GLATFELTER CORPORATION 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 2019 compared to 2018 is included herein. For discussion and analysis of 2018 compared to 2017, 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 endedDecember 31, 2018 , which was filed with theUnited States Securities and Exchange Commission onFebruary 25, 2019 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:
i. variations in demand for our products or the pricing thereof, product
substitution or the impact of unplanned market-related downtime;
ii. the impact of competition, both domestic and international, changes in
industry production capacity, including the construction of new machines or
mills, idling of machines or the closing of mills and incremental changes due
to capital expenditures or productivity increases;
iii. risks associated with our international operations, including local/regional
economic and political environments and fluctuations in currency exchange
rates;
iv. geopolitical events, including
v. our ability to develop new, high value-added products;
vi. changes in the price or availability of raw materials we use, particularly
pulp, pulp substitutes, synthetic pulp, specialty fibers and abaca fiber;
vii. changes in energy-related prices and the price of commodity raw materials
with an energy component;
viii. the impact of unplanned production interruptions at our facilities or at
any of our key suppliers;
ix. disruptions in production and/or increased costs due to labor disputes;
x. the gain or loss of significant customers and/or on-going viability of such
customers;
xi. unfavorable outcomes or unforeseen costs with respect to our ongoing
obligations for the
xii. the impact of war and terrorism;
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 tax assets;
xiv. enactment of adverse state, federal or foreign tax or other legislation or
changes in government policy or regulation; and
xv. our ability to finance, consummate and integrate future acquisitions.
GLATFELTER 2019 FORM 10-K 13
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Introduction We manufacture a wide array of engineered materials and manage our company along two operating segments:
• Composite Fibers with revenue from the sale 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
• Airlaid Materials with revenue from the sale of airlaid nonwoven fabric-like
materials used in feminine hygiene, adult incontinence products, table top,
specialty wipes, home care products and other airlaid applications.
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. RESULTS OF OPERATIONS 2019 versus 2018 Overview For the year endedDecember 31, 2019 we reported a net loss of$21.5 million , or$0.49 per share compared with a net loss of$177.6 million , or$4.06 per diluted share in 2018. The results for 2019 reflect a number of significant actions we undertook including corporate cost reductions, debt refinancing and termination and settlement of our qualified pension plan. Excluding these items from reported results, adjusted earnings, a non-GAAP measure, was$33.2 million , or$0.75 per diluted share for 2019, compared with$9.2 million , or$0.21 per diluted share, a year ago. OnOctober 31, 2018 , we completed the sale of the Specialty Papers business, and onOctober 1, 2018 , we completed our acquisition ofGeorgia-Pacific's European nonwovens business based in Steinfurt,Germany ("Steinfurt"), with annual revenues of approximately$99 million as part of our strategic transformation to becoming a leading global supplier of engineered materials. These actions are all part of our strategic transformation to becoming a leading global supplier of engineered materials. The results discussed in the preceding paragraph are in accordance with generally accepted accounting principles inthe United States ("GAAP"). These reported results reflect the impact of significant unusual and non-recurring items including, among others, the results of Specialty Papers, a discontinued operation, the cost to terminate and settle liabilities associated with our qualified pension plan, cost optimization actions, costs of strategic initiatives, capacity expansion and gains from timberland sales. We generated$102.8 million of cash from operations in 2019 compared with the use of$6.0 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 2019 and 2018, capital expenditures totaled$27.8 and$42.1 million , respectively, reflecting the completion of the airlaid capacity expansion project in early 2018. The following table sets forth summarized GAAP-based consolidated results of operations: Year ended December 31 In thousands, except per share 2019 2018 Net sales$ 927,673 $ 866,286 Gross profit 147,542 130,407 Operating income 54,635 21,942 Continuing operations Loss (25,211 ) (448 ) Loss per share (0.57 ) (0.01 ) Discontinued operations Income (loss) from discontinued operations 3,670 (177,156 ) Earnings (loss) per share 0.08 (4.05 ) Net loss (21,541 ) (177,604 ) Loss per share (0.49 ) (4.06 ) In addition to the results reported in accordance with GAAP, we evaluate our performance using adjusted earnings and adjusted earnings per diluted share. We disclose this information to allow investors to evaluate our performance exclusive of certain items that impact the comparability of results from period to period and we believe it is helpful in understanding
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underlying operating trends and cash flow generation. Adjusted earnings consist 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 connection with the sale, are reported as discontinued operations for all periods presented. This adjustment reflects the net results of this discontinued operation. Pension settlement charge. This adjustment reflects a charge recorded in connection with the termination of our qualified pension plan and the related actions to settle all obligations to the plan's participants. The pension settlement charge reflects the recognition of previously unrecognized losses deferred as a component of accumulated other comprehensive losses. Since the pension plan was fully funded, this action did not require the use of cash, but instead was accomplished through the use or transfer of plan assets. 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 separation, 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. Strategic initiatives. These adjustments primarily reflect one-time professional and legal fees incurred directly related to evaluating and executing certain strategic initiatives, acquisition transaction costs and, in 2018, a currency translation gain on acquisition financing.
Airlaid capacity expansion costs. This adjustment reflects non-capitalized,
one-time costs incurred related to the start-up of a new airlaid production
facility in
Debt refinancing costs. Represents a charge to write-off unamortized debt
issuance costs in connection with the redemption of the Company's
Fox River environmental matter. This adjustment excludes a gain and reflects a decrease in the Company's overall reserve for theFox River matter primarily due to the resolution of the litigation in the first quarter of 2019.
Timberland sales and related costs. This adjustment excludes 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.
U.S. Tax Reform. This adjustment reflects amounts recorded estimating the impact of the TCJA which was signed into law onDecember 22, 2017 . The TCJA includes, among many provisions, a tax on the mandatory repatriation of earnings of the Company's non-U.S. subsidiaries and a change in the corporate tax rate from 35% to 21%. 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.
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
GLATFELTER 2019 FORM 10-K 15 --------------------------------------------------------------------------------
Year ended December 31
2019 2018
In thousands, except per share Amount EPS Amount EPS
Net income $ (21,541 ) $ (0.49 ) (177,604 ) $ (4.06 )
Exclude: Net income from discontinued
operations (3,670 ) (0.08 ) 177,156 4.05
Loss from continuing operations (25,211 ) (0.57 ) (448 ) (0.01 )
Adjustments (pre-tax)
Pension settlement charge 75,326 -
Cost optimization actions 8,583 440
Airlaid capacity expansion costs 1,014 7,072
Debt refinancing 992 -
Strategic initiatives 249 5,898
Fox River environmental matter (2,509 ) -
Timberland sales and related costs (1,572 ) (3,225 ) Total adjustments (pre-tax) 82,083 10,185 Income taxes (1) (23,722 ) 6 U.S. Tax Reform - (545 ) Total after-tax adjustments 58,361 1.32 9,646 0.22 Adjusted earnings$ 33,150 $ 0.75 $ 9,198 $ 0.21
(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.
Segment Financial Performance
Year ended December
31 Other and
Dollars in millions Composite Fibers Airlaid Materials Unallocated Total
2019 2018 2019 2018 2019 2018 2019 2018
Net sales $ 521.7 $ 554.9 $ 406.0 $ 311.4 $ - $ - $ 927.7 $ 866.3
Cost of products
sold 432.2 462.3 346.6 269.3 1.3 4.3 780.1 735.9
Gross profit (loss) 89.5 92.6 59.4 42.1 (1.3 ) (4.3 ) 147.6 130.4
SG&A 41.6 44.2 18.3 12.2 35.1 55.3 95.0 111.7
Gains on
dispositions of
plant,
equipment and
timberlands, net - - - - (2.1 ) (3.3 ) (2.1 ) (3.3 )
Total operating
income (loss) 47.9 48.4 41.1 29.9 (34.3 ) (56.3 ) 54.6 21.9
Non-operating
expense - - - - (89.1 ) (14.7 ) (89.1 ) (14.7 )
Income (loss)
before income taxes $ 47.9 $ 48.4 $ 41.1 $ 29.9 $ (123.4 ) $ (71.0 ) $ (34.5 ) $ 7.3
Supplementary Data
Net tons sold
(thousands) 133.5 143.8 137.6 104.8 - - 271.1 248.6
Depreciation,
depletion and
amortization $ 26.2 $ 28.3 $ 21.1 $ 14.9 $ 3.5$ 4.3 $ 50.8 $ 47.5 Capital expenditures 12.0 15.7 13.7 21.6 2.1 4.8 27.8 42.1
The sum of individual amounts set forth above may not agree to the consolidated financial statements included herein due to rounding.
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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 inthe 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
Year ended
December 31
In thousands 2019 2018 Change
Net sales $ 927,673 $ 866,286 $ 61,387
Costs of products sold 780,131 735,879 44,252
Gross profit $ 147,542 $ 130,407 $ 17,135 Gross profit as a percent of Net sales 15.9 % 15.1 %
The following table sets forth the contribution to consolidated net sales by
each segment:
Year ended
December 31
Percent of Total 2019 2018
Segment
Composite Fibers 56.2 % 64.1 %
Airlaid Materials 43.8 35.9
Total 100.0 % 100.0 %
Net sales on a consolidated basis totaled $927.7 million and $866.3 million in
2019 and 2018, respectively. The $61.4 million increase was primarily driven by
the Steinfurt acquisition, which contributed $71.0 million in the comparison,
and partially offset by $31.4 million of unfavorable currency translation.
Shipping volumes increased 9.1%.
GLATFELTER 2019 FORM 10-K 17
-------------------------------------------------------------------------------- Composite Fibers' net sales decreased$33.2 million , or 6.0%, and totaled$521.7 million in 2019. The decrease was primarily due to$22.8 million from unfavorable currency translation and a 7.2% decrease in shipping volumes reflecting weak demand for wallcover and metallized products. Slightly higher selling prices added$2.2 million . Composite Fibers' operating income for the year endedDecember 31, 2019 decreased$0.5 million to$47.9 million compared to a year ago. Lower shipping volumes impacted results by$4.7 million and higher operating costs driven by inflationary pressure and higher freight, adversely affected the comparison by$2.8 million . Currency was$4.7 million favorable compared to the year-ago period reflecting hedging instruments that matured more than offsetting the impact of the lower Euro translation rate. The primary drivers are summarized in the following chart (in millions): [[Image Removed]] Airlaid Materials' net sales totaled$406.0 million in 2019. Net sales increased$94.6 million in the year-over-year comparison primarily due the Steinfurt acquisition which contributed$71 million of the increase and an 11.0% increase in shipping volumes from the legacy business. Selling prices and currency translation were unfavorable by$2.7 million and$8.6 million , respectively. Airlaid Materials' operating income totaled$41.1 million , an increase of$11.2 million , or 37.5% compared to a year ago. The increase was primarily due to higher shipping volumes related to the Steinfurt acquisition and the additional capacity added by theFort Smith facility. Lower raw material and energy costs were partially offset by lower selling prices, primarily reflecting pass-through arrangements. The primary drivers are summarized in the following chart (in millions): [[Image Removed]] 18
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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$34.3 million for 2019 compared with$56.3 million in 2018. The amounts presented in this category include cost optimization actions, strategic initiatives, airlaid capacity expansion,Fox River reserve adjustments and gains on timberland sales, all of which are presented previously in the reconciliation of GAAP results to Adjusted earnings. Excluding these items, unallocated expenses declined$14.8 million primarily reflecting receipt of payments for transition services, cost control and rightsizing initiatives and lower professional services.
Gain on Sales of Plant, Equipment and Timberlands, net During each of the past three years, we completed the following sales of assets:
Dollars in thousands Acres Proceeds Gain (loss) 2019 Timberlands 1,996$ 1,705 $ 1,572 Other n/a 493 488 Total$ 2,198 $ 2,060 2018 Timberlands 1,918$ 3,414 $ 3,225 Other n/a 48 31 Total$ 3,462 $ 3,256 2017 Timberlands 332$ 209 $ 188 Other n/a 9 9 Total$ 218 $ 197 Income taxes On continuing operations, for the year endedDecember 31, 2019 , we recorded a$9.2 million income tax benefit on a pretax loss of$34.5 million . The amounts for 2019 include a$23.1 million of tax benefit recorded in connection with the$75.3 million pension settlement charge. In addition, the income taxes in 2019 include a$3.0 million benefit due to the completion of tax audits and the release of certain state valuation allowances. During 2018, we recorded a provision of$7.7 million on pretax income of$7.3 million . Our effective tax rate for 2018 was unusually high primarily due to losses from lower taxedU.S. -based operations, together with provisions of the TCJA which require us to provide for an additionalU.S. tax on international earnings (Global Intangible Low Taxed Income, or GILTI). Foreign Currency We own and operate facilities inCanada ,Germany ,France , theUnited Kingdom andthe Philippines . The functional currency of our Canadian operations is theU.S. dollar. However, inGermany andFrance it is the Euro, in theUK , it is the British Pound Sterling, and inthe Philippines the functional currency is the Peso. On an annual basis, our euro denominated revenue exceeds euro expenses by an estimated €140 million. For 2019 compared to 2018, the average currency exchange rate of the euro weakened relative to theU.S. dollar by approximately 5.2% in the year over year comparison, and the British pound sterling to the dollar weakened by approximately 4.4%. 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 intoU.S. dollars is subject to changes in foreign currency exchange rates.
GLATFELTER 2019 FORM 10-K 19
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The table below summarizes the translation impact on reported results that
changes in currency exchange rates had on our non-
Year ended
In thousands December 31, 2019
Favorable
(unfavorable)
Net sales $ (31,438 )
Costs of products sold 35,017
SG&A expenses 2,282
Income taxes and other (330 )
Net income $ 5,531
The above table only presents the financial reporting impact of foreign currency
translations assuming currency exchange rates in 2019 were the same as 2018, 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 the Specialty Papers business
on October 31, 2018 . Its results of operations are reported as discontinued
operations for all periods presented. For 2019, we reported income from
discontinued operations of $3.7 million related to adjustments for post-closing
working capital, pension, the reversal of tax reserves associated with the
closure of tax matters, and other items in connection with the sale of Specialty
Papers. For the year ended December 31, 2018 , we reported a net loss from
discontinued operations of $177.2 million , including a $144.1 million impairment
charge recorded in connection with the sale of the business.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires expenditures for new or enhanced equipment, research and
development efforts, and to support our business strategy. In addition, we have
mandatory debt service requirements of both principal and interest. The
following table summarizes cash flow information for each of the periods
presented:
Year ended
December 31
In thousands 2019 2018Cash and cash equivalents at beginning
of period$ 142,685 $ 116,219 Cash provided (used) by Operating activities 102,835 (5,952 ) Investing activities (27,113 ) (217,640 ) Financing activities (72,774 ) (91,426 ) Effect of exchange rate changes on cash (269 )
(5,564 ) Change in cash and cash equivalents from discontinued operations
(19,163 ) 347,048
Net cash provided (used) (16,484 )
26,466
Cash and cash equivalents at end of
period$ 126,201 $ 142,685 AtDecember 31, 2019 , we had$126.2 million in cash and cash equivalents ("cash"), of which approximately 37% was held by foreign subsidiaries. Cash held by our foreign subsidiaries can be repatriated without incurring a significant amount of additional taxes. The cash held at the end of 2019 includes$53.4 million received in connection with the termination of our overfunded qualified pension plan. In 2020, after we establish an account to fund 401(k) contributions for the next 7 years and pay excise taxes and fees, approximately$32 million will be available for unrestricted general use.
In addition to cash, as of
Cash provided by operating activities totaled$102.8 million in 2019 compared with a use of$6.0 million a year ago. The improvement in cash from operations primarily reflects the$53.4 million of cash from the pension settlement, improved earnings, reduced working capital use, predominantly inventory, as well as lower payments for interest as a result of changes in our capital debt structure in early 2019. These improvements were partially offset by the$20.8 million payment related to theFox River matter. Net cash used by investing activities decreased by$190.5 million in the year-over-year comparison as the amount for 2018 included the use of$178.9 million , net of cash acquired for the Steinfurt acquisition. Capital expenditures totaled$27.8 million in 2019 compared with$42.1 million in 2018 reflecting lower spending due to the completion of Airlaid Materials' capacity expansion project in early 2018. Capital expenditures are expected to total between$30 million and$35 million in
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2020.
Net cash used by financing activities totaled$72.8 million in 2019 compared with$91.4 million in 2018. The change in the year-to-year comparison primarily reflects lower repayments of amounts outstanding under our Revolving credit facility, partially offset by an increase of$5.6 million in term loan repayments.
The following table sets forth our outstanding long-term indebtedness:
December 31
In thousands 2019 2018
Revolving credit facility, due
-
5.375% Notes, due Oct. 2020 - 250,000
Term loan, due Feb. 2024 240,969 -
2.40% Term Loan, due Jun. 2022 4,012 5,725
2.05% Term Loan, due Mar. 2023 19,487 25,972
1.30% Term Loan, due Jun. 2023 5,617 7,361
1.55% Term Loan, due Sep. 2025 7,915 9,470
Total long-term debt 362,255 413,023
Less current portion (22,940 ) (10,785 )
Unamortized deferred issuance costs (2,396 ) (1,276 )
Long-term debt, net of current portion
Our revolving credit facility due inFebruary 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 2019. As ofDecember 31, 2019 , the leverage ratio, as calculated in accordance with the definition in our amended credit agreement, was 2.2x, within the limits set forth in our credit agreement. The table above sets forth our outstanding debt as ofDecember 31, 2019 . The significant terms of the debt instruments are more fully discussed in Item 8 - Financial Statements and Supplementary Data - Note 18. In early 2019, we significantly changed our debt capital structure. InFebruary 2019 we redeemed at par, all outstanding 5.375% Notes. In addition, onFebruary 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 2019, we used$22.9 million of cash for dividends on our common stock compared with$22.8 million in 2018. 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. During 2018, we sold Specialty Papers for net proceeds of$323 million . This receipt and the net activities of the business are reflected in the summary table of cash flows under the caption "Change in cash and cash equivalents from discontinued operations." 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 22 - Commitments, Contingencies and Legal Proceedings ("Note 21"), we are involved in theLower Fox River inWisconsin (the "Fox River "), anEPA 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 inJanuary 2019 , we paid$20.5 million for past government oversight costs. Although there remains some uncertainty as to the amount we may ultimately be required to spend, primarily for government oversight costs, the consent decree specifies the nature of our future obligations. We expect to meet all our near and long-term cash needs from a combination of operating cash flow, cash and cash equivalents, our existing credit facility and other long-term debt.
GLATFELTER 2019 FORM 10-K 21
-------------------------------------------------------------------------------- Off-Balance-Sheet Arrangements As ofDecember 31, 2019 and 2018, we had not entered into any off-balance-sheet arrangements. Financial derivative instruments, to which we are a party, and guarantees of indebtedness, which solely consist of obligations of subsidiaries and a partnership, are reflected in the consolidated balance sheets included herein in Item 8 - Financial Statements and Supplementary Data. Contractual Obligations The following table sets forth contractual obligations as ofDecember 31, 2019 : Payments due during the year ending December 31, In millions Total 2020 2021 to 2022 2023 to 2024 2025 and beyond Long-term debt (1)$ 381 $ 28 $ 54 $ 298 $ 1 Operating leases (2) 18 5 7 2 4 Purchase obligations (3) 119 87 32 - - Other long term obligations (4), (5) 52 4 6 5 37 Total$ 570 $ 124 $ 99 $ 305 $ 42
(1) Represents contractual principal and interest payments due on long-term debt.
The amounts include expected interest payments of
of the underlying debt instruments based contractual or current market rates
in the case of variable rate instruments.
(2) Represents agreements for the lease of production equipment, warehouse space,
facilities, automobiles, and office space.
(3) Represents open purchase orders and other obligations, primarily for raw
material and energy supply contracts. In certain situations, prices are
subject to variations based on market prices. In such situations, the
information above is based on prices in effect at December 31, 2019 .
(4) Primarily represents benefits estimated to be paid pursuant to retirement
medical plans and nonqualified pension plans.
(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 -
Financial Statements and Supplementary Data, Note 9, "Income Taxes," such
amounts totaled $31 million at December 31, 2019 .
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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 inthe 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, revenues 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 during the third quarter of each year. 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:
2019 2018 2017
Pension plans
Weighted average discount rate for benefit expense 4.34 % 3.85 % 4.44 %
for benefit obligation 2.70 % 4.34 % 3.85 %
Expected long-term rate of return on plan assets(1) 4.50 % 7.25 % 7.25 %
Rate of compensation increase 2.50 % 3.00 % 3.00 %
Post-employment medical
Weighted average discount rate for benefit expense 4.19 % 3.68 % 4.18 %
for benefit obligation 3.11 % 4.19 % 3.68 %
Health care cost trend rate assumed for next year 5.60 % 5.90 % 6.20 %
Ultimate cost trend rate 4.50 % 4.50 % 4.50 %
Year that the ultimate cost trend rate is reached 2037 2037 2037
(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.
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.
GLATFELTER 2019 FORM 10-K 23
-------------------------------------------------------------------------------- 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.
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