million for 2009 compared with $52.5 million for the full-year 2008.
Net debt, excluding cash collateralized borrowings, was $82.5 million at December 31, 2009, a decrease of $127.9 million compared with December 31, 2008 and a decrease of $28.3 million compared with September 30, 2009.
At the end of the 2009, the company had $135.4 million in cash and $194.3 million available under its revolving credit agreement, which matures in April 2011.
On February 5, 2010, the company completed a private placement offering of $100.0 million of 7.125 percent senior unsecured notes issued at a 5 percent discount. The proceeds, net of underwriting and related fees, will be used to fund, in part, the Concert Industries acquisition, which is expected to close in the next few days subject to closing conditions.
For Specialty Papers, the company expects shipping volumes to increase approximately 4% in the first quarter of 2010 compared with the fourth quarter of 2009 and selling prices are expected to be stable to slightly higher in the same comparison. The company expects higher pulp and energy costs in the first quarter of 2010 compared to the fourth quarter of 2009 that will more than offset the impact of selling price increases.
Our long-term electricity sales agreement at the Spring Grove facility expires on March 31, 2010 after which time we will be selling electricity at market rates which are currently approximately 30% below the pricing in our expiring contract. The sale of renewable energy credits is expected to be approximately $7 million in 2010 which will more than offset lower net revenue from sales of excess electricity.
In the Composite Fibers business unit, the company anticipates shipping volumes in the first quarter of 2010 to be in line with the fourth quarter of 2009. Selling prices are expected to be slightly lower and input costs, primarily woodpulp, are expected to increase slightly compared with the fourth quarter of 2009.
On a pre-tax basis, pension expense for 2010 is expected to be $9.0 million, compared with $7.3 million in 2009.
In connection with its previously announced agreement to acquire Concert Industries, the company hedged the Canadian dollar purchase price and, as a result, expects to incur a charge to earnings of approximately $3.9 million in the first quarter of 2010 due to a stronger US dollar. In addition, we expect to incur other transaction related costs as a result of closing the acquisition and initiating integration activities.
Mr. Glatfelter commented, “Today’s earnings announcement confirms that our strategic direction is delivering results. After a strong conclusion in a very difficult economic environment, I believe we have created significant momentum and we are well positioned to continue generating value for our shareholders. In 2010, the company expects to maintain strong cash flows, deliver strong operating results, and realize the benefit of the Concert acquisition.”