# Magnera Corp (MAGN) FY 2020 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Magnera Corp's 10-K for fiscal year 2020.

SEC filing source: https://www.sec.gov/Archives/edgar/data/41719/000156459021008961/glt-10k_20201231.htm
Accession: 0001564590-21-008961
Filing date: 2021-02-25
Report date: 2020-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/MAGN/
All MD&A years: /company/MAGN/mda/
Next year: /company/MAGN/mda/fy2021/ (FY 2021)

ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this annual report. Our discussion and analysis of 2020 compared to 2019 is included herein. For discussion and analysis of 2019 compared to 2018, please refer to Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which was filed with the United States Securities and Exchange Commission on February 26, 2020 and is incorporated herein by reference.

Forward-Looking Statements    This Annual Report on Form 10-K 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-K 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 regarding expectations of, among others, environmental costs, capital expenditures and liquidity, 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:

[[GREPCENT_TABLE]]
[["","i.","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;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","ii.","variations in demand for our products including the impact of unplanned market-related downtime, variations in product pricing, or product substitution;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","iii.","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;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","iv.","risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","v.","geopolitical matters, including any impact to our operations from events in Russia, Ukraine and Philippines;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","vi.","our ability to develop new, high value-added products;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","vii.","changes in the price or availability of raw materials we use, particularly woodpulp, pulp substitutes, synthetic pulp, other specialty fibers and abaca fiber;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","viii.","changes in energy-related prices and commodity raw materials with an energy component;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","ix.","the impact of unplanned production interruption at our facilities or at any of our key suppliers;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","x.","disruptions in production and/or increased costs due to labor disputes;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","xi.","the gain or loss of significant customers and/or on-going viability of such customers;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","xii.","the impact of war and terrorism;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","xiii.","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;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","xiv.","enactment of adverse state, federal or foreign tax or other legislation or changes in government legislation, policy or regulation; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","xv.","our ability to finance, consummate and integrate acquisitions."]]
[[/GREPCENT_TABLE]]

14

Introduction  We manufacture a wide array of engineered materials and manage our company along two operating segments:

[[GREPCENT_TABLE]]
[["\u2022","Composite Fibers with net 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; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u2022","Airlaid Materials with net 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."]]
[[/GREPCENT_TABLE]]

Specialty Papers’ results of operations and financial condition are reported as discontinued operations. The following discussion and analysis primarily focuses on the financial results of operations and financial condition of our continuing operations.

COVID-19 Pandemic  On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic as the virus spread throughout the world. As the virus continued its rapid spread, a significant portion of the world’s economies were significantly impacted by government mandates that all “non-essential” businesses close and that residents “shelter-in-place” or practice “social distancing.” These actions have had, and are likely to have, a continuing significant adverse impact on a wide range of economies and industries throughout the world, including certain markets we serve.

The COVID-19 pandemic and the actions undertaken throughout the world in an attempt to contain the virus have had an unprecedented and significant adverse impact on global economies in terms of reduced GDP, increased unemployment, and insolvencies in a variety of industries and markets. As a result, we have experienced and may continue to experience weaker demand for certain of our products due to the effects of the pandemic, and there may be periods during which demand for our products is insufficient to enable us to operate our production facilities in an economical manner which may force us to take machine downtime to curtail production to match demand.

Our financial performance and results of operations have been impacted by the weaker economic conditions related to the pandemic as demand for wallcover products were significantly weaker particularly during the second quarter of 2020, although shipping volumes increased significantly during the second half of 2020. In addition, demand for tabletop products has been significantly adversely impacted by the pandemic and the effect on venues, such as restaurants, which use tabletop products. The majority of our other product portfolios is considered to be “essential” consumer staples. We believe demand for certain of our products, such as Composite Fibers’ food & beverage filtration products and Airlaid Materials’ personal hygiene and wipes, will remain strong. To date, we have successfully maintained our global supply chain securing critical raw materials with minimal disruptions or incremental costs and the demand for substantially all products has been stable as our customers continued to serve critical products to end-user consumers.

As disclosed in Item 1A – Risk Factors to this Annual Report, approximately $79 million of our net sales in 2020 was earned from customers located in Ukraine, Russia, and members of the Commonwealth of Independent States. The large majority of our net sales from this region consists of wallcover base material. During the second quarter of 2020, our wallcover net sales were significantly impacted by temporary suspension of operations of many of our customers due to government orders related to the pandemic. Although our customers have resumed operations and demand for our wallcover products returned to more normalized levels, if the governmental authorities reimplement actions to fight any resurgence of COVID-19 in these regions, or if economic hardships continue, sales to some of our customers, such as wallpaper printers, may be adversely impacted. In addition, as authorities instituted restrictions limiting business operations, social distancing and other health and safety measures, restaurants and similar venues globally were forced to significantly curtail or close their businesses. As a result, tabletop volumes in our Airlaid Materials segment were significantly lower in 2020.

The health and safety of our employees and their families are a top priority, and we remain committed to taking all the necessary measures to protect them. We have instituted appropriate new safety, hygiene, and communication protocols throughout our facilities to ensure we maintain our ability to produce product. Accordingly, we continue to proactively work to identify and mitigate risks to safeguard the continuity of our business. We believe we are well positioned from a liquidity and leverage perspective following the successful restructuring and cost optimization initiatives in 2019 and 2020 and the debt refinancing in 2019. As a result, we believe we are able to supply our customers high-quality engineered materials necessary to manufacture a variety of essential and life-sustaining consumer staples including wipes, health and hygiene products, and food and beverage items during this challenging time.

[[GREPCENT_TABLE]]
[["GLATFELTER 2020 FORM 10-K","15"]]
[[/GREPCENT_TABLE]]

RESULTS OF OPERATIONS

2020 versus 2019

Overview For the year ended December 31, 2020 we reported income from continuing operations of $20.8 million, or $0.47 per share compared with a loss of $25.2 million, or $0.57 per share in 2019.

 The following table sets forth summarized GAAP-based consolidated results of operations:

[[GREPCENT_TABLE]]
[["","Year ended December 31"],["In thousands, except per share","2020","","","","2019"],["Net sales","$","916,498","","","","$","927,673"],["Gross profit","","147,869","","","","","147,542"],["Operating income","","49,156","","","","","54,635"],["Continuing operations"],["Income (loss)","","20,783","","","","","(25,211",")"],["Earnings (loss) per share","","0.47","","","","","(0.57",")"],["Discontinued operations"],["Income","","515","","","","","3,670"],["Earnings per share","","0.01","","","","","0.08"],["Net income (loss)","","21,298","","","","","(21,541",")"],["Earnings (loss) per share","$","0.48","","","","$","(0.49",")"]]
[[/GREPCENT_TABLE]]

We generated $109.0 million of cash from operations in 2020 compared with $102.8 million a year ago. The amount reported for 2019 includes $53.4 million of cash, before tax, available to us as a result of the pension plan termination and settlement of all liabilities. During 2020 and 2019, capital expenditures totaled $28.1 and $27.8 million, respectively.

The results presented above are in accordance with generally accepted accounting principles in the United States (“GAAP”) and reflect a number of significant actions we undertook including cost optimization, the restructuring and consolidation of our metallized business, debt refinancing and termination and settlement of our qualified pension plan, among others. Excluding these items from reported results, adjusted earnings, a non-GAAP measure, was $37.4 million, or $0.84 per diluted share for 2020, compared with $33.2 million, or $0.75 per diluted share, a year ago. Operating income for our segments, Composite Fibers and Airlaid Materials, increased by $4.2 million, or 8.8%, and $5.2 million, or 12.6%, respectively. Although growth in aggregate shipping volumes was limited due to the COVID-19 pandemic, the segments’ results benefited from a favorable mix of products sold, efficient operations and disciplined cost control. In addition, interest expense, net declined $2.7 million reflecting the benefits of our debt refinancing in 2019.

Adjusted earnings consists of net income determined in accordance with GAAP adjusted to exclude the impact of the following:

Discontinued Operations. In connection with the sale of the Specialty Papers business, its results of operations, including the loss recorded in 2018 connection with the sale, are reported as discontinued operations for all periods presented. This adjustment reflects the net results of this discontinued operation.

Restructuring charge – Metallized operations. This adjustment represents the charges incurred in connection with the decision to restructure a portion of the Composite Fibers segment, primarily consisting of the consolidation of our metallizing operation from Gernsbach, Germany to Caerphilly, U.K. The adjustment includes a non-cash charge of $5.0 million associated with accelerated depreciation and the write-off of inventory and spare parts in addition to cash severance costs totaling $6.1 million.

16

Cost optimization actions. These adjustments reflect charges incurred in connection with initiatives to optimize the cost structure of the Company, including costs related to the organizational change to a functional operating model. The costs are primarily related to executive separations, other headcount reductions, professional fees, asset write-offs and certain contract termination costs. 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.

Corporate headquarters relocation. These adjustments reflect costs incurred in connection with the strategic relocation of the Company’s corporate headquarters to Charlotte, NC. The costs are primarily related to employee relocation costs and exit costs at the previous corporate headquarters.

Pension settlement expenses, net. This adjustment reflects expenses incurred in connection with the termination of the Company’s qualified pension plan in 2019 and the reversion of excess pension plan assets to the Company. In the fourth quarter of 2019, the Company incurred a $75.3 million pension settlement charge in connection with the termination of the plan. Since the pension plan was fully funded, the settlement of the pension obligations did not require the use of the Company’s cash, but instead was accomplished with plan assets. In connection with the reversion of excess pension plan assets in the second quarter of 2020, the Company incurred pension settlement expenses related to excise taxes, net of post settlement adjustments and certain related professional fees.

COVID-19 incremental costs. This adjustment represents incremental cash costs incurred directly related to the COVID-19 pandemic such as mill employee incentive payments, enhanced hygiene protocols, safety and supplies and professional fees primarily associated with the CARES Act benefit.

Asset Impairment Charge. This adjustment represents a non-cash charge recorded to reduce the carrying amount of a tradename intangible asset of the Dresden wallcover business due to the impact of the COVID 19 pandemic on the underlying forecasted revenue stream.

Airlaid capacity expansion costs. These adjustments reflect non-capitalized, one-time costs incurred related to the start-up of a new airlaid production facility in Fort Smith, Arkansas and implementation of a new business system.

Strategic initiatives. These adjustments primarily reflect professional and legal fees incurred directly related to evaluating and executing certain strategic initiatives including costs associated with acquisitions and the related integration.

Debt refinancing costs. Represents a charge to write-off unamortized debt issuance costs in connection with the redemption of the Company’s $250 million, 5.375% Notes.

Fox River environmental matter. This adjustment excludes a gain and reflects a decrease in the Company’s overall reserve for the Fox River matter primarily due to the resolution of the litigation in the first quarter of 2019.

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 the tax benefit recognized as a result of the March 27, 2020 change in U.S. tax law which, among others, allows net operating 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.

[[GREPCENT_TABLE]]
[["GLATFELTER 2020 FORM 10-K","17"]]
[[/GREPCENT_TABLE]]

Adjusted earnings and adjusted earnings per diluted 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 sets forth the reconciliation of net income to adjusted earnings for the years ended December 31, 2020 and 2019:

[[GREPCENT_TABLE]]
[["","","Year ended December 31"],["","","2020","","","2019"],["In thousands, except per share","","Amount","","","EPS","","","Amount","","","EPS"],["Net income","","$","21,298","","","$","0.48","","","$","(21,541",")","","$","(0.49",")"],["Exclude: Income from discontinued operations","","","(515",")","","","(0.01",")","","","(3,670",")","","","(0.08",")"],["Income (loss) from continuing operations","","","20,783","","","","0.47","","","","(25,211",")","","","(0.57",")"],["Adjustments (pre-tax)"],["Restructuring charge - Metallized operations","","","11,111","","","","","","","","\u2014"],["Cost optimization actions","","","5,979","","","","","","","","8,583"],["Corporate headquarters relocation","","","1,053","","","","","","","","\u2014"],["Pension settlement expenses, net","","","6,154","","","","","","","","75,326"],["COVID 19 - incremental costs","","","2,715","","","","","","","","\u2014"],["Asset impairment charge","","","900","","","","","","","","\u2014"],["Airlaid capacity expansion costs","","","\u2014","","","","","","","","1,014"],["Debt refinancing","","","\u2014","","","","","","","","992"],["Strategic initiatives","","","1,567","","","","","","","","249"],["Fox River environmental matter","","","\u2014","","","","","","","","(2,509",")"],["Timberland sales and related costs","","","(1,382",")","","","","","","","(1,572",")"],["Total adjustments (pre-tax)","","","28,097","","","","","","","","82,083"],["Income taxes (1)","","","(5,405",")","","","","","","","(23,722",")"],["CARES Act of 2020 tax benefit (2)","","","(6,082",")","","","","","","","\u2014"],["Total after-tax adjustments","","","16,610","","","","0.37","","","","58,361","","","","1.32"],["Adjusted earnings","","$","37,393","","","$","0.84","","","$","33,150","","","$","0.75"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","Tax effect on adjustments calculated based on the incremental effective tax rate of the jurisdiction in which each adjustment originated and the related impact of valuation allowances."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(2)","Tax benefit recorded in connection with passage of the Coronavirus Aid, Relief, and Economic Security Act (\u201cCARES\u201d) related to provisions that modified the \u201cnet operating loss\u201d provisions of previous law to allow certain losses to be carried back five years."]]
[[/GREPCENT_TABLE]]

Segment Financial Performance

[[GREPCENT_TABLE]]
[["Year ended December 31","","","","","","","Other and"],["Dollars in thousands","Composite Fibers","","","Airlaid Materials","","","Unallocated","","","Total"],["","2020","","","2019","","","2020","","","2019","","","2020","","","2019","","","2020","","","2019"],["Net sales","$","525,089","","","$","521,666","","","$","391,409","","","$","406,007","","","$","\u2014","","","$","\u2014","","","$","916,498","","","$","927,673"],["Cost of products sold","","430,420","","","","432,154","","","","326,809","","","","346,568","","","","11,400","","","","1,409","","","","768,629","","","","780,131"],["Gross profit (loss)","","94,669","","","","89,512","","","","64,600","","","","59,439","","","","(11,400",")","","","(1,409",")","","","147,869","","","","147,542"],["SG&A","","42,575","","","","41,629","","","","18,296","","","","18,321","","","","39,174","","","","35,017","","","","100,045","","","","94,967"],["Gains on dispositions of plant, equipment and timberlands, net","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","(1,332",")","","","(2,060",")","","","(1,332",")","","","(2,060",")"],["Total operating income (loss)","","52,094","","","","47,883","","","","46,304","","","","41,118","","","","(49,242",")","","","(34,366",")","","","49,156","","","","54,635"],["Non-operating expense","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","(16,797",")","","","(89,088",")","","","(16,797",")","","","(89,088",")"],["Income (loss) before income taxes","$","52,094","","","$","47,883","","","$","46,304","","","$","41,118","","","$","(66,039",")","","$","(123,454",")","","$","32,359","","","$","(34,453",")"],["Supplementary Data"],["Net tons sold (thousands)","","134,758","","","","133,473","","","","136,661","","","","137,595","","","","\u2014","","","","\u2014","","","","271,419","","","","271,068"],["Depreciation, depletion and amortization","$","26,175","","","$","26,153","","","$","22,416","","","$","21,136","","","$","8,009","","","$","3,531","","","$","56,600","","","$","50,820"],["Capital expenditures","","13,262","","","","11,972","","","","9,311","","","","13,667","","","","5,563","","","","2,126","","","","28,136","","","","27,765"]]
[[/GREPCENT_TABLE]]

The sum of individual amounts set forth above may not agree to the consolidated financial statements included herein due to rounding.

18

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 in the 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 operating segment are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the table above.

Management evaluates results of operations of the 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 operating 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 segment 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 Costs of Products Sold

[[GREPCENT_TABLE]]
[["","Year ended December 31"],["In thousands","2020","","","","2019","","","Change"],["Net sales","$","916,498","","","","$","927,673","","","$","(11,175",")"],["Costs of products sold","","768,629","","","","","780,131","","","","(11,502",")"],["Gross profit","$","147,869","","","","$","147,542","","","$","327"],["Gross profit as a percent of Net sales","","16.1","%","","","","15.9","%"]]
[[/GREPCENT_TABLE]]

The following table sets forth the contribution to consolidated net sales by each segment:

[[GREPCENT_TABLE]]
[["","Year ended December 31"],["Percent of Total","2020","","","","2019"],["Segment"],["Composite Fibers","","57.3","%","","","","56.2","%"],["Airlaid Materials","","42.7","","","","","43.8"],["Total","","100.0","%","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

Net sales on a consolidated basis totaled $916.5 million and $927.7 million in 2020 and 2019, respectively. The $11.2 million decrease was primarily driven by lower average selling prices partially offset by favorable currency translation. Shipping volumes increased 0.1%.

Composite Fibers’ net sales increased $3.4 million, or 0.7%, and totaled $525.1 million in 2020. The increase was primarily due to a more favorable mix of products sold and $7.1 million from favorable currency translation. Shipping volumes increased 1.0% and lower selling prices adversely impacted the comparison by $11.3 million.

[[GREPCENT_TABLE]]
[["GLATFELTER 2020 FORM 10-K","19"]]
[[/GREPCENT_TABLE]]

Composite Fibers’ operating income for the year ended December 31, 2020 increased $4.2 million to $52.1 million compared to a year ago. The segment’s results were favorably impacted by $10.4 million from lower raw material and energy prices, operational efficiencies, and volume/mix improvements. Currency was $0.9 million unfavorable compared to the prior year. The primary drivers are summarized in the following chart (in millions):

Airlaid Materials’ net sales totaled $391.4 million in 2020, a $14.6 million decrease in the year-over-year comparison driven by $13.7 million of lower selling prices. Shipping volumes declined slightly as the closure of restaurants globally due to the COVID-19 pandemic resulted in significantly lower tabletop volumes. This decline was partially offset by strong shipments of home care, food pads and wipes products. Lower selling prices primarily reflects contractual pass-through arrangements. Currency translation was favorable $4.4 million.

Airlaid Materials’ operating income totaled $46.3 million, an increase of $5.2 million, or 12.6% compared to a year ago. The increase was primarily due to lower raw material and energy costs partially offset by lower selling prices, primarily reflecting pass-through arrangements. Currency translation was favorable $2.0 million. The primary drivers are summarized in the following chart (in millions):

20

Other and Unallocated The amount of net operating expenses not allocated to an operating segment and reported as “Other and Unallocated” in our table of Segment Financial Performance, totaled $49.2 million for 2020 compared with $34.4 million in 2019. Excluding the items identified to present “adjusted earnings,” unallocated expenses for the comparison declined $1.3 million primarily reflecting cost reduction initiatives, position elimination and less travel.

Gain on Sales of Plant, Equipment and Timberlands, net    During each of the past two years, we completed the following sales of assets:

[[GREPCENT_TABLE]]
[["Dollars in thousands","","Acres","","","Proceeds","","","Gain (loss)"],["2020"],["Timberlands","","","461","","","$","1,413","","","$","1,381"],["Other","","n/a","","","","\u2014","","","","(49",")"],["Total","","","","","","$","1,413","","","$","1,332"],["2019"],["Timberlands","","","1,996","","","$","1,705","","","$","1,572"],["Other","","n/a","","","","493","","","","488"],["Total","","","","","","$","2,198","","","$","2,060"]]
[[/GREPCENT_TABLE]]

Income taxes For continuing operations for the year ended December 31, 2020, we recorded a $11.6 million income tax provision on a pretax income of $32.4 million. The comparable amounts for 2019 were a $9.2 million income tax benefit on a pretax loss of $34.5 million. The income tax expense in 2020 includes the impact of nondeductible excise tax totaling $8.3 million partially offset by a $6.1 million benefit recorded in connection with passage of the CARES Act. This Act, which was signed into law on March 27, 2020, modified the “net operating loss” provisions of previous law to allow certain losses to be carried back five years. These amounts are excluded from net income when arriving at adjusted earnings. The amounts for 2019 included a $23.1 million tax benefit recorded in connection with the $75.3 million pension settlement charge. In addition, income taxes in 2019 included a $3.0 million benefit due to the completion of tax audits and the release of certain state valuation allowances.

On adjusted pre-tax income of $60.5 million, income tax expense was $23.1 million in 2020. The comparable amounts in 2019 were $47.6 million and $14.0 million, respectively. The effective tax rate on adjusted earnings was 38.2% in the 2020 compared to 30.4% in 2019.

Foreign Currency We own and operate facilities in Canada, Germany, France, the United Kingdom, and the Philippines. The functional currency of our Canadian operations is the U.S. dollar. However, in Germany and France it is the Euro, in the UK, it is the British pound sterling, and in the 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 2020 compared to 2019, the average currency exchange rate of the euro strengthened relative to the U.S. dollar by approximately 9.5% in the year over year comparison, and the British pound sterling to the dollar strengthened by approximately 2.3%. 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 into U.S. dollars is subject to changes in foreign currency exchange rates.

The table below summarizes the translation impact on reported results that changes in currency exchange rates had on our non-U.S. based operations from the conversion of these operation’s results for the period indicated.

[[GREPCENT_TABLE]]
[["In thousands","Year ended December 31, 2020"],["","Favorable (unfavorable)"],["Net sales","","","","$","11,467"],["Costs of products sold","","","","","(9,894",")"],["SG&A expenses","","","","","(448",")"],["Income taxes and other","","","","","(13",")"],["Net income","","","","$","1,112"]]
[[/GREPCENT_TABLE]]

The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2020 were the same as 2019, or “constant currency.” It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.

Discontinued Operations We completed the sale of our Specialty Papers business on October 31, 2018. Its results of operations are reported as discontinued operations for all periods presented. There was an immaterial amount of activity in results of discontinued operations for 2020. In 2019, we reported income from discontinued operations of $3.7 million

[[GREPCENT_TABLE]]
[["GLATFELTER 2020 FORM 10-K","21"]]
[[/GREPCENT_TABLE]]

primarily relating to adjustments for post-closing working capital, pension and the reversal of tax reserves associated with the closure of tax matters, and other items in connection with the sale of Specialty Papers.

LIQUIDITY AND CAPITAL RESOURCES

Our business requires expenditures for new or enhanced equipment, 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:

[[GREPCENT_TABLE]]
[["","Year ended December 31"],["In thousands","2020","","","","2019"],["Cash and cash equivalents at beginning of period","$","126,201","","","","$","142,685"],["Cash provided (used) by"],["Operating activities","","108,993","","","","","102,835"],["Investing activities","","(26,773",")","","","","(27,113",")"],["Financing activities","","(100,306",")","","","","(72,774",")"],["Effect of exchange rate changes on cash","","5,163","","","","","(269",")"],["Change in cash and cash equivalents from discontinued operations","","(1,613",")","","","","(19,163",")"],["Net cash used","","(14,536",")","","","","(16,484",")"],["Cash, cash equivalents and restricted cash at the end of period","","111,665","","","","","126,201"],["Less: restricted cash in Prepaid and other current assets","","(2,000",")","","","","\u2014"],["Less: restricted cash in Other assets","","(10,084",")","","","","\u2014"],["Cash and cash equivalents at end of period","$","99,581","","","","$","126,201"]]
[[/GREPCENT_TABLE]]

At December 31, 2020, we had $99.6 million in cash and cash equivalents (“cash”), of which approximately 86% was held by foreign subsidiaries. Cash held by our foreign subsidiaries can be repatriated without incurring a significant amount of additional taxes. In addition to cash, as of December 31, 2020, $175.2 million was available under our existing revolving credit agreement.

Cash provided by operating activities totaled $109.0 million in 2020 compared with $102.8 million a year ago, which included $53.4 million of cash received in connection with the termination of our overfunded qualified pension plan. The improvement in operating cash flow reflects a $12.9 million increase in EBITDA, adjusted to exclude items identified to determine adjusted earnings, $21.7 million from improved working capital usage, a $20.4 million tax refund associated with the CARES Act, and $17.2 million of lower cash used for the Fox River matter, partially offset by cash used for restructuring activities, excise taxes on the pension asset reversion and strategic initiatives in 2020. Cash used for interest payments declined $4.0 million in the comparison reflecting savings from our debt refinancing in early 2019.

Net cash used by investing activities decreased by $0.3 million in the year-over-year comparison. Capital expenditures totaled $28.1 million in 2020 compared with $27.8 million in 2019. Capital expenditures are expected to total between $38 million and $42 million in 2021.

Net cash used by financing activities totaled $100.3 million in 2020 compared with $72.8 million in 2019. The change in the year-to-year comparison primarily reflects reductions in amounts outstanding under our Revolving credit facility and term loan repayments.

The following table sets forth our outstanding long-term indebtedness:

[[GREPCENT_TABLE]]
[["","","December 31"],["In thousands","","","2020","","","","","2019"],["Revolving credit facility, due Feb. 2024","","$","36,813","","","","$","84,255"],["Term loan, due Feb. 2024","","","249,715","","","","","240,969"],["2.40% Term Loan, due Jun. 2022","","","2,629","","","","","4,012"],["2.05% Term Loan, due Mar. 2023","","","14,737","","","","","19,487"],["1.30% Term Loan, due Jun. 2023","","","4,382","","","","","5,617"],["1.55% Term Loan, due Sep. 2025","","","7,143","","","","","7,915"],["Total long-term debt","","","315,419","","","","","362,255"],["Less current portion","","","(25,057",")","","","","(22,940",")"],["Unamortized deferred issuance costs","","","(1,898",")","","","","(2,396",")"],["Long-term debt, net of current portion","","$","288,464","","","","$","336,919"]]
[[/GREPCENT_TABLE]]

Our revolving credit facility due in February 2024, contains a number of customary compliance covenants, the most restrictive of which is a maximum leverage ratio of 4.0x at the end of 2020. As of December 31, 2020, the leverage ratio, as calculated in accordance with the definition in our amended credit agreement, was 1.8x, within the limits set forth in our credit agreement.

22

The table above sets forth our outstanding debt as of December 31, 2020. The significant terms of the debt instruments are more fully discussed in Item 8 - Financial Statements and Supplementary Data – Note 20 - “Long-Term Debt.” All term loans are denominated in euros and the balances reported are influenced by currency translation, the effect of which is mitigated by certain financial derivatives as discussed in Item 8 – Financial Statements and Supplementary Data – Note - 22 “Financial Derivatives and Hedging Activities.”

In early 2019, we significantly changed our debt capital structure. In February 2019 we redeemed at par, all outstanding 5.375% Notes. In addition, on February 8, 2019, we entered into a new credit facility with a consortium of financial institutions. The new five-year facility (the “2019 Facility”) replaces our existing Revolving credit facility and consists of a $400 million variable rate revolver and a €220 million term loan. The other terms of the 2019 Facility are substantially similar to our then existing Revolving credit facility.

Financing activities includes cash used for common stock dividends. In 2020, we used $23.5 million of cash for dividends on our common stock compared with $22.9 million in 2019. In the second quarter of 2020, we increased the quarterly cash dividend by 3.85%. 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 costs to comply with these regulations and we could incur additional costs as new regulations are developed or regulatory priorities change.

As more fully discussed in Item 8 - Financial Statements and Supplementary Data – Note 24 – “Commitments, Contingencies and Legal Proceedings,” we are involved in the Lower Fox River in Wisconsin (the “Fox River”), an EPA Superfund site for which we remain potentially liable for certain government oversight and long-term monitoring and maintenance costs. Pursuant to a consent decree with certain government agencies entered into in January 2019, we paid $20.5 million for past government oversight costs. Although there remains some uncertainty as to the amount we may ultimately be required to spend, primarily for government oversight costs, the consent decree specifies the nature of our future obligations.

We expect to meet all our near and long-term cash needs, including the pending acquisition of Georgia-Pacific's U.S. nonwovens business for $175 million, 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 of December 31, 2020 and 2019, 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 consolidated balance sheets included herein in Item 8 – Financial Statements and Supplementary Data.

Contractual Obligations    The following table sets forth contractual obligations as of December 31, 2020:

[[GREPCENT_TABLE]]
[["","","","","","Payments due during the year ending December 31,"],["In millions","Total","","","2021","","","2022 to 2023","","","2024 to 2025","","","2026 and beyond"],["Long-term debt (1)","$","330","","","$","30","","","$","50","","","$","250","","","$","\u2014"],["Operating leases (2)","","16","","","","5","","","","5","","","","2","","","","4"],["Purchase obligations (3)","","104","","","","92","","","","12","","","","\u2014","","","","\u2014"],["Other long term obligations (4), (5)","","32","","","","3","","","","6","","","","5","","","","18"],["Total","$","482","","","$","130","","","$","73","","","$","257","","","$","22"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Represents contractual principal and interest payments due on long-term debt. The amounts include expected interest payments of $14 million over the term of the underlying debt instruments based contractual or, in the case of variable rate instruments, current market rates."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Represents agreements for the lease of production equipment, warehouse space, facilities, automobiles, and office space."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","Represents open purchase orders and other obligations, primarily for raw material and energy supply contracts."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(4)","Primarily represents benefits estimated to be paid pursuant to retirement medical plans and nonqualified pension plans."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(5)","Since we are unable to reasonably estimate the timing of ultimate payment, the amounts set forth above do not include any payments that may be made related to uncertain tax positions, including potential interest, accounted for in accordance with ASC 740-10-20. As discussed in more detail in Item 8 \u2013 Financial Statements and Supplementary Data, Note 11 - \u201cIncome Taxes,\u201d such amounts totaled $46 million at December 31, 2020."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["GLATFELTER 2020 FORM 10-K","23"]]
[[/GREPCENT_TABLE]]

Critical Accounting Policies and Estimates   The preceding discussion and analysis of our consolidated financial position and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, long-lived assets, pension and post-employment obligations, environmental liabilities, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

We believe the following represent the most significant and subjective estimates used in the preparation of our consolidated financial statements.

Long- and indefinite-lived Assets    We evaluate the recoverability of our long- and indefinite-lived assets, including plant, equipment, timberlands, goodwill, and other intangible assets periodically or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Goodwill and non-amortizing tradename intangible assets are reviewed for impairment annually, during the third quarter, or more frequently if impairment indicators are present. However, in 2020, as a result of potential impairment indicators related to the impact of the COVID-19 pandemic, we evaluated such assets as of the end of the second quarter and, in connection with our normal review cycle, in the third quarter. In addition, in order to align the evaluation process more closely with the timing change for our strategic planning cycle, we changed the timing of the annual evaluation to be completed in the fourth quarter. Accordingly, we completed an evaluation during the fourth quarter of 2020, and we concluded there was no impairment of goodwill or non-amortizing tradename intangible assets.

The fair value of our reporting units, which are also our operating segments, is determined using a market approach and a discounted cash flow model. The fair value of non-amortizing tradename intangible assets is determined using a discounted cash flow model. Our evaluations include a variety of qualitative factors and analyses based on estimates of future cash flows expected to be generated from the use of the underlying assets, trends or other determinants of fair value. If the value of an asset determined by these evaluations is less than its carrying amount, a loss is recognized for the difference between the fair value and the carrying value of the asset. Future adverse changes in market conditions or poor operating results of the related business may indicate an inability to recover the carrying value of the assets, thereby possibly requiring an impairment charge in the future.

Pension and Other Post-Employment Obligations    Accounting for defined-benefit pension plans, and any curtailments or settlements thereof, requires various assumptions, including, but not limited to discount rates, expected long-term rates of return on plan assets, future compensation growth rates and mortality rates. Accounting for our retiree medical plans, and any curtailments or settlements thereof, also requires various assumptions, which include, but are not limited to, discount rates and annual rates of increase in the per capita costs of health care benefits.

The following chart summarizes the more significant assumption used in the actuarial valuation of our defined-benefit plans for each of the past three years:

[[GREPCENT_TABLE]]
[["","","2020","","","","2019","","","","2018"],["Pension plans"],["Weighted average discount rate"],["for benefit expense","","","2.70","%","","","","4.34","%","","","","3.85","%"],["for benefit obligation","","","2.17","%","","","","2.70","%","","","","4.34","%"],["Expected long-term rate of return on plan assets(1)","","","\u2014","","","","","4.50","%","","","","7.25","%"],["Rate of compensation increase","","","\u2014","","","","","2.50","%","","","","3.00","%"],["Post-employment medical"],["Weighted average discount rate"],["for benefit expense","","","3.11","%","","","","4.19","%","","","","3.68","%"],["for benefit obligation","","","2.30","%","","","","3.11","%","","","","4.19","%"],["Health care cost trend rate assumed for next year","","","5.30","%","","","","5.60","%","","","","5.90","%"],["Ultimate cost trend rate","","","4.50","%","","","","4.50","%","","","","4.50","%"],["Year that the ultimate cost trend rate is reached","","2037","","","","2037","","","","2037"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","For 2019, the expected long-term rate of return on plan assets was reduced to 4.50% due, in part, to a change in the investment allocation of plan assets."]]
[[/GREPCENT_TABLE]]

We evaluate these assumptions at least once each year or as facts and circumstances dictate and we make changes as conditions warrant. Changes to these assumptions will increase or decrease our reported net periodic benefit expense, which will result in changes to the recorded benefit plan assets and liabilities.

24

Environmental Liabilities    We maintain accruals for losses associated with environmental obligations when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing legislation and remediation technologies. These accruals are adjusted periodically as assessment and remediation actions continue and/or further legal or technical information develops. Such liabilities are exclusive of any insurance or other claims against third parties. Environmental costs are capitalized if the costs extend the life of the asset, increase its capacity and/or mitigate or prevent contamination from future operations. Recoveries of environmental remediation costs from other parties, including insurance carriers, are recorded as assets when their receipt is assured beyond a reasonable doubt.

Income Taxes    We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our consolidated balance sheets, as well as operating loss and tax credit carry forwards. These deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when such amounts are expected to reverse or be utilized. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If we are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase the valuation allowance against our deferred tax assets, which may result in a substantial increase in our effective tax rate and a material adverse impact on our reported results.

Significant judgment is required in determining our worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is less than certain. We and our subsidiaries are examined by various Federal, State and foreign tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current liability and deferred taxes in the period in which the facts that give rise to a revision become known.

Other significant accounting policies, not involving the same level of uncertainties as those discussed above, are nevertheless important to an understanding of the Consolidated Financial Statements. Refer to Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements for additional accounting policies.