Glatfelter Corp

RESULTS OF OPERATIONS

2023 versus 2022

Overview For the year ended December 31, 2023, we reported a loss from continuing operations of $78.1 million, or loss of $1.73 per share compared with a loss of $194.1 million and loss of $4.33 per share in 2022. The following table sets forth summarized GAAP-based consolidated results of operations:

We used $25.6 million of cash for operating activities in 2023 compared with a cash outflow of $40.8 million a year ago. During 2023 and 2022, capital expenditures totaled $33.8 and $37.7 million, respectively. Refer to Liquidity and Capital Resources for additional discussion of our sources and uses of cash.

The reported results are in accordance with generally accepted accounting principles in the United States (“GAAP”) and reflect a number of significant items both positive and negative to our Income from Continuing Operations, including: the Ober-Schmitten operations divestiture, turnaround strategy expenses, recognizing tornado related costs, strategic initiatives expenses, debt refinancing costs, and benefits from the sale of timberlands, among others. Excluding these items from reported results, our adjusted loss, a non-GAAP measure, was $38.7 million, or $0.86 loss per share for 2023, compared with our adjusted loss of $19.0 million, or $0.42 loss per share, a year ago. Operating income for our Airlaid Materials segment was $11.6 million lower in 2023 compared with 2022. Operating income for our Composite Fibers segment and Spunlace segment were $4.4 million and $7.2 million higher, respectively. In addition to the results reported in accordance with GAAP, we evaluate our performance using adjusted earnings and adjusted earnings before interest expense, interest income, income taxes, depreciation and amortization and stock-based compensation (“Adjusted EBITDA”). 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 underlying operating trends and cash flow generation.

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

Goodwill and Other Asset Impairment Charges. This adjustment represents non-cash charges recorded to reduce the carrying amount of certain long-lived assets of our Dresden and Ober-Schmitten, Germany facilities and goodwill of our Composite Fibers and Spunlace reporting segments.

Turnaround strategy costs. This adjustment reflects costs incurred in connection with the Company's turnaround strategy initiated in 2022 under its new chief executive officer to drive operational and financial improvement. These costs are primarily related to professional services fees and employee separation expenses.

Russia/Ukraine conflict charges. This adjustment represents a non-cash charge recorded to reduce the carrying amount of accounts receivable and inventory directly related to the Russia/Ukraine military conflict.

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, the pending merger, and related integrations.

Ober-Schmitten divestiture costs. This adjustment reflects the loss on sale of the Ober-Schmitten, Germany operations and professional and other costs directly associated with the sale of the facility.

Tornado insurance deductible costs. This adjustment reflects the deductible on an insured loss to a leased Spunlace facility in Tennessee resulting from tornadoes in December 2023.

Debt refinancing costs. Represents charges to write-off unamortized debt issuance costs in connection with the extinguishment of the Company’s €220.0 million Term Loan and IKB loans, as well as the amendment to the Company's credit facility. These costs also include an early repayment penalty related to the extinguishment of the IKB loans.

CEO transition costs. This adjustment reflects costs related to consulting services provided by the former CEO.

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 former corporate headquarters.

Cost optimization actions. These adjustments reflect charges incurred in connection with initiatives to optimize the cost structure of the Company, improve efficiencies or other objectives. Such actions may include asset rationalization, headcount reductions or similar actions. 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.

COVID-19 ERC recovery. This adjustment reflects the benefit recognized from employee retention credits claimed under the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) Act and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and professional services fees directly associated with claiming this benefit.

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.

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

Other tax adjustments. Tax effect on adjustments calculated based on the incremental effective tax rate of the jurisdiction in which each adjustment originated. For items originating in the U.S., no tax effect is recognized due to the previously established valuation allowance on the net deferred tax assets.

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 EBITDA 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 periods presented:

(1)For 2022, reflects goodwill impairment charge of $119.0 million and other asset impairment charges of $71.6 million.

(2)For 2023, primarily reflects employee separation costs of $6.1 million and professional fees of $2.7 million. For 2022, reflects professional services fees of $4.7 million and employee separation costs of $3.3 million.

(3)For 2023, reflects reductions in accounts receivable reserves due to subsequent collections of $1.4 million. For 2022, reflects accounts receivable reserves of $2.9 million and inventory reserves of $0.3 million.

(4)For 2023, reflects primarily professional services fees related to acquisitions or dispositions (including transaction advisory, legal and other consultant costs) of $1.7 million, a loss on the sale of our Costa Rica operations of $0.6 million, a write-off of purchased construction in process of $0.5 million, employee-related costs of $0.2 million, and other costs of $0.2 million. For 2022, reflects primarily professional services fees related to acquisitions (including transaction advisory, legal and other consultant costs) of $4.3 million, employee separation and other costs of $1.1 million, and other costs directly related to the acquisitions of $0.2 million.

(5)Reflects loss on sale of $17.8 million, legal fees of $0.5 million, employee separation costs of $0.1 million, and other costs of $0.4 million in connection with the sale of the Ober-Schmitten facility.

(6)Reflects the deductible on an insured tornado loss to a leased Spunlace facility in Tennessee in December 2023.

(7)Reflects $1.8 million write-off of deferred debt issuance costs in connection with the Company’s debt refinancing in Q1 2023, and $0.1 million in early repayment penalties and write-off of unamortized financing fees on the IKB loans.

(8)For 2023, primarily reflects a pension settlement charge of $0.6 million related to the separation of our former CEO. For 2022, primarily reflects separation and transition related costs of $4.8 million partially offset by a $3.1 million non-cash benefit related to the forfeiture of stock-based compensation awards.

(9)For 2022, primarily reflects employee separation costs of $0.4 million, equipment write-down of $0.4 million and other costs of $0.1 million directly associated with closure of synthetic fiber production facility in the U.K.

(10) For 2023 and 2022, reflects the benefit recognized from employee retention credits claimed under the CARES Act of 2020 and the subsequent related amendments, partially offset by professional services fees directly related to claiming this benefit.

(11) Tax effect on adjustments calculated based on the incremental effective tax rate of the jurisdiction in which each adjustment originated. For items originating in the U.S., no tax effect is recognized due to the previously established valuation allowance on the net deferred tax assets.

(12) Tax effect of applying certain provisions of the CARES Act of 2020. The amount in 2023 also includes $2.4 million of valuation allowance added to deferred tax asset related to the Ober-Schmitten facility.

EBITDA is a measure used by management to assess our operating performance and is calculated using

income (loss) from continuing operations and excludes interest expense, interest income, income taxes and

depreciation and amortization. Adjusted EBITDA is calculated using EBITDA and further excludes certain items management considers to be unrelated to the company’s core operations. The adjustments include, among others, the costs of strategic initiatives, turnaround strategy costs, costs associated with the Ober-Schmitten divestiture, debt refinancing costs, CEO transition costs, certain cost optimization and restructuring activities, certain COVID-19 ERC recovery, corporate headquarters relocation expenses, asset impairment charge, and share-based compensation expense, as well as the elimination of gains from sales of timberlands. Adjusted EBITDA is a performance measure that excludes costs that we do not consider to be indicative of our ongoing operating performance.

Segment Financial Performance

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

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

Net sales on a consolidated basis totaled $1,385.5 million and $1,491.3 million in 2023 and 2022, respectively. Sales decreased 7.1%, or 7.9% on a constant currency basis, primarily due to an 8.5% decrease in shipments.

Airlaid Materials’ net sales decreased $15.0 million or 2.5%, in the comparison of 2023 to 2022, mainly driven by lower shipments partially offset by higher selling prices from cost pass-through arrangements as raw material and energy costs remained high in the first half of 2023 compared to same period last year. Shipments decreased 5.1% driven by some of our larger customers destocking inventory coupled with weakness in the European market and competition from lower cost alternate substrates as consumers manage cost. Currency translation was $6.2 million favorable.

Airlaid Materials’ 2023 operating income of $43.2 million was $11.6 million lower than 2022. Lower shipments and product mix negatively impacted results by $4.2 million. Selling price increases and energy surcharges of $10.1 million that were particularly higher in the first half of the year mostly offset the higher raw material, energy and other inflationary costs of $11.3 million. For the full year 2023, primary raw material input costs increased $14.2 million, or 5%, as inflationary pressure persisted in the early part of 2023. Overall, the trend in primary raw material input costs was in-line with broader market indices for 2023. Energy costs decreased $2.9 million, or 8%, compared to 2022 as energy prices were less volatile. As of December 31, 2023, Airlaid Materials had approximately 77% of its net sales with contracts with pass-through provisions. Operations and other were unfavorable by $7.7 million mainly driven by lower production to manage inventory as some customers slowed ordering patterns to manage inventory levels. The impact of currency and related hedging positively impacted earnings by $1.5 million. The primary drivers of the change in Airlaid Materials’ operating income are summarized in the following chart (presented in millions):

Composite Fibers’ net sales decreased $40.3 million or 7.7% in 2023 compared to 2022. The decline in net sales is primarily driven by a 8.1% decline in shipments. Shipments in all market categories, except for wallcover, were lower than in 2022 primarily due to customer destocking and pricing pressure driven by elevated inputs costs seen in the first half of 2023. Higher selling prices of $7.2 million, driven by price increases and energy surcharges to recover input cost inflation, partially offset the overall lower shipments. Currency translation was favorable $5.0 million.

Composite Fibers 2023 full year operating income of $21.3 million was $4.4 million higher than the full year operating income in 2022. Higher selling prices and energy surcharges of $7.2 million more than offset the continued inflation in energy, raw material, and freight, particularly in the first half of the year. Full year energy costs were slightly favorable with 2022 while primary raw material input costs decreased $3.6 million, or 2%, compared to 2022 as a result of inflationary pressures abating in second half of the year. Overall, the trend in primary raw material input costs was in-line with broader market indices for 2023 and energy prices were less volatile. As of December 31, 2023, Composite Fibers had approximately 50% of its net sales with contracts with pass-through provisions. Operations and other were favorable by $1.4 million mainly driven by lower depreciation and amortization expense as a result of the 2022 impairment in the Composite Fibers business, but partially offset by lower inclined wire production in 2023. The Ober-Schmitten site negatively impacted full year-over-year results by $8.3 million. The impact of currency and related hedging negatively impacted earnings by $1.8 million. The primary drivers of the change in Composite Fibers’ operating income are summarized in the following chart (presented in millions):

Spunlace’s net sales decreased $48.0 million or 13.1% in 2023 compared to 2022. The decline in net sales is primarily due to lower shipments of 15.3% driven by market softness and access to cheaper products in Europe combined with production constraints experienced on the converting side by our customers in North America. Selling prices were higher $6.4 million driven by price increases and energy surcharges to recover input cost inflation particularly in first half of 2023. Currency translation was favorable $1.0 million.

Spunlace's 2023 operating loss of $2.1 million improved by $7.2 million compared to an operating loss of $9.3 million in 2022. Higher selling prices and energy surcharges particularly in the first half of the year were partially offset by higher raw material and energy costs that persisted in first half of the year but the price cost gap further improved in the second half of 2023 as inflationary pressures eased and overall positively impacted earnings by a combined $11.6 million. In 2023, primary raw material input costs increased slightly by $1.0 million while energy costs decreased by $6.2 million, or 20%, compared to 2022. Overall, the trend in primary raw material input costs was in-line with broader market indices for 2023 and energy prices were less volatile. As of December 31, 2023, Spunlace had approximately 48% of its net sales with contracts with pass-through provisions. Operations and others were favorable by $0.5 million as actions taken to improve operations and reduce overall spending were mostly offset by lower production to match customer demands. The impact of currency and related hedging positively impacted earnings by $0.4 million. The primary drivers of the change in Spunlace’s operating loss are summarized in the following chart (presented in millions):

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 $59.8 million for 2023 compared with $226.4 million in 2022. Excluding the items identified to present “adjusted earnings,” unallocated expenses for the comparison increased $0.3 million. The higher costs were driven by higher incentive accruals in 2023 compared to 2022, largely offset by expenses related to a customer claim. Expenses for 2023 and 2022 included a customer claim and associated costs totaling $1.6 million and $3.1 million, respectively, related to a supplier's raw material defect that was identified in 2022 by Glatfelter and reported to the customer thereby avoiding the impacted product from reaching the end consumer. The Company is in discussions with the supplier and its insurance provider to recover Glatfelter's losses related to the issue. No recovery of losses was recorded in the 2022 or 2023 financials.

Gain on Sales of Plant, Equipment and Timberlands, net During each of the past two years, we sold certain assets, primarily timberlands. For a summary of these transactions, refer to Item 8 - Financial Statements and Supplementary Data, Note 7 -"Gain on Dispositions of Plant Equipment and Timberlands."

Interest expense, net For the year ended December 31, 2023, interest expense, net totaled $63.3 million compared with $32.8 million for 2022. The increase reflects our debt refinancing in 2023 in which we entered into a new €250.0 million term loan at a fixed rate of 11.25% per annum and extinguished our then existing €220 million term loan at a fixed rate of 3.75% per annum. For more detail regarding our debt activity, refer to Item 8 - Financial Statements and Supplementary Data, Note 20 -"Long-Term Debt."

Income taxes For the year ended December 31, 2023, we recorded a $7.0 million income tax provision on a pretax loss of $71.1 million from continuing operations. The comparable amounts for 2022 were a $10.3 million income tax benefit on a pre-tax loss of $204.4 million. The income tax expense in 2023 includes a valuation allowance recorded for the operating losses in the U.S. and certain foreign jurisdictions for which no income tax benefit was recorded, partially offset by a deferred tax benefit associated with a notional interest deduction carryforward at a foreign subsidiary. The income tax benefit in 2022 includes deferred tax benefits associated with the asset impairment charges and related bad debt and inventory reserves, partially offset by a valuation allowance recorded for the operating losses in the U.S. and certain foreign jurisdictions for which no income tax benefit was recorded.

Foreign Currency We own and operate facilities in Canada, Germany, France, the United Kingdom, Spain and the Philippines. The functional currency of our Canadian operations is the U.S. dollar. However, in Germany, France and Spain 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 €170 million. For 2023 compared to 2022, the average currency exchange rate of the euro strengthened relative to the U.S. dollar by approximately 2.6% , and the British pound sterling to the dollar strengthened by approximately 0.5%. 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.

The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2023 were the same as 2022, 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 2023 and 2022.