-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MISf0HdD6oHONJr+InBI1WDQEZtd5TAhkp94zFiUpZWLj/K7/bKb+WAlnBScxFgJ NwT5Bsaa+RL5SL4wbMmGZQ== 0000893220-00-000688.txt : 20000516 0000893220-00-000688.hdr.sgml : 20000516 ACCESSION NUMBER: 0000893220-00-000688 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLATFELTER P H CO CENTRAL INDEX KEY: 0000041719 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 230628360 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03560 FILM NUMBER: 636107 BUSINESS ADDRESS: STREET 1: 228 S MAIN ST CITY: SPRING GROVE STATE: PA ZIP: 17362 BUSINESS PHONE: 7172254711 MAIL ADDRESS: STREET 2: 228 S MAIN ST CITY: SPRING GROVE STATE: PA ZIP: 17362 10-Q 1 FORM 10-Q FOR MARCH 31,2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________________to______________________ Commission File No. 1-3560 P. H. GLATFELTER COMPANY (Exact name of registrant as specified in its charter) Pennsylvania 23-0628360 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 96 South George Street, Suite 500, York, Pennsylvania 17401 (Address of principal executive offices) (Zip Code) (717) 225-4711 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X N . --- ---- Shares of Common Stock outstanding at April 28, 2000 were 42,314,942. 1 2 P. H. GLATFELTER COMPANY INDEX Part I - Financial Information Financial Statements: Condensed Consolidated Statements of Income - Three Months Ended March 31, 2000 and 1999 (Unaudited).... 3 Condensed Consolidated Balance Sheets - March 31, 2000 (Unaudited) and December 31, 1999......................... 4 Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2000 and 1999 (Unaudited).......... 5 Notes to Condensed Consolidated Financial Statements (Unaudited)............................................... 6 Independent Accountants' Report................................ 12 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 13 Quantitative and Qualitative Disclosures About Market Risk..... 18 Part II - Other Information........................................ 18 Signature.......................................................... 20 Index of Exhibits.................................................. 21 Exhibit 15 - Letter in Lieu of Consent Regarding Review Report of Unaudited Interim Financial Information Exhibit 27 - Financial Data Schedule 2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS P. H. GLATFELTER COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (UNAUDITED)
Three Months Ended 3/31/2000 3/31/1999 --------- --------- Revenues Net sales $181,260 $165,846 Other income - net Energy sales - net 2,466 2,238 Interest on investments and other - net 1,288 370 Gain from property dispositions, etc. - net 308 920 -------- -------- 4,062 3,528 Total revenues 185,322 169,374 Costs and expenses Cost of products sold 147,753 138,163 Selling, general and administrative expenses 13,103 13,509 Interest on debt - net 4,380 4,790 Unusual item 3,336 -- -------- -------- 168,572 156,462 Income before income taxes 16,750 12,912 Income tax provision Current taxes 4,490 4,126 Deferred taxes 1,616 646 -------- -------- Total 6,106 4,772 Net income $ 10,644 $ 8,140 ======== ======== Basic and diluted earnings per share $ 0.25 $ 0.19 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 4 P. H. GLATFELTER COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) ASSETS
3/31/2000 (unaudited) 12/31/1999 ----------- ----------- Current assets: Cash and cash equivalents $ 72,719 $ 76,035 Accounts receivable - net 87,626 74,638 Inventories: Raw materials 38,553 41,013 In process and finished 40,480 42,463 Supplies 31,239 31,624 ----------- ----------- Total inventories 110,272 115,100 Prepaid expenses and other current assets 3,931 2,354 ----------- ----------- Total current assets 274,548 268,127 Plant, equipment and timberlands - net 565,936 582,213 Other assets 155,843 153,440 ----------- ----------- Total assets $ 996,327 $ 1,003,780 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 1,744 $ 1,824 Short-term debt 24,791 26,566 Accounts payable 41,508 40,047 Dividends payable 7,400 7,393 Income taxes payable 13,888 9,601 Accrued compensation and other expenses and deferred income taxes 37,626 47,200 ----------- ----------- Total current liabilities 126,957 132,631 Long-term debt 293,916 301,380 Deferred income taxes 150,489 147,698 Other long-term liabilities 63,476 63,947 ----------- ----------- Total liabilities 634,838 645,656 ----------- ----------- Commitments and contingencies Shareholders' equity: Common stock 544 544 Capital in excess of par value 42,149 42,296 Retained earnings 499,922 496,680 Accumulated other comprehensive income (1,854) (1,392) ----------- ----------- Total 540,761 538,128 Less cost of common stock in treasury (179,272) (180,004) ----------- ----------- Total shareholders' equity 361,489 358,124 ----------- ----------- Total liabilities and shareholders' equity $ 996,327 $ 1,003,780 =========== ===========
See accompanying notes to condensed consolidated financial statements. 4 5 P. H. GLATFELTER COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (UNAUDITED)
Three Months Ended 3/31/2000 3/31/1999 --------- --------- Cash flows from operating activities: Net income $ 10,644 $ 8,140 Items included in net income not using (providing) cash: Depreciation, depletion and amortization 11,820 12,292 Loss (gain) on disposition of fixed assets 98 (908) Expense related to 401(k) plans 481 63 Changes in assets and liabilities: Accounts receivable (14,406) (11,358) Inventories 4,932 2,683 Other assets and prepaid expenses (5,471) (4,001) Accounts payable, accrued compensation and other expenses, deferred income taxes and other long-term liabilities (7,217) 453 Income taxes payable 4,431 984 Deferred income taxes - noncurrent 2,791 2,322 -------- -------- Net cash provided by operating activities 8,103 10,670 -------- -------- Cash flows from investing activities: Sale or maturity of investments - net -- 2 Proceeds from disposal of fixed assets 40 949 Additions to plant, equipment and timberlands (3,429) (5,914) -------- -------- Net cash used in investing activities (3,389) (4,963) -------- -------- Cash flows from financing activities: Net payment of debt (638) (637) Dividends paid (7,393) (7,365) -------- -------- Net cash used in financing activities (8,031) (8,002) -------- -------- Effect of exchange rate changes on cash 1 (380) -------- -------- Net decrease in cash and cash equivalents (3,316) (2,675) Cash and cash equivalents: At beginning of year 76,035 50,907 -------- -------- At end of period $ 72,719 $ 48,232 ======== ======== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 7,168 $ 8,595 Income taxes 265 844
See accompanying notes to condensed consolidated financial statements. 5 6 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. EARNINGS PER SHARE ("EPS") Basic EPS excludes the dilutive impact of common stock equivalents and is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS includes the effect of potential dilution from the issuance of common stock, pursuant to common stock equivalents, using the treasury stock method. A reconciliation of the Registrant's basic and diluted EPS follows with the dollar and share amounts in thousands:
Three Months Ended March 31 ---------------------------- 2000 1999 ---- ---- Shares Shares ------ ------ Basic EPS factors 42,267 42,110 Effect of potentially dilutive employee incentive plans: Restricted stock awards 62 11 Performance stock awards 39 142 -------- ------- Diluted EPS factors 42,368 42,263 ======== ======= Net income $ 10,644 $ 8,140 Basic and diluted EPS $ 0.25 $ 0.19
The 2000 basic and diluted EPS of $.25, as presented on the Condensed Consolidated Statement of Income, reflects the negative impact of an after-tax restructuring charge (unusual item) of $.05 per share (see Note 2). 2. UNUSUAL ITEM The Registrant announced in September 1999 that, effective January 1, 2000, prices would be increased for certain of its tobacco paper products. This initiative was required for the Registrant to remain a viable, high-quality supplier to its tobacco paper customers. As the Registrant expected, certain of these customers sought other suppliers after this announcement. As a result, the Registrant announced in December 1999 that it would begin reducing its tobacco paper manufacturing capacity at its Ecusta mill during 2000. During the first quarter of 2000, the Registrant finalized its plan of restructuring and will begin to reduce the workforce at Ecusta shortly. The workforce reduction is expected to be completed by late 2000 and will ultimately result in the reduction of approximately 300 salaried and hourly jobs associated with the Registrant's tobacco paper production capacity. The Registrant accrued and charged to expense $3,336,000 on a pre-tax basis ($2,120,000 after tax) in the first quarter of 2000 primarily as a result of the voluntary portion, specifically 42 salaried employees, of this restructuring. 3. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other 6 7 contracts (collectively referred to as derivatives), and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 137, issued in July 1999, deferred the effective date of SFAS No. 133 until the beginning of the Registrant's first quarter of 2001. The Registrant is evaluating the effects that the adoption of SFAS No. 133 may have on its consolidated financial position and results of operations. 4. INTEREST RATE SWAP AGREEMENTS In January 1998, the Registrant entered into two interest rate swap agreements, each having a total notional principal amount of DM 52,600,000 (approximately $25,700,000 as of March 31, 2000). One such agreement expired on January 6, 2000. Under the remaining agreement, the Registrant receives a floating rate of the six-month DM London Interbank Offered Rate ("LIBOR") and pays a fixed rate of 4.45% until January 6, 2001. The six-month DM LIBOR applicable for the first half of 2000 is approximately 3.8%. In January 1999, the Registrant entered into two additional interest rate swap agreements, each having a total notional principal amount of DM 50,000,000 (approximately $24,400,000 as of March 31, 2000). Under one agreement, which was effective April 6, 1999, the Registrant receives a floating rate of the three-month DM LIBOR plus twenty basis points and pays a fixed rate of approximately 3.41% for the term of the agreement. Under the second agreement, which was effective July 6, 1999, the Registrant receives a floating rate, which is also the three-month DM LIBOR plus twenty basis points, and pays a fixed rate of 3.43% for the term of the agreement. The Registrant has other various interest rate swap agreements outstanding which do not have a material impact on the Registrant's consolidated financial statements. All of the Registrant's interest rate swap agreements convert a portion of the Registrant's borrowings from a floating rate to a fixed rate basis. Although the Registrant can terminate any of its swap agreements at any time, the Registrant intends to hold all of its swap agreements until their maturities. 5. COMPREHENSIVE INCOME For the three months ended March 31, 2000 and 1999, comprehensive income was $10,182,000 and $7,591,000, respectively. Comprehensive income includes the effects of changes in certain currency exchange rates relative to the U.S. dollar. 6. COMMITMENTS AND CONTINGENCIES The Registrant is subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of air and water emissions and noise from its mills, as well as the disposal of solid waste generated by its operations. To comply with environmental laws and regulations, the Registrant has incurred substantial capital and operating expenditures in past years. The Registrant anticipates that environmental regulation of its operations will continue to become more burdensome and that capital and operating expenditures will continue, and perhaps increase, in the future. In addition, the Registrant may incur obligations to remove or mitigate any adverse effects on the environment resulting from its operations, including the restoration of natural resources, and liability for personal injury and damage to property, including natural resources. Because environmental regulations are not consistent worldwide, the Registrant's ability to 7 8 compete in the world marketplace may be adversely affected by capital and operating expenditures required for environmental compliance. Subject to permit approval, the Registrant has undertaken an initiative under the Voluntary Advanced Technical Incentive Program of the United States Environmental Protection Agency ("EPA") to comply with the new "Cluster Rule" regulations. This initiative, the Registrant's "New Century Project," will require capital expenditures currently estimated at approximately $30,000,000 to be incurred before April 2004. The Pennsylvania Department of Environmental Protection ("DEP") has proposed to reissue the Registrant's wastewater discharge permit for the Spring Grove mill on terms unacceptable to the Registrant. DEP has concurrently publicly proposed terms for resolution of an anticipated appeal from the issuance of that permit which terms, subject to the satisfaction of certain conditions, are acceptable to the Registrant. However, such terms may be unacceptable to EPA or certain third parties. The Registrant cannot determine the impact that the new permit will have on the Registrant if it contains objectionable terms because the material terms of the final form of the permit are unknown. The Pennsylvania Public Interest Research Group ("Penn PIRG") and several other plaintiffs have brought a citizen suit under the Federal Clean Water Act and Pennsylvania Clean Streams Law seeking a reduction in the Spring Grove mill's discharge of color, civil penalties and costs of litigation. The Registrant believes Penn PIRG's lawsuit to be without merit, but the Registrant cannot predict the impact on the Registrant of any relief the court might award because the case is not yet at a stage where the nature and extent of any relief can be predicted. In 1999, EPA and DEP issued to the Registrant separate Notices of Violation ("NOVs") alleging violations of the federal and state air pollution control laws, primarily for purportedly failing to obtain appropriate preconstruction air quality permits in conjunction with certain modifications to the Registrant's Spring Grove mill. EPA announced that the Registrant was one of seven pulp and paper mill operators to have received contemporaneously an NOV alleging this kind of violation. EPA and DEP alleged that the Registrant's modifications produced (1) significant net emissions increases in certain air pollutants which should have been covered by appropriate permits imposing new emissions limitations, and (2) certain other violations. For all but one of the modifications cited by EPA, the Registrant applied for and obtained from DEP the preconstruction permits which the Registrant concluded were required by applicable law. EPA reviewed those applications before the permits were issued. DEP's NOV only pertained to the modification for which the Registrant did not receive a preconstruction permit. The Registrant conducted an evaluation at the time of this modification, and determined that the preconstruction permit cited by EPA and DEP was not required. The Registrant has been informed that EPA and DEP will seek substantial emissions reductions, as well as civil penalties, to which the Registrant believes it has meritorious defenses. Nevertheless, the Registrant is unable to predict the ultimate outcome of these matters or the costs involved. The Registrant, along with six other companies which operate or formerly operated facilities along the Fox River in Wisconsin, has been identified as a potentially responsible party ("PRP") under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and other laws for (a) investigation and cleanup and (b) natural resources damages arising from the alleged discharge of polychlorinated biphenyls ("PCBs") and other hazardous substances to the Fox River below Lake Winnebago (the "lower Fox River") and the Bay of Green Bay. A dispute presently exists as to 8 9 which sovereign controls which claims concerning this matter. Accordingly, the Registrant has been in discussions with EPA, the Wisconsin Department of Natural Resources ("DNR"), the United States Fish and Wildlife Service ("FWS"), the National Oceanic and Atmospheric Administration ("NOAA"), the Menominee Indian Tribe of Wisconsin, the Oneida Tribe of Indians of Wisconsin, and the state and federal Departments of Justice. On July 11, 1997, these agencies and tribes entered into a Memorandum of Agreement (the "MOA") which provides for coordination and cooperation among those parties in addressing the release or threat of release of hazardous substances into the lower Fox River, Green Bay and Lake Michigan environment. The MOA sets forth a mutual goal of remediating and/or responding to hazardous substance releases and threats of releases, and restoring injured and potentially injured natural resources. The MOA further states that, based on current information, removal of the PCB-contaminated sediments in the lower Fox River is expected to be the principal, but not exclusive, action undertaken to achieve restoration and rehabilitation of injured natural resources. The MOA anticipates funding from the Registrant and the six other companies. On February 26, 1999, DNR released a draft remedial investigation and feasibility study ("RI/FS") for the lower Fox River for public comment. In the draft RI/FS, DNR reviewed and summarized a number of possible remedial alternatives for the site estimated to cost in the range of $0 to $721,000,000, but did not select a preferred remedy. The Registrant does not believe that the no action remedy will be selected. The largest components of the costs of certain of the remedial alternatives are attributable to large-scale sediment removal and disposal. There is no assurance that the cost estimates in the draft RI/FS will not differ significantly from actual costs. The Registrant and the other six companies have submitted extensive technical comments to the draft RI/FS. In addition, the Registrant has submitted its individual comments to the draft RI/FS. DNR and EPA have announced that the RI/FS will be revised. The revision may add, delete or amend the remedial alternatives, and a final RI/FS and a proposed remedial action plan will be issued. The agencies have publicly stated that these documents may be issued in mid to late 2000. Based on current information and advice from its environmental consultants, the Registrant continues to believe that an aggressive effort, as included in certain remedial alternatives in the draft RI/FS, to remove PCB-contaminated sediment, much of which is buried under cleaner material or is otherwise unlikely to move and which is abating naturally, would be environmentally detrimental and, therefore, inappropriate. Natural resources damages may be assessed in addition to cleanup costs. In November 1999, FWS announced a preliminary estimate of damages as the result of injury to recreational fishing. The range of damages announced is from $106 million to $150 million. The Registrant believes that this range is significantly overstated. FWS and the federal and tribal trustees have not yet announced estimates of certain other components of their natural resources damages claim. The Registrant believes DNR to be the lead agency for assessment of damages, and has been cooperatively assessing damages with DNR independent of the federal agencies. The Registrant currently is unable to predict the ultimate costs to the Registrant related to this matter, because the Registrant cannot predict which remedy will be selected for the site or the ultimate amount of natural resources damages nor can the Registrant predict its share of these costs or damages. The Registrant continues to believe it is likely that this matter will result in litigation; however, the Registrant believes it will be able to persuade a court that removal of a substantial amount of PCB-contaminated 9 10 sediments is not an appropriate remedy. There can be no assurance, however, that the Registrant will be successful in arguing that removal of PCB-contaminated sediments is inappropriate or that it would prevail in any resulting litigation. The amount and timing of future expenditures for environmental compliance, cleanup, remediation and personal injury, natural resource damage and property damage liability, including but not limited to those related to the lower Fox River and the Bay of Green Bay, cannot be ascertained with any certainty due to, among other things, the unknown extent and nature of any contamination, the extent and timing of any technological advances for pollution control, the remedial actions which may be required and the number and financial resources of any other responsible parties. The Registrant continues to evaluate its exposure and the level of its reserves, including, but not limited to, its share of the costs and damages (if any) associated with the lower Fox River and the Bay of Green Bay. The Registrant believes that it is insured against certain losses related to the lower Fox River, depending on the nature and amount thereof. Coverage, which is currently being investigated under reservation of rights by various insurance companies, is dependent upon the identity of the plaintiff, the procedural posture of the claims asserted and how such claims are characterized. The Registrant does not know when the insurers' investigation as to coverage will be completed. The Registrant's current assessment, after consultation with legal counsel, is that ultimately it should be able to resolve these environmental matters without a long-term material adverse impact on the Registrant. In the meantime, however, these matters could, at any particular time or for any particular period, have a material adverse effect on the Registrant's consolidated financial condition, liquidity or results of operations or result in a default under the Registrant's loan covenants. Moreover, there can be no assurance that the Registrant's reserves will be adequate to provide for future obligations related to these matters, that the Registrant's share of costs and/or damages for these matters will not exceed its available resources or that such obligations will not have a long-term material adverse effect on the Registrant's consolidated financial condition, liquidity or results of operations. 7. SUBSEQUENT EVENTS On April 18, 2000, certain flax inventory held at a facility owned and operated by the Registrant, located in Manitoba, Canada, sustained substantial damage as a result of a fire. The Registrant believes it is fully insured for such loss, subject to a modest deductible. The Registrant does not believe that its operations will be materially adversely affected by this incident. On May 1, 2000, the Registrant granted to each non-employee member of its Board of Directors options to purchase 1,500 shares of common stock for a total of 13,500 options granted. Such options become exercisable on May 1, 2001 at an exercise price of $10.78125, which represents the average quoted market price of the Registrant's common stock on the date of grant, and expire on April 30, 2010. 8. DISCLOSURE STATEMENT In the opinion of the Registrant, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which comprise only normal recurring accruals) necessary for a fair presentation of the financial information contained therein. These unaudited condensed consolidated financial statements should be read in conjunction with the more complete disclosures contained in the Registrant's Annual Report on 10 11 Form 10-K for the year ended December 31, 1999. Certain reclassifications have been made of previously reported amounts to conform with classifications used in the current year. 11 12 INDEPENDENT ACCOUNTANTS' REPORT P. H. Glatfelter Company: We have reviewed the accompanying condensed consolidated balance sheet of P. H. Glatfelter Company and subsidiaries as of March 31, 2000, and the related condensed consolidated statements of income and cash flows for the three months ended March 31, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of P. H. Glatfelter Company and subsidiaries as of December 31, 1999, and the related consolidated statements of income and comprehensive income, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 11, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1999 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Deloitte & Touche LLP Philadelphia, Pennsylvania April 18, 2000, except for Note 7 as to which the date is May 1, 2000 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis contains forward-looking statements. See "Cautionary Statement" set forth in Item 5. RESULTS OF OPERATIONS A summary of the period-to-period changes in the principal items included in the Condensed Consolidated Statements of Income is shown below.
Comparison of Three Months Ended March 31, 2000 and March 31, 1999 ---------------------- Increase (Decrease) (dollars in thousands) Net sales 15,414 9.3 % Other income - net 534 15.1 % Cost of products sold 9,590 6.9 % Selling, general and administrative expenses (406) (3.0)% Interest on debt - net (410) (8.6)% Income tax provision 1,334 28.0 % Net income 2,504 30.8 %
Net Sales Worldwide net sales increased $15,414,000, or 9.3%, for the first quarter of 2000 compared to the first quarter of 1999. This increase was a result of both improved pricing and sales volume. The Registrant classifies its sales into two product groups: specialized printing papers and engineered papers (which includes tobacco papers). Total net sales of specialized printing papers increased 18.4% in the first quarter of 2000 compared to the first quarter of 1999 as the impact of a 5.6% increase in net sales volume was compounded by a 12.1% increase in average net selling prices. The increased sales volume of specialized printing papers was largely due to improved demand in the first quarter of 2000 versus the like period of 1999. The early part of 1999 was characterized by generally weak demand for such papers and short order backlogs for the Registrant. During the last three quarters of 1999, demand for the Registrant's specialized printing papers improved. Such increased demand enabled the Registrant to increase its pricing, as reflected by various price increases for such papers that became effective in February through early April 2000. The Registrant is currently experiencing what it believes to be a temporary weakness in demand for its specialized printing papers. It has taken a small amount of market-related downtime at one of its facilities but believes market conditions are still strong and will support existing pricing over the near term. Net sales of engineered papers for the three months ended March 31, 2000 were slightly lower than in the corresponding 1999 period. This decrease was primarily the result of demand erosion for the Registrant's tobacco papers, partially offset by an increase in pricing for such papers. As explained in "Unusual Item" below, the Registrant has increased pricing for certain of its tobacco papers, which has resulted in reduced sales volume. The Registrant expects that net sales of tobacco papers will continue to trend downward, with volume decreases more than offsetting improvements in pricing over the next several months. 13 14 Net sales of the Registrant's engineered papers, excluding tobacco papers, decreased 2.0% in the first quarter of 2000 versus the first quarter of 1999 as a result of a decrease in net average selling prices. Net sales volume for the comparative periods remained flat. The decrease in average net selling prices was a result of a shift in the mix of products sold and not a result of decreased pricing for specific products. Other Income - Net The Registrant's other income - net increased $534,000, or 15.1%, for the first quarter of 2000 compared to the corresponding period of 1999. Interest on investments and other - net increased $918,000 as a result of higher average cash balances in the first quarter of 2000 versus the first quarter of 1999. In addition, the Registrant recognized minority interest expense of $343,000 in the first quarter of 1999. No such minority interest expense was recognized in the first quarter of 2000. Gain from property dispositions, etc. - net was $612,000 lower for the first three months of 2000 versus the first three months of 1999. During the first quarter of 1999, the Registrant realized a gain of $976,000 resulting from the sale of a tract of timberland, while no significant sales of property occurred in the first quarter of 2000. Cost of Products Sold and Gross Margin The Registrant's cost of products sold increased $9,590,000, or 6.9%, in the first three months of 2000 versus the first three months of 1999 as a result of an increased volume of products sold and increased costs of raw materials. The Registrant sold 5.2% more volume during the first quarter of 2000 than the first quarter of 1999. This increased volume was a result of improved demand for certain of the Registrant's products as described above. Prices for certain of the Registrant's principal raw materials, especially market pulp and wastepaper, have increased over the past four quarters thereby increasing its marginal cost of products sold by 1.6% in the first quarter of 2000 versus the same quarter of 1999. This increase in marginal cost of products sold was more than offset by an increase in average net selling price per ton, resulting in an increase in gross margin per ton of 15.0% in the first quarter of 2000 compared to the first quarter of 1999. The Registrant expects that market pulp prices will continue to increase over the last three quarters of 2000. Since pricing for many of the Registrant's products typically follows that of market pulp, the Registrant also expects corresponding improved pricing for such products. Selling, General and Administrative Expenses The Registrant's selling, general and administrative expenses decreased $406,000, or 3.0%, for the first quarter of 2000 versus the comparable period of 1999 as a result of reduced legal and professional expenses. Interest on Debt - Net The Registrant's interest on debt - net decreased $410,000, or 8.6%, for the three months ended March 31, 2000 versus the comparable period of 1999. Due to changes in certain currency exchange rates, especially the weakening of the Deutsche Mark 14 15 relative to the U.S. dollar, the Registrant's average borrowings have decreased, resulting in lower interest expense. Income Tax Provision The Registrant's income tax provision increased by $1,334,000, or 28.0%, for the first quarter of 2000 versus the first quarter of 1999. The increase was principally due to the increase in net income in 2000 versus 1999. UNUSUAL ITEM The Registrant's tobacco papers business has suffered from extremely low pricing in recent years as a result of industry overcapacity and declining domestic consumption. To combat such depressed pricing, the Registrant announced in September 1999 that it had notified its major tobacco paper customers that, effective January 1, 2000, prices would be increased for certain of its tobacco paper products. This initiative was required for the Registrant to remain a viable, high-quality supplier to its tobacco paper customers. As the Registrant expected, certain of these customers sought other suppliers after this announcement. As a result, the Registrant announced in December 1999 that it would begin reducing its tobacco paper manufacturing capacity at its Ecusta mill during 2000. During the first quarter of 2000, the Registrant finalized its plan of restructuring and will begin to reduce the workforce at Ecusta shortly. The workforce reduction is expected to be completed by late 2000 and will ultimately result in the reduction of approximately 300 salaried and hourly jobs associated with the Registrant's tobacco paper production capacity. The Registrant accrued and charged to expense $3,336,000 on a pre-tax basis ($2,120,000 after tax) in the first quarter of 2000 primarily as a result of the voluntary portion, specifically 42 salaried employees, of this restructuring. FINANCIAL CONDITION Liquidity Cash and cash equivalents decreased $3,316,000 during the first three months of 2000. Net cash provided by operating activities of $8,103,000 was more than offset by cash used in investing activities of $3,389,000 and financing activities of $8,031,000. Significant cash activities during the first three months of 2000 included the payment of $7,393,000 of dividends and $3,429,000 for plant, equipment and timberlands. To finance the acquisition of S&H Papier-Holding GmbH, on December 22, 1997, the Registrant entered into a $200,000,000 multi-currency revolving credit facility ("Revolving Credit Facility") with a syndicate of major lending institutions. The Revolving Credit Facility enables the Registrant to borrow up to the equivalent of $200,000,000 in certain currencies in the form of revolving credit loans with a final maturity date of December 22, 2002, and with interest periods determined, at the Registrant's option, on a daily or one- to six-month basis. Interest on the revolving credit loans is at variable rates based, at the Registrant's option, on the Eurocurrency Rate or the Base Rate (lender's prime rate), plus applicable margins. Margins are based on the higher of the Registrant's debt ratings as published by Standard & Poor's and Moody's. As of March 31, 2000, the Registrant's outstanding borrowings were DM 284,200,000 (approximately $138,500,000) under the Revolving Credit Facility. In January 1998, the Registrant entered into two interest rate swap agreements, each having a total notional principal amount of DM 52,600,000 (approximately $25,700,000 as of March 31, 2000). One such agreement was expired on January 6, 2000. Under the remaining agreement, the Registrant receives a floating rate of 15 16 the six-month DM London Interbank Offered Rate ("LIBOR") and pays a fixed rate of 4.45% until January 6, 2001. The six-month DM LIBOR applicable for the first half of 2000 is approximately 3.8%. In January 1999, the Registrant entered into two additional interest rate swap agreements, each having a total notional principal amount of DM 50,000,000 (approximately $24,400,000 as of March 31, 2000). Under one agreement, which was effective April 6, 1999, the Registrant receives a floating rate of the three-month DM LIBOR plus twenty basis points and pays a fixed rate of approximately 3.41% for the term of the agreement. Under the second agreement, which was effective July 6, 1999, the Registrant receives a floating rate, which is also the three-month DM LIBOR plus twenty basis points, and pays a fixed rate of 3.43% for the term of the agreement. The Registrant has other various interest rate swap agreements outstanding which do not have a material impact on the Registrant's consolidated financial statements. All of the Registrant's interest rate swap agreements convert a portion of the Registrant's borrowings from a floating rate to a fixed rate basis. Although the Registrant can terminate any of its swap agreements at any time, the Registrant intends to hold all of its swap agreements until their maturities. On July 22, 1997, the Registrant issued $150,000,000 principal amount of 6-7/8% Notes due July 15, 2007. Interest on the Notes is payable semiannually on January 15 and July 15. The Notes are redeemable, in whole or in part, at the option of the Registrant at any time at a calculated redemption price plus accrued and unpaid interest to the date of redemption, and constitute unsecured and unsubordinated indebtedness of the Registrant. The net proceeds from the sale of the Notes were used primarily to repay certain short-term unsecured debt and related interest. The Registrant expects to meet all its near- and long-term cash needs from a combination of internally generated funds, cash, cash equivalents and its existing Revolving Credit Facility or other bank lines of credit and, if prudent, other long-term debt. Interest Rate Risk The Registrant uses its Revolving Credit Facility and proceeds from the issuance of its 6-7/8% Notes to finance a significant portion of its operations. The Revolving Credit Facility provides for variable rates of interest and exposes the Registrant to interest rate risk resulting from changes in the DM LIBOR. The Registrant uses off-balance sheet interest rate swap agreements to hedge partially interest rate exposure associated with the Revolving Credit Facility. All of the Registrant's derivative financial instrument transactions are entered into for non-trading purposes. To the extent that the Registrant's financial instruments expose the Registrant to interest rate risk and market risk, they are presented in the table below. The table presents principal cash flows and related interest rates by year of maturity for the Registrant's Revolving Credit Facility and 6-7/8% Notes as of March 31, 2000. For interest rate swap agreements, the table presents notional amounts and the related reference interest rates by year of maturity. Fair values included herein have been determined based upon (1) rates currently available to the Registrant for debt with similar terms and remaining maturities, and (2) estimates obtained from dealers to settle interest rate swap agreements. 16 17
Year of Maturity ------------------------------------------------------------------ (dollar amounts in thousands) Total Due at Fair Value at 2000 2001 2002 2003 2004 Thereafter Maturity 3/31/00 ---- ---- ---- ---- ---- ---------- -------- ------- Debt: Fixed rate -- $ 1,409 $ 1,449 $ 1,449 $ 1,290 $1,132 $ 150,412 $ 157,141 $ 149,443 Average interest rate 6.85% 6.85% 6.85% 6.86% 6.86% 6.87% Variable rate -- $ -- $ -- $138,519 $ -- $ -- $ -- $ 138,519 $ 138,519 Average interest rate 3.78% 3.82% 3.95% -- -- -- Interest rate swap agreements: Variable to fixed swaps -- $ 3,312 $27,465 $ 25,637 $48,740 $ -- $ -- $ 105,154 $ 1,771 Average pay rate 4.34% 3.75% 3.42% 3.42% -- -- Average receive rate 4.00% 3.95% 4.00% 4.00% -- --
Capital Expenditures The Registrant expended $3,429,000 on capital projects for the first three months of 2000 compared to $5,914,000 for the first three months of 1999. Capital spending is expected to approximate $40,000,000 during 2000. ENVIRONMENTAL MATTERS The Registrant is subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of air and water emissions and noise from its mills, as well as the disposal of solid waste generated by its operations. To comply with environmental laws and regulations, the Registrant has incurred substantial capital and operating expenditures in past years. During 1999, 1998 and 1997, the Registrant incurred approximately $15,800,000, $17,700,000 and $14,800,000, respectively, in operating costs related to complying with environmental laws and regulations. The Registrant anticipates that environmental regulation of its operations will continue to become more burdensome and that capital and operating expenditures will continue, and perhaps increase, in the future. In addition, the Registrant may incur obligations to remove or mitigate any adverse effects on the environment resulting from its operations, including the restoration of natural resources, and liability for personal injury and damage to property, including natural resources. In particular, the Registrant continues to negotiate with EPA and DEP regarding the NOVs under the federal and state air pollution control laws and the State of Wisconsin and the United States regarding natural resources damages and response costs related to the discharge of PCBs and other hazardous substances in the lower Fox River, on which the Registrant's Neenah mill is located. The costs associated with such matters are presently unknown but could be substantial and perhaps exceed the Registrant's available resources. The Registrant's current assessment, after consultation with legal counsel, is that ultimately it should be able to resolve these environmental matters without a long-term material adverse impact on the Registrant. In the meantime, however, these matters could, at any particular time or for any particular period, have a material adverse effect on the Registrant's consolidated financial condition, liquidity or results of operations. Moreover, there can be no assurance that the Registrant's reserves will be adequate to provide for future obligations related to these matters or that such obligations will not have a long-term material adverse effect on the Registrant's consolidated financial condition, liquidity or results of operations. See Note 6 to the Registrant's condensed consolidated financial statements. SUBSEQUENT EVENT On April 18, 2000, certain flax inventory held at a facility owned and operated by the Registrant, located in Manitoba, Canada, sustained substantial damage as a result of a fire. The Registrant believes it is fully insured for such loss, subject to a modest deductible. The Registrant does not believe that its operations will be materially adversely affected by this incident. 17 18 YEAR 2000 The Registrant's efforts to achieve Year 2000 compliance for its information technology systems and non-information technology systems have been successful to date. The Registrant will continue to monitor its systems, as well as its interaction with vendors, suppliers and customers, for potential Year 2000 noncompliance through the remainder of 2000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See the discussion under the headings "Liquidity" and "Interest Rate Risk" in Item 2 as well as Note 4 to the Registrant's condensed consolidated financial statements. PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Registrant's Annual Meeting of Shareholders was held on April 26, 2000. All of the Board of Directors' nominees for election as Directors were elected by the shareholders. Each was elected to a term expiring in 2003. The votes cast for election of Directors were as follows:
For Withheld --- -------- R. E. Chappell 35,961,871 2,712,181 G. H. Glatfelter II 35,830,237 2,843,815 R. L. Smoot 34,795,534 3,878,518
The holders of common stock rejected two Shareholder Proposals as presented, in accordance with the recommendations of the Registrant's Board of Directors. Shareholder Proposal 1 called for the declassification of the Registrant's Board of Directors and was defeated by a majority of the votes cast, with 25,851,520 votes against, 9,707,216 votes for, 2,927,072 broker non-votes and 188,244 abstentions. Shareholder Proposal 2 urged the Registrant's Board of Directors to arrange for the prompt sale of the Registrant to the highest bidder and was also rejected by a majority of the votes cast, with 33,208,282 votes against, 2,199,220 votes for, 2,927,071 broker non-votes and 339,479 abstentions. ITEM 5. OTHER INFORMATION Cautionary Statement Any statements set forth herein or otherwise made in writing or orally by the Registrant with regard to its goals for revenues, cost reductions and return on capital, expectations as to industry conditions and the Registrant's operating results, demand for or pricing of its products, environmental matters, Year 2000 compliance and other aspects of its business may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Registrant makes such statements based on assumptions that it believes to be reasonable, there can be no assurance that actual results will not differ materially from the Registrant's expectations. Accordingly, the Registrant identifies the following important factors, among others, which could cause its results to differ from any results which might be projected, forecasted or estimated by the Registrant in any such forward-looking statements: (i) variations in demand for or pricing of its products, including variations resulting from the Registrant's previously announced tobacco paper price increases; (ii) the Registrant's ability to identify, finance and consummate future alliances or acquisitions; (iii) the Registrant's ability to develop new, high value-added engineered products; (iv) the Registrant's ability to identify and implement its 18 19 planned cost reductions; (v) changes in the cost or availability of raw materials used by the Registrant, in particular market pulp, pulp substitutes and wastepaper; (vi) changes in industry paper production capacity, including the construction of new mills, the closing of mills and incremental changes due to capital expenditures or productivity increases; (vii) the gain or loss of significant customers; (viii) cost and other effects of environmental compliance, cleanup, damages, remediation or restoration, or personal injury or property damage related thereto, such as costs associated with the NOVs issued by EPA and DEP and the costs of natural resource restoration or damages related to the presence of PCBs in the lower Fox River on which the Registrant's Neenah mill is located; (ix) significant changes in cigarette consumption, both domestically and internationally; (x) enactment of adverse state, federal or foreign legislation or changes in government policy or regulation; (xi) adverse results in litigation; (xii) fluctuations in currency exchange rates; (xiii) failure of third parties which are material to the Registrant to be Year 2000 compliant thereby interrupting their and the Registrant's business operations; and (xiv) disruptions in production and/or increased costs due to labor disputes. ITEM 6. EXHIBITS (a) EXHIBITS Number Description of Documents 15 Letter in Lieu of Consent Regarding Review Report of Unaudited Interim Financial Information 27 Financial Data Schedule (b) REPORTS ON FORM 8-K None 19 20 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. P. H. GLATFELTER COMPANY Date: May 12, 2000 R. P. Newcomer Executive Vice President and Chief Financial Officer 21 INDEX OF EXHIBITS Number Description of Documents 15 Letter in Lieu of Consent Regarding Review Report of Unaudited Interim Financial Information 27 Financial Data Schedule 21 EX-15 2 LETTER IN LIEU OF CONSENT REGARDING REVIEW REPORT 1 EXHIBIT 15 LETTER IN LIEU OF CONSENT REGARDING REVIEW REPORT OF UNAUDITED INTERIM FINANCIAL INFORMATION P. H. Glatfelter Company: We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited condensed consolidated financial statements of P. H. Glatfelter Company and subsidiaries for the three months ended March 31, 2000 and 1999, as indicated in our report dated April 18, 2000, except for Note 7 as to which the date is May 1, 2000; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, is incorporated by reference in Registration Statements Nos. 33-25884, 33-37198, 33-49660, 33-53338, 33-54409, 33-62331, 333-12089, 333-26587, 333-34797, 333-53977 and 333-66991 on Forms S-8. We are also aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. Deloitte & Touche LLP Philadelphia, Pennsylvania May 1, 2000 22 EX-27 3 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31 OF P.H. GLATFELTER CO. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 MAR-31-2000 72,719 0 88,856 1,230 110,272 274,548 1,253,383 687,447 996,327 121,778 293,916 0 0 544 360,945 996,327 181,260 185,322 147,753 147,753 3,336 200 4,380 16,750 6,106 10,644 0 0 0 10,644 0.25 0.25
-----END PRIVACY-ENHANCED MESSAGE-----