Glatfelter Reports Lower Third Quarter Earnings
Nov. 2, 2010 - Glatfelter today reported its financial results for the third quarter ended September 30, 2010, including adjusted earnings of $0.36 per diluted share in the third quarter of 2010, compared to $0.29 per diluted share a year ago.
"We are pleased to report another quarter of strong bottom-line growth with a 24 percent increase in adjusted earnings per share and generation of $33 million of free cash flow," said George H. Glatfelter II, Chairman and Chief Executive Officer.
"Driving our performance in the third quarter was the record $9.7 million earned by our Composite Fibers business, which is a reflection of improved market conditions, the quality of this unit’s products, and the effectiveness of the continued operating improvements we have employed in this business. In addition, our Specialty Papers business delivered improved year-over-year results in the third quarter of 2010 despite an unplanned production interruption and higher pulp prices."
Mr. Glatfelter noted that the continued solid performance of these business units more than offset the lower than expected earnings from the Company’s Advanced Airlaid Materials business unit, which faced some challenges as a result of rising input costs and operational difficulties during the quarter.
"The integration of this newly acquired business is ongoing. While the progress our team is making with the integration is not yet reflected in the business unit’s results, we remain very confident in the business’ long-term prospects," Mr. Glatfelter said.
Consolidated net sales for the third quarter of 2010 were $379.1 million, a 21.4 percent increase compared with $312.4 million for the third quarter of 2009, reflecting the top-line contributions of the new Advanced Airlaid Materials business unit and stronger market conditions for the Company’s Composite Fibers and Specialty Papers products. Net sales grew 6% excluding the impact of acquisitions and foreign currency changes.
On a GAAP basis, the Company reported net income of $39.4 million or $0.85 per diluted share, for the third quarter of 2010, compared with net income of $46.0 million or $1.00 per diluted share in the 2009 third quarter. Adjusted earnings were $16.7 million, or $0.36 per diluted share, which excludes items of an unusual and non-recurring nature as set forth below, compared with $13.1 million, or $0.29 per diluted share, in the 2009 third quarter. Adjusted earnings is a non-GAAP measure that excludes from the Company’s GAAP-based results certain non-core business items.
THIRD-QUARTER BUSINESS UNIT RESULTS
In the quarter-over-quarter comparison, Specialty Papers’ net sales increased $5.7 million due to a $12.4 million benefit from higher average selling prices partially offset by lower volumes.
Operating income increased $2.1 million, or 10.2 percent, compared with the 2009 third quarter. Operating income in the 2010 third quarter benefited from higher selling prices but was adversely impacted by $5.8 million of higher raw material costs and a related $0.7 million charge under the LIFO inventory valuation method. In addition, Specialty Papers experienced $5.6 million of net excess operational costs primarily related to a press roll failure and associated production interruption at its Chillicothe, Ohio facility.
Composite Fibers’ net sales improved due to strengthening demand in all of its product lines as volumes shipped increased 13.2 percent. Net sales increased 3.0 percent despite an $8.5 million adverse impact from the translation of foreign currencies and a $0.9 million impact from lower average selling prices. On a constant currency basis, net sales increased 11.5 percent.
Composite Fibers’ operating income increased $3.9 million, or 67.2 percent, in the quarter-to-quarter comparison. Improved market conditions and business development initiatives increased shipping volumes and eliminated the need for market-driven down time which together benefited operating profit by $2.5 million. In addition, improved operating efficiency gains of $3.6 million as a result of continuous improvement initiatives more than offset the net negative impact of higher fiber prices.
Advanced Airlaid Materials
(Note: Because this business unit was created upon completion of the previously announced acquisition of Concert Industries on February 12, 2010, the results below are shown with a sequential comparison rather than a year-over-year basis.)
Third-quarter 2010 operating income of $1.2 million from the Advanced Airlaid Materials business unit was lower than the 2010 second quarter and less than the Company’s expectations. Compared to the 2010 second quarter, higher selling prices benefited results by $1.3 million; however, continued upward movement in the price of fluff pulp together with higher costs of other key raw materials and changes to currency exchange rates adversely impacted operating income by $1.2 million. Operating results were also adversely impacted by downtime and operating inefficiencies.
"During the quarter, our team has worked to realign the organizational structure and put the right processes in place to drive meaningful and predictable growth in this business unit," said Mr. Glatfelter. "I fully expect the continuous improvement methodology that has been so successful for our Specialty Papers and Composite Fibers businesses will have a similar positive, long-term impact on the operating performance of this global growth business."
Other Financial Information
Interest expense totaled $6.6 million for the third quarter of 2010, an increase of $2.0 million primarily due to the issuance of $100.0 million in bonds in February 2010, used to fund, in part, the Concert acquisition.
For the third quarter of 2010, the Company’s effective tax rate on adjusted earnings was 25.9 percent compared with a 19.7 percent benefit in the same quarter of 2009. The higher effective tax rate in the comparison was primarily due to the expiration of the research and development tax credit at the end of 2009.
In connection with the filing of its 2009 federal income tax return, the Company recognized a $23.1 million tax benefit related to cellulosic biofuel production credits as a reduction of income tax expense in the third quarter of 2010. Approximately $14.8 million of this amount is expected to be received in cash during the 2010 fourth quarter.
For Specialty Papers, the Company expects shipping volumes in the fourth quarter of 2010 to be approximately five percent less than the third quarter of 2010 reflecting normal seasonality. Selling prices and input costs are expected to remain substantially unchanged in the same comparison; however, our mix of products sold is expected to be less favorable due to normal market softening in the fourth quarter. In addition, the Company expects Specialty Papers fourth quarter 2010 results relative to the 2010 third quarter to be adversely impacted by normal seasonal downtime, lower energy sales approximating $1 million, and additional LIFO related charges approximating $1 million.
For Composite Fibers, the Company anticipates shipping volumes, selling prices and input costs in the fourth quarter of 2010 to be relatively in line with the third quarter of 2010. In addition, the Company expects contracted energy prices to be higher, along with a slightly extended normal seasonal outage in December for maintenance work and inventory alignment as it enters 2011.
Shipping volumes for the Advanced Airlaid Materials business unit in the fourth quarter of 2010 are expected to be approximately 5 percent lower than the third quarter. Selling prices are expected to be approximately $1.4 million higher in the fourth quarter as the Company will contractually pass on the impact of the higher input costs from prior periods. Input costs are expected to be generally in line with third-quarter 2010 levels.
Mr. Glatfelter commented, "Our Advanced Airlaid Materials business is not performing as well as anticipated at this point in time, which is why we made some changes in the business during the quarter. Given the slower progress, we now anticipate this business to be approximately $0.15 per share accretive to earnings in 2011. We firmly believe this business is well positioned for profitable growth and value creation over the long term. Given our proven ability to create value from acquisitions, coupled with the future growth opportunities we see in the airlaid markets, we are confident in our ability to maximize the potential expected from this business unit.
"As we approach the 2010 year-end, we feel very good about the strength and momentum of our Specialty Papers and Composite Fibers businesses. Through sound execution of their organic growth plans, as well as remaining responsive to customer needs, both business units are expected to continue to generate strong earnings and free cash flows going forward.
“I have a high degree of confidence that our business is very well positioned to benefit from continuing improvements in the global economy, leading positions in key global markets and the financial impact of continuous improvement programs across our Company."
Headquartered in York, Pennsylvania, Glatfelter is a global manufacturer of specialty papers and fiber-based engineered products. U.S. operations include facilities in Spring Grove, Pennsylvania and Chillicothe and Fremont, Ohio. International operations include facilities in Canada, Germany, France, the United Kingdom and the Philippines, a representative office in China and a sales and distribution office in Russia. Glatfelter’s sales approximate $1.4 billion annually.