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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 June 30, 2002
| | 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
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(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
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(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| No | |.
Shares of Common Stock outstanding at July 31, 2002 were 43,582,962.
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P. H. GLATFELTER COMPANY
INDEX
Part I - Financial Information
Financial Statements (Unaudited):
Condensed Consolidated Statements of Income (Loss) -
Three Months and Six Months Ended June 30, 2002 and 2001.... 3
Condensed Consolidated Balance Sheets - June 30, 2002
and December 31, 2001....................................... 4
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2002 and 2001......................... 5
Notes to Condensed Consolidated Financial Statements................. 6
Independent Accountants' Report............................................... 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 17
Quantitative and Qualitative Disclosures About Market Risk.................... 26
Part II - Other Information................................................... 26
Signature..................................................................... 29
Index of Exhibits............................................................. 30
2
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 Six Months Ended
6/30/02 6/30/01 6/30/02 6/30/01
------------ ------------ ------------ ------------
Revenues:
Net sales $ 137,473 $ 170,287 $ 269,471 $ 355,933
Other income - net:
Energy sales - net 2,533 2,402 4,699 4,714
Interest on investments
and other - net 820 961 1,062 2,339
Gain from property
dispositions, etc. - net 451 595 1,041 1,095
------------ ------------ ------------ ------------
3,804 3,958 6,802 8,148
Total revenues 141,277 174,245 276,273 364,081
Costs and expenses:
Cost of products sold 111,072 138,060 210,729 283,981
Selling, general and
administrative expenses 14,406 15,082 28,898 30,582
Interest on debt 3,962 3,802 7,706 8,244
Unusual items -- 52,500 -- 52,500
------------ ------------ ------------ ------------
129,440 209,444 247,333 375,307
Income (loss) before income taxes 11,837 (35,199) 28,940 (11,226)
Income tax provision (benefit):
Current 2,304 (5,601) 6,325 673
Deferred 1,957 (7,126) 3,915 (4,791)
------------ ------------ ------------ ------------
Total 4,261 (12,727) 10,240 (4,118)
Net income (loss) $ 7,576 $ (22,472) $ 18,700 $ (7,108)
============ ============ ============ ============
Basic and diluted earnings (loss) per share $ 0.17 $ (0.53) $ 0.43 $ (0.17)
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
3
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(UNAUDITED)
ASSETS
------
6/30/02 12/31/01
------------ ------------
Current assets:
Cash and cash equivalents $ 20,227 $ 95,501
Accounts receivable - net 69,766 60,157
Inventories:
Raw materials 16,566 13,404
In-process and finished 31,124 27,376
Supplies 20,528 22,035
------------ ------------
Total inventories 68,218 62,815
Refundable income taxes 5,722 17,522
Prepaid expenses and other current assets 5,702 4,433
------------ ------------
Total current assets 169,635 240,428
Plant, equipment and timberlands - net 513,746 497,228
Other assets 243,520 223,068
------------ ------------
Total assets $ 926,901 $ 960,724
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,915 $ 123,709
Short-term debt -- 1,453
Accounts payable 30,584 36,155
Dividends payable 7,623 7,481
Income taxes payable 2,200 1,853
Accrued compensation and other expenses
and deferred income taxes 48,534 38,664
------------ ------------
Total current liabilities 90,856 209,315
Long-term debt 216,288 152,593
Deferred income taxes 172,774 167,623
Other long-term liabilities 77,300 77,724
------------ ------------
Total liabilities 557,218 607,255
Commitments and contingencies
Shareholders' equity:
Common stock 544 544
Capital in excess of par value 40,606 40,968
Retained earnings 491,656 488,150
Accumulated other comprehensive loss (2,781) (3,849)
------------ ------------
Total 530,025 525,813
Less cost of common stock in treasury (160,342) (172,344)
------------ ------------
Total shareholders' equity 369,683 353,469
Total liabilities and shareholders' equity $ 926,901 $ 960,724
============ ============
See accompanying notes to condensed consolidated financial statements.
4
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
Six Months Ended
6/30/02 6/30/01
------------ ------------
Cash flows from operating activities:
Net income $ 18,700 $ (7,108)
Items included in net income not using (generating) cash:
Depreciation, depletion and amortization 22,294 22,924
Loss (gain) on disposition of fixed assets (94) (333)
Loss on impairment of fixed assets -- 49,100
Expense related to 401(k) plans 659 868
Change in assets and liabilities:
Accounts receivable (5,687) (13,259)
Inventories (2,241) 1,296
Other assets and prepaid expenses (22,006) (13,130)
Accounts payable, accrued compensation and
other expenses, deferred income taxes
and other long-term liabilities (5,601) 6,357
Income taxes payable and refundable income taxes 9,245 (14,488)
Deferred income taxes - noncurrent 5,504 (4,507)
------------ ------------
Net cash provided by operating activities 20,773 27,720
------------ ------------
Cash flows from investing activities:
Proceeds from disposal of fixed assets 181 570
Additions to plant, equipment and timberlands (25,736) (23,398)
------------ ------------
Net cash used in investing activities (25,555) (22,828)
------------ ------------
Cash flows from financing activities:
Repayment of debt under previous revolving credit agreement (135,829) --
Net borrowings (payments) of debt 69,331 (4,847)
Dividends paid (15,051) (14,847)
Proceeds from stock option exercises 10,463 1,468
------------ ------------
Net cash used in financing activities (71,086) (18,226)
------------ ------------
Effect of exchange rate changes on cash 594 (285)
------------ ------------
Net increase in cash and cash equivalents (75,274) (13,619)
Cash and cash equivalents:
At beginning of year 95,501 110,552
------------ ------------
At end of period $ 20,227 $ 96,933
============ ============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 8,076 $ 8,264
Income taxes 5,367 12,802
See accompanying notes to condensed consolidated financial statements.
5
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 our basic and diluted EPS follows with the dollar and
share amounts in thousands (except per-share amounts):
Three Months Ended Six Months Ended
June 30 June 30
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Shares Shares Shares Shares
---------- ---------- ---------- ----------
Basic per-share factors 43,406 42,514 43,180 42,466
Effect of potentially dilutive employee incentive plans:
Restricted stock awards 171 -- 179 31
Performance stock awards -- -- -- 6
Employee stock options 472 -- 435 43
---------- ---------- ---------- ----------
Diluted per-share factors 44,049 42,514 43,794 42,546
========== ========== ========== ==========
Net income (loss) $ 7,576 $ (22,472) $ 18,700 $ (7,108)
Basic and diluted earnings
(loss) per share $ 0.17 $ (0.53) $ 0.43 $ (0.17)
Fully diluted loss per share is not presented for the three months and six
months ended June 30, 2001 as we incurred a net loss, which causes
potentially dilutive shares to be antidilutive. An aggregate of 447,000
and 254,000 potentially dilutive shares have been excluded from the
computation of diluted loss per share for the second quarter of 2001 and
the first six months of 2001, respectively.
Basic and diluted loss per share of $.53 and $.17 for the three months and
six months ended June 30, 2001, respectively, as presented on the
Condensed Consolidated Statements of Income (Loss), reflects the negative
impact of an after-tax impairment charge and a settlement of an
environmental matter (unusual items) of $.79 per share (see Note 2).
2. UNUSUAL ITEMS
On May 16, 2001, we announced that we had entered into an agreement to
sell our Ecusta Division consisting of our Ecusta paper making facility
and two of its operating subsidiaries. Because our Board of Directors had
committed to a plan to dispose of the Ecusta Division by accepting an
offer to sell the Division, subject to certain closing conditions, at a
loss, on that date the assets of the Ecusta Division were reclassified as
assets held-for-disposal. The resulting pre-tax impairment charge relating
to these assets was $50,000,000. The decision to sell the Ecusta Division
was made due to the determination that the business of the Ecusta
Division, principally tobacco papers, did not fit with our long-term
strategic plans.
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On August 9, 2001, we completed the sale of the Ecusta Division including
plant and equipment, inventory, accounts receivable and essentially all
other operating assets and certain other receivables related to our
tobacco papers business. As part of this transaction, the buyer assumed
certain liabilities related to the operation of the Ecusta Division. Our
total charge to earnings associated with the sale was $58,408,000
including the $50,000,000 impairment charge recognized during the second
quarter of 2001.
We also recognized a $2,500,000 pre-tax charge in the second quarter of
2001 due to the settlement of an environmental matter in connection with
the Spring Grove, Pennsylvania facility's wastewater discharge permit.
3. RECENT ACCOUNTING PRONOUNCEMENTS AND RECLASSIFICATIONS
On January 1, 2001, we adopted Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133, as amended and interpreted, establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities. The adoption of SFAS No. 133 on January 1, 2001
resulted in an $845,000 increase in Other Comprehensive Income ("OCI") as
of January 1, 2001 as a cumulative transition adjustment for derivatives
designated in cash flow-type hedges prior to adopting SFAS No. 133. Due to
our limited use of derivative instruments, the effect on earnings of
adopting SFAS No. 133 was immaterial.
The Financial Accounting Standards Board issued SFAS No. 141, "Business
Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets," and
SFAS No. 143, "Accounting for Asset Retirement Obligations," in June 2001,
issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," in August 2001, issued SFAS 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
Technical Corrections," in April 2002, and issued SFAS 146, "Accounting
for Costs Associated with Exit or Disposal Activities," in July 2002.
SFAS No. 141 is effective for all business combinations occurring after
June 30, 2001 and requires that all business combinations be accounted for
under the purchase method only and that certain acquired intangible assets
in a business combination be recognized as assets apart from goodwill. The
adoption of SFAS No. 141 had no impact on our consolidated financial
position or results of operations.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001 and establishes revised reporting requirements for goodwill and other
intangible assets. Since adoption, we no longer amortize goodwill unless
evidence of impairment exists; goodwill will be evaluated on at least an
annual basis. We have performed the first step of the transitional
goodwill impairment test as of January 1, 2002 and have determined that no
impairment to our goodwill existed. As of June 30, 2002 and using the 2002
foreign currency translation rates, we had approximately $9,200,000 in
unamortized goodwill. We recorded $129,000 and $265,000 in pre-tax
goodwill amortization expense, translated at appropriate 2001 rates, for
the second quarter of 2001 and first six months of 2001, respectively.
Exclusive of goodwill amortization expense, net loss in the second quarter
and first six months of 2001 was $22,388,000, or $0.53 per share, and
$6,936,000, or $0.16 per share, respectively. We adopted SFAS No. 142 on
January 1, 2002.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002
and applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and/or
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the normal operation of a long-lived asset. We will adopt SFAS No. 143 on
January 1, 2003. We are currently evaluating the effects that the adoption
of SFAS No. 143 may have on our consolidated financial position and
results of operations.
SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. This statement supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and establishes new guidelines for the valuation of long-lived
assets. We adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS
No. 144 had no impact on our consolidated financial position or results of
operations.
SFAS No. 145 is effective for fiscal years beginning after May 15, 2002.
This statement, among other things, rescinds the requirement to classify a
gain or loss upon the extinguishment of debt as an extraordinary item on
the income statement. It also requires lessees to account for certain
modifications to lease agreements in a manner consistent with
sale-leaseback transaction accounting. The adoption of SFAS No. 145 will
not have an impact on our consolidated financial position or results of
operation.
SFAS No. 146 requires recognition of costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. This statement is to be applied
prospectively to exit or disposal activities initiated after December 31,
2002 and, as such, has no impact on our consolidated financial position or
results of operations.
4. DEBT REFINANCING
On June 24, 2002, we entered into an unsecured $102,500,000 multi-currency
revolving credit facility (the "Facility") with a syndicate of three major
banks. The Facility enables us to borrow up to the equivalent of
$102,500,000 in certain currencies with a final maturity date of June 24,
2006. Under the Facility, we have the option to borrow based upon the
domestic prime rate or a eurocurrency rate for any time period from one
day to six months. The Facility also provides for a facility fee on the
commitment balance and an interest rate margin on borrowings based on the
higher of our debt ratings as published by Standard & Poor's and Moody's.
As provided for in the Facility, we are currently negotiating with a bank
to increase the total amount available under the Facility to $125,000,000.
On June 24, 2002, we repaid (euro)138,700,000 in borrowings under the
previously existing $200,000,000 multi-currency revolving credit
agreement. This repayment was made using (euro)74,100,000 of our existing
cash and a borrowing of (euro)64,600,000 under the Facility.
In conjunction with our refinancing, we entered into a cross-currency swap
transaction with floating interest rates effective June 24, 2002 with a
termination date of June 26, 2006. Under this swap transaction, we swapped
$70,000,000 for (euro)72,985,090 and will pay interest on the euro portion
of the swap at a floating Eurocurrency Rate, plus applicable margins and
will receive interest on the dollar portion of the swap at a floating US
Dollar LIBOR rate, plus applicable margins.
Also in conjunction with the refinancing, we terminated two existing
interest rate swap agreements on June 24, 2002, each having a total
notional principal amount of DM 50,000,000 (approximately $25,035,000 as
of June 24, 2002). Under these agreements, which were effective April 6,
1999 and July 6, 1999 and which had an expiration date of December 22,
2002, we received a
8
floating rate of the three-month DM LIBOR plus twenty basis points and
paid a fixed rate of 3.41% and 3.43%, respectively. We recognized a
$101,000 gain in connection with the early termination of these swap
arrangements and the repayment of the outstanding debt under the
previously existing $200,000,000 multi-currency revolving credit
agreement.
5. COMPREHENSIVE INCOME
Comprehensive income (loss) was $8,961,000 and $(24,836,000) for the
second quarter of 2002 and 2001, respectively, and $19,768,000 and
$(8,677,000) for the first six months of 2002 and 2001, respectively.
Comprehensive income (loss) includes the effects of changes in (1) certain
currency exchange rates relative to the U.S. dollar and (2) the fair value
of derivative instruments (terminated interest rate swap agreements)
designated in cash flow-type hedges that we held during the reporting
periods (see Note 4).
6. COMMITMENTS AND CONTINGENCIES
We are subject to loss contingencies resulting from regulation by various
federal, state, local and foreign governmental authorities with respect to
the environmental impact of our mills. To comply with environmental laws
and regulations, we have incurred substantial capital and operating
expenditures in past years. We anticipate that environmental regulation of
our operations will continue to become more burdensome and that capital
and operating expenditures necessary to comply with environmental
regulations will continue, and perhaps increase, in the future. In
addition, we may incur obligations to remove or mitigate any adverse
effects on the environment resulting from our operations, including the
restoration of natural resources, and liability for personal injury and
for damages to property and natural resources. Because environmental
regulations are not consistent worldwide, our ability to compete in the
world marketplace may be adversely affected by capital and operating
expenditures required for environmental compliance.
We are subject to the "Cluster Rule," a 1998 federal regulation in which
the United States Environmental Protection Agency ("EPA") aims to regulate
air and water emissions from certain pulp and paper mills, including kraft
pulp mills such as our Spring Grove facility. Issued under both the Clean
Air Act and the Clean Water Act, the Cluster Rule establishes baseline
emissions limits for toxic and non-conventional pollutant releases to both
water and air.
Subject to permit approvals, we have undertaken an initiative at our
Spring Grove facility under the Voluntary Advanced Technical Incentive
Program set forth by the EPA in the Cluster Rule. This initiative, the
"New Century Project," will require capital expenditures currently
estimated at approximately $35,000,000 to be incurred before April 2004.
Projects include improvements in brownstock washing, installation of an
oxygen delignification bleaching process and 100 percent chlorine dioxide
substitution. Through June 30, 2002, we have invested approximately
$3,900,000 in this project including approximately $1,500,000 during the
first six months of 2002. We estimate that $12,500,000, $18,000,000 and
$2,100,000 will be spent on this project during 2002, 2003 and 2004,
respectively. We presently do not anticipate difficulties in implementing
the New Century Project; however, we have not yet received all the
required governmental approvals, nor have we installed all the necessary
equipment.
SPRING GROVE, PENNSYLVANIA - WATER. We are voluntarily cooperating with an
investigation by the Pennsylvania Department of Environmental Protection
9
("Pennsylvania DEP"), which commenced in February 2002, of our Spring
Grove facility related to certain discharges, which are alleged to be
unpermitted, to the Codorus Creek. There is no indication that these
discharges had an impact on human health or on the environment. Although
this investigation could result in the imposition of a fine or other
punitive measures, we currently do not know what, if any, actions will be
taken nor are we able to predict our ultimate cost, if any, related to
this matter.
SPRING GROVE, PENNSYLVANIA - AIR. In 1999, EPA and the Pennsylvania DEP
issued to us separate Notices of Violation ("NOVs") alleging violations of
air pollution control laws, primarily for purportedly failing to obtain
appropriate pre-construction air quality permits in conjunction with
certain modifications to our Spring Grove facility. EPA and the
Pennsylvania DEP primarily alleged that our modifications produced
significant net emissions increases in certain air pollutants that should
have been covered by permits containing reduced emissions limitations.
For all but one of the modifications cited by EPA, we applied for and
obtained from the Pennsylvania DEP the pre-construction permits that we
concluded were required by applicable law. EPA reviewed those applications
before the permits were issued. The Pennsylvania DEP's NOV pertained only
to the modification for which we did not receive a pre-construction
permit. We conducted an evaluation at the time of this modification and
determined that the pre-construction permit cited by EPA and the
Pennsylvania DEP was not required. We have been informed that EPA and the
Pennsylvania DEP will seek substantial emissions reductions, as well as
civil penalties, to which we believe we have meritorious defenses.
Nevertheless, we are unable to predict the ultimate outcome of these
matters or the costs involved.
NEENAH, WISCONSIN - WATER. We have previously reported with respect to
potential environmental claims arising out of the presence of
polychlorinated biphenyls ("PCBs") in sediments in the lower Fox River and
in the Bay of Green Bay, downstream of our Neenah, Wisconsin facility. We
acquired the Neenah facility in 1979 as part of the acquisition of the
Bergstrom Paper Company. In part, this facility uses wastepaper as a
source of fiber. At no time did the Neenah facility utilize PCBs in the
pulp and paper making process, but discharges from the facility containing
PCBs from wastepaper may have occurred from 1954 to the late 1970s. Any
PCBs that the Neenah facility discharged into the Fox River resulted from
the presence of NCR(R)-brand carbonless copy paper in the wastepaper that
was received from others and recycled.
As described below, various state and federal governmental agencies have
formally notified seven potentially responsible parties ("PRPs"),
including Glatfelter, that they are potentially responsible for response
costs and "natural resource damages" ("NRDs") arising from PCB
contamination in the lower Fox River and in the Bay of Green Bay, under
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") and other statutes. The six other identified PRPs are NCR
Corporation, Appleton Papers Inc., Georgia Pacific Corp. (successor to
Fort Howard Corp. and Fort James Corp.), WTM I Co. (a subsidiary of
Chesapeake Corp.), Riverside Paper Company, and U.S. Paper Mills Corp.
(now owned by Sonoco Products Company).
CERCLA establishes a two-part liability structure that makes responsible
parties liable for (1) "response costs" associated with the remediation of
a release of hazardous substances and (2) NRDs related to that release.
Courts have interpreted CERCLA to impose joint and several liability on
responsible parties, subject to equitable allocation in certain instances.
Prior to a final settlement by all responsible parties and the final
cleanup of the contamination, uncertainty regarding the application of
such liability will persist.
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On October 2, 2001, the Wisconsin Department of Natural Resources
("Wisconsin DNR") and EPA issued drafts of the reports resulting from the
remedial investigation and the feasibility study of the PCB contamination
of the lower Fox River and the Bay of Green Bay. On that same day, the
Wisconsin DNR and EPA issued a Proposed Remedial Action Plan ("PRAP") for
the cleanup of the lower Fox River and the Bay of Green Bay, estimating
the total costs associated with the proposed response action at
$307,600,000 (without a contingency factor) over a 7-to-18-year time
period. The most significant component of the estimated costs is
attributable to large-scale sediment removal by dredging. Based on cost
estimates of large-scale dredging response actions at other sites, we
believe that the PRAP's cost projections may underestimate actual costs of
the proposed remedy by over $800,000,000.
We do not believe that the response action proposed by the Wisconsin DNR
and EPA is appropriate or cost effective. We believe that a protective
remedy for Little Lake Butte des Morts, the portion of the river that is
closest to our Neenah facility, can be implemented at a much lower actual
cost than would be incurred performing large-scale dredging. We also
believe that an aggressive effort to remove the PCB-contaminated sediment,
much of which is buried under cleaner sediment or is otherwise unlikely to
move and which is abating naturally, would be environmentally detrimental
and, therefore, inappropriate at all locations of the river. We have
proposed to dredge and cap certain delineated areas with relatively higher
concentrations of PCBs in Little Lake Butte des Morts. We have accrued an
amount expected to cover this project, potential NRD claims, claims for
reimbursement of expenses of other parties and residual liabilities.
We have submitted comments to the PRAP that advocate vigorously for the
implementation of environmentally protective alternatives that do not rely
upon large-scale dredging. EPA, in consultation with the Wisconsin DNR,
will consider comments on the PRAP and will then select a remedy to
address the contaminated sediment. Because we have thus far been unable to
persuade the EPA and the Wisconsin DNR of the correctness of our
assessment (as evidenced by the issuance of the PRAP), we are less
confident than we were prior to the issuance of the PRAP that an
alternative remedy totally excluding large scale dredging will be
implemented. The issuance of the PRAP did not materially impact the amount
we have accrued for this matter, however, as we continue to believe that
ultimately we will be able to convince the EPA and the Wisconsin DNR that
large-scale dredging is inappropriate. The EPA and the Wisconsin DNR have
indicated that a record of decision ("ROD") regarding the selected
remedial action plan may be issued within the next several months.
As noted above, NRD claims are theoretically distinct from costs related
to the primary remediation of a Superfund site. Calculating the value of
NRD claims is difficult, especially in the absence of a completed remedy
for the underlying contamination. The State of Wisconsin has informally
asserted claims for NRDs against the identified PRPs regarding alleged
injuries to natural resources under its alleged trusteeship in the lower
Fox River and the Bay of Green Bay. To date, Wisconsin has not prepared
any estimates of the alleged value of its NRD claims settlements nor
finalized any settlements from which that value could be estimated. Based
on available information, we believe that any NRD claims that Wisconsin
may bring will likely be legally and factually without merit.
The United States Fish and Wildlife Service ("FWS"), the National Oceanic
and Atmospheric Administration ("NOAA"), four Indian tribes and the
Michigan Attorney General also assert that they possess NRD claims related
to the lower Fox River and the Bay of Green Bay. In June 1994, FWS
notified the
11
seven identified PRPs that it considered them potentially responsible for
NRDs. The federal, tribal and Michigan agencies claiming to be NRD
trustees have proceeded with the preparation of an NRD assessment separate
from the Wisconsin DNR. While the final assessment will be delayed until
after the selection of a remedy, the federal trustees released a plan on
October 25, 2000 that values their NRDs for injured natural resources
between $176,000,000 and $333,000,000. We believe that the federal NRD
assessment is technically and procedurally flawed. We also believe that
the NRD claims alleged by the federal, tribal and Michigan entities are
legally and factually without merit.
On June 20, 2002, the United States, the State of Wisconsin and the Fort
James Operating Company ("Fort James") lodged a consent decree with the
U.S. District Court for the Eastern District of Wisconsin. If entered,
that consent decree would resolve certain outstanding claims, primarily
NRD claims, against Fort James and a related entity. Under the terms of
the proposed consent decree, Fort James would pay $6.2 million in cash to
the United States and the State of Wisconsin in settlement of various
claims related to NRDs and cost recovery related to dredging of sediments
at Deposits 56/57. Fort James also agrees to convey 1,063 acres of land to
the State and to perform delineated NRD "restoration" projects at a cost
of up to $3.9 million.
We submitted comments on the proposed consent decree to the U.S.
Department of Justice suggesting that the United States, the State of
Wisconsin and certain natural resource trustees not move to enter this
proposed consent decree, but we cannot predict whether the governments
will ultimately make such a motion or whether the Court will enter the
proposed consent decree as it is written. Because the plaintiffs have yet
to provide a factual or legal justification for the settlement, we are not
able to extrapolate an estimated settlement amount for Glatfelter from the
proposed consent decree. Accordingly, we do not have a sufficient basis to
adjust our reserves for this contingency at this time.
We are seeking settlement with the Wisconsin agencies and with the federal
government for all of our potential liabilities for response costs and
NRDs associated with the contamination. The Wisconsin DNR and FWS have
published studies, the latter in draft form, estimating the amount of PCBs
discharged by each PRP that estimate the volumetric share of the discharge
from our Neenah facility to be as high as 27%. We do not believe the
volumetric estimates used in these studies are accurate because the
studies themselves disclose that they are not accurate and are based on
assumptions for which there is no evidence. We believe that our volumetric
contribution is significantly lower. Further, we do not believe that a
volumetric allocation would constitute an equitable distribution of the
potential liability for the contamination. Other factors, such as the
location of contamination, location of discharge and a party's role in
causing discharge must be considered in order for the allocation to be
equitable. We have entered into interim cost-sharing agreements with four
of the other six PRPs, pursuant to which the PRPs have agreed to share
both defense costs and costs for scientific studies relating to PCBs
discharged into the Lower Fox River. These interim cost-sharing agreements
have no bearing on the final allocation of costs related to this matter.
Based upon our evaluation of the magnitude, nature and location of the
various discharges of PCBs to the river and the relationship of those
discharges to identified contamination, we believe our share of any
liability among the seven identified PRPs is much less than one-seventh of
the whole.
We also believe that additional potentially responsible parties exist
other than the seven identified PRPs, which are all paper companies. For
instance, certain of the identified PRPs discharged their wastewater
through public wastewater treatment facilities, which we believe makes the
owners of
12
such facilities potentially responsible in this matter. We also believe
that entities providing wastepaper-containing PCBs to each of the
recycling mills, including our Neenah facility, are also potentially
responsible for this matter.
We currently are unable to predict our ultimate cost related to this
matter, because we cannot predict which remedy will be selected for the
site, the costs thereof, the ultimate amount of NRDs, or our share of
these costs or NRDs.
We continue to believe it is likely that this matter will result in
litigation. We maintain that the removal of a substantial amount of
PCB-contaminated sediments is not an appropriate remedy. There can be no
assurance, however, that we will be successful in arguing that removal of
PCB-contaminated sediments is inappropriate or that we would prevail in
any resulting litigation.
The amount and timing of future expenditures for environmental compliance,
cleanup, remediation and personal injury, NRDs 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 abatement, the response actions that may be required, the
availability of qualified remediation contractors, equipment and landfill
space and the number and financial resources of any other PRPs. We have
established reserves, relating to unasserted claims, for environmental
remediation and other environmental liabilities for those environmental
matters for which it is probable that an assertion will be made and an
obligation exists and for which the amount of the obligation is reasonably
estimable. As of June 30, 2002 and December 31, 2001, we had accrued
reserves of approximately $28,800,000, representing our best estimate
within a range of possible outcomes, which would cover the cost of our
proposed project regarding Little Lake Butte des Morts, potential NRD
claims, claims for reimbursement of expenses of other parties and residual
liabilities. This accrual is included in "Other long-term liabilities" on
the Condensed Consolidated Balance Sheets. Changes to the accrual reflect
updates to our best estimate of the ultimate outcome and consider changes
in the extent and cost of the remedy, the status of negotiations with the
various parties, including other PRPs, and our assessment of potential NRD
claims, claims for reimbursement of expenses of other parties and residual
liabilities. Based upon our assessment as to the ultimate outcome to this
matter, we accrued and charged $1,200,000 to pre-tax earnings during the
first six months of 2001.
Based on analysis of currently available information and experience with
respect to the cleanup of hazardous substances, we believe that it is
reasonably possible that our costs associated with these matters may
exceed current reserves by amounts that may prove to be insignificant or
that could range, in the aggregate, up to approximately $200,000,000 over
a period that is undeterminable but could range between 10 to 20 years or
beyond. The upper limit of such range is substantially larger than the
amount or our reserves. The estimate of the range of reasonably possible
additional costs is less certain than the estimates upon which our
reserves are based. In order to establish the upper limit of such range,
we used assumptions that are the least favorable to us among the range of
assumptions pertinent to reasonably possible outcomes. We believe that the
likelihood of an outcome in the upper end of the range is significantly
less than other possible outcomes within the range and that the
possibility of an outcome in excess of the upper end of the range is
remote.
13
In our estimate of the upper end of the range, we have assumed full-scale
dredging as set forth in the PRAP, at a significantly higher cost than
estimated in the PRAP. We have also assumed our share of the ultimate
liability to be 18% which is significantly higher than we believe is
appropriate or will occur and a level of NRD claims and claims for
reimbursement of expenses from other parties that, although reasonably
possible, is unlikely. In estimating both our current reserve for
environmental remediation and other environmental liabilities and the
possible range of additional costs, we have not assumed that we will bear
the entire cost of remediation and damages to the exclusion of other known
PRPs who may be jointly and severally liable. The ability of other PRPs to
participate has been taken into account, based generally on their
financial condition and probable contribution. Our evaluation of the other
PRPs' financial condition included the review of publicly disclosed
financial information. The relative probable contribution is based upon
our knowledge that at least two PRPs manufactured the paper that included
the PCBs and as such, in our opinion, bear a higher level of
responsibility. In addition, our assessment is based upon the magnitude,
nature and location of the various discharges of PCBs to the river and the
relationship of those discharges to identified contamination. We did not
consider the financial condition of a smaller, non-public PRP as financial
information is not available, and we do not believe its contribution to be
material. We have also considered that over a number of years, certain
PRPs were under the ownership of large multinational companies, which
appear to retain some liability for this matter. We continue to evaluate
our exposure and the level of our reserves, including, but not limited to,
our potential share of the costs and NRDs (if any) associated with the
lower Fox River and the Bay of Green Bay.
We believe that we are insured against certain losses related to the lower
Fox River and the Bay of Green Bay, depending on the nature and amount of
the losses. Insurance 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. We do not know when the
insurers' investigations as to coverage will be completed and we are
uncertain as to what the ultimate recovery will be and whether it will be
significant in relation to the losses for which we have accrued.
SUMMARY. Our current assessment is that we should be able to manage these
environmental matters without a long-term, material adverse impact on us.
These matters could, however, at any particular time or for any particular
year or years, have a material adverse effect on our consolidated
financial condition, liquidity or results of operations or could result in
a default under our loan covenants. Moreover, there can be no assurance
that our reserves will be adequate to provide for future obligations
related to these matters, that our share of costs and/or damages for these
matters will not exceed our available resources, or that such obligations
will not have a long-term, material adverse effect on our consolidated
financial condition, liquidity or results of operations. With regard to
the lower Fox River and the Bay of Green Bay, if we are not successful in
managing the matter and are ordered to implement the remedy proposed in
the PRAP, such an order would have a material adverse effect on our
consolidated financial condition, liquidity and results of operations and
would result in a default under our loan covenants.
We are also involved in other lawsuits. The ultimate outcome of these
lawsuits cannot be predicted with certainty, however, we do not expect
that such lawsuits in the aggregate or individually will have a material
adverse effect on our consolidated financial position, results of
operations or liquidity.
14
7. SUBSEQUENT EVENTS
As discussed in Note 2, on August 9, 2001, we completed the sale of the
Ecusta Division. As part of the transaction, the buyers assumed certain
liabilities related to the operation of the Ecusta Division. On or about
July 29, 2002, we received a letter from legal counsel of the buyers of
the Ecusta Division asserting claims for indemnification, without
estimates of value, pursuant to the sale agreement. We are currently
investigating these claims and have not yet determined the validity or
value of these claims. As such, we cannot ascertain at this time what
effect, if any, these claims will have on our financial condition or
results of operations.
On August 12, 2002, the media reported that one of the buyers of the
Ecusta Division announced plans to shut down the paper mill in Pisgah
Forest, North Carolina, which was the most significant operation of the
Ecusta Division. At this time, we are uncertain as to what effect, if any,
this announcement or any shutdown will have on us. To date, no claims have
been asserted against us, as a result of this announcement, regarding
liabilities that were assumed by the buyers or related to our former
operation of the paper mill.
8. DISCLOSURE STATEMENT
In our opinion, 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. Certain information and note disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted. These unaudited condensed consolidated financial
statements should be read in conjunction with the more complete
disclosures contained in our Annual Report on Form 10-K for the year ended
December 31, 2001. Certain reclassifications have been made to the prior
periods' financial information to conform to those classifications used in
2002. Quarterly results should not be considered indicative of the results
to be expected for the full year.
15
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 June 30, 2002, the related condensed
consolidated statements of income (loss) for the three months and six months
ended June 30, 2002 and 2001, and the related condensed consolidated statements
of cash flows for the six months ended June 30, 2002 and 2001. 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 auditing standards generally accepted in the United States of
America, 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 accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of P.
H. Glatfelter Company and subsidiaries as of December 31, 2001, 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 28, 2002, 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, 2001 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
July 29, 2002, except for Note 7 as to
which the date is August 12, 2002
16
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 (Loss) is shown below.
Three Months Ended Six Months Ended
June 30, 2002 and 2001 June 30, 2002 and 2001
------------------------- --------------------------
Increase (Decrease)
(dollars in thousands)
Net sales (32,814) -19.3% (86,462) -24.3%
Other income - net (154) -3.9% (1,346) -16.5%
Cost of products sold (26,988) -19.5% (73,252) -25.8%
Selling, general and
administrative expenses (676) -4.5% (1,684) -5.5%
Interest on debt 160 4.2% (538) -6.5%
Unusual items (52,500) NM (52,500) NM
Income tax provision 16,988 NM 14,358 NM
Net income 30,048 NM 25,808 NM
NM - Not meaningful
Net Sales
Net sales decreased $32,814,000, or 19.3%, for the second quarter of 2002
compared to the second quarter of 2001. The Ecusta Division, which was sold on
August 9, 2001, contributed net sales of $38,169,000 during the second quarter
of 2001. Excluding the Ecusta Division, net sales increased $5,355,000, or 4.1%,
for the same time periods due to a 7.2% increase in net sales volume partially
offset by a 3.0% decrease in average net selling prices.
Net sales decreased $86,462,000, or 24.3%, for the first six months of 2002
versus the comparable 2001 period. Of this decrease, $80,125,000 was
attributable to the Ecusta Division. Excluding the Ecusta Division, net sales
decreased $6,337,000, or 2.3% for the first six months of 2002 compared to the
first six months of 2001. During this comparative six-month period, an increase
in net sales volume of 3.1% was more than offset by a decrease in average net
selling prices of 5.3%.
For analysis purposes, we currently classify our sales into two product groups:
specialized printing papers and engineered papers (including tobacco papers). We
are in the process of changing our organization and information systems to
manage our business in three separate business units: (1) engineered products,
(2) printing and converting papers and (3) long fiber and overlay papers. Our
information systems do not currently provide the information necessary for
reporting by business unit. Such information is expected to be available by the
end of 2002.
Excluding Ecusta, net sales of specialized printing papers were essentially flat
in the second quarter of 2002 compared to the first quarter of 2001, due to a
4.5% increase in net sales volume which was mostly offset by a 4.1% decrease in
average net selling prices.
17
Net sales of specialized printing papers, excluding Ecusta, decreased 4.7% for
the first half of 2002 compared to the similar period for 2001 as a 6.0%
decrease in average net selling prices was partially offset by a 1.5% increase
in net sales volume.
The decrease in average net selling prices of specialized printing papers is
indicative of the difficult market conditions facing this portion of our
business for the first six months of 2002 compared to the same time period
during 2001. Despite these conditions, net sales volume has remained steady. We
believe this is indicative of the recognition by our customers of the value of
our products and services. Recent demand for certain of our specialized printing
paper products has been somewhat weak, which is fairly typical during the
summer. We are hopeful that demand for these products will improve in the near
future.
We have implemented a price increase for certain book publishing paper products
within the specialized printing paper market effective July 1, 2002. We are
uncertain as to whether further selling price changes may occur throughout the
remainder of the year.
Net sales of engineered papers, excluding Ecusta, increased 9.5% and 1.2% in the
second quarter and first six months of 2002 respectively, versus the like
periods of 2001. These increases occurred despite the continued erosion of
demand for tobacco papers from our Schoeller & Hoesch Division for which our net
sales decreased by over 39.0% during the first half of 2002 versus the
comparable period of 2001. A 17.3% increase in net sales volume for engineered
papers during the second quarter of 2002 compared to the second quarter of 2001
more than offset a 6.7% decrease in average net selling prices. On a
year-to-date basis, a 9.6% increase in net sales volume during 2002 compared to
2001 was partially offset by a 7.6% decrease in average net selling prices.
Some of the decrease in average selling price is the result of decisions to
increase our volume of engineered products with below average prices to fully
utilize our capacity and to enter certain markets. We expect this trend to
continue during the second half of the year. Average selling prices were also
lower for specific engineered paper products for the relevant 2002 periods
compared to 2001.
Although the increased net sales volume for these products is indicative of
strong demand for our products, it is difficult to determine demand and pricing
trends for the entire portfolio of engineered papers due to the fragmentation
and small size of markets within this group. Our best estimate is that overall
pricing in these product lines will be relatively stable with slight downward
pressure in certain markets.
Other Income - Net
Other income - net decreased $154,000 and $1,346,000 in the second quarter and
first six months of 2002 respectively, versus the like periods of 2001. The
primary causes for the decrease in the first six months of 2002 versus the same
period in 2001 include considerably lower interest rates on investments as well
as lower average investment balances - particularly during the comparative first
quarter periods. In addition, we invested a higher percentage of our available
cash in tax-free interest municipal bonds during the first six months of 2002
compared to the like period of 2001, and such investments yield substantially
lower pre-tax interest rates. Income from energy sales - net and gain from
property dispositions, etc. - net were similar during the three and six month
periods ended June 30, 2002 compared to similar periods ended June 30, 2001.
18
Cost of Products Sold and Gross Margin
Cost of products sold decreased $26,988,000, or 19.5%, for the second quarter of
2002 versus the second quarter of 2001. Excluding the Ecusta Division, cost of
products sold increased $5,094,000, or 4.8% for the second quarter of 2002
compared to the second quarter of 2001.
Cost of products sold decreased $73,252,000, or 25.8%, for the first six months
of 2002 versus the first six months of 2001. Excluding the Ecusta Division, cost
of products sold decreased $3,667,000, or 1.7% for the first six months of 2002
compared to the first six months of 2001.
The variances in cost of products sold are in part due to changes in net sales
volume described in "Net Sales" above. Excluding Ecusta, cost of products sold
did not increase as much as net sales volume for the second quarter of 2002
compared to the second quarter of 2001. Cost of products sold decreased for the
comparative six-month periods ended June 30, 2002 and 2001 despite an increase
in net sales volume for those comparable periods. Cost of products sold was
favorably impacted for the second quarter and first six months of 2002 versus
the like periods in 2001 by decreases in unit costs for purchased pulp and
wastepaper as well as a decrease in energy-related costs and the impact of
cost-control efforts. We expect that market pulp prices will remain relatively
flat through the third quarter of 2002.
Non-cash income resulting from the overfunded status of our defined benefit
pension plans decreased cost of products sold by $6,870,000 and $5,808,000 for
the second quarters of 2002 and 2001, respectively, and decreased cost of
products sold by $13,457,000 and $12,875,000 for the first six months of 2002
and 2001, respectively.
As a result of the aforementioned items, gross margin as a percentage of net
sales increased to 19.2% for the second quarter of 2002 from 18.9% for the like
quarter of 2001. Excluding the Ecusta Division, gross margin as a percentage of
net sales during the second quarter of 2001 was 19.8%. Gross margin as a
percentage of net sales increased to 21.8% for the first six months of 2002
compared to 20.2% for the first six months of 2001. Excluding the Ecusta
Division, gross margin as a percentage of net sales was 22.2% for the six months
of 2001.
The decrease in gross margin as a percentage of sales from the first quarter to
the second quarter in both 2002 and 2001 was due primarily to the annual
scheduled maintenance shutdown at the Spring Grove, Pennsylvania facility. This
shutdown results in higher maintenance expense and a reduction of production
leading to unfavorable manufacturing variances, which negatively impact cost of
products sold.
Our non-cash pension income is calculated each year using certain actuarial
assumptions and is based upon other factors including the fair value of our
pension assets as of the first date of the calendar year. The fair value of our
pension assets has decreased significantly since January 1, 2002. As a result of
this decrease, absent a recovery in the fair value of our pension assets by
December 31, 2002, our non-cash pension income will be substantially less in
2003 than is currently being recognized.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses for the second quarter of 2002 were $676,000, or 4.5%, lower than
for the second quarter of 2001. Excluding the Ecusta Division, SG&A increased by
$1,959,000 for the second quarter of 2002 compared to the second quarter of
2001. SG&A expenses for the first six months of 2002 were $1,684,000, or 5.5%,
lower than for the first six months of 2001. Excluding the Ecusta Division, SG&A
increased by $3,675,000 for the first six months of 2002 compared to the first
six
19
months of 2001. Increases in SG&A expenses, excluding the Ecusta Division, were
due primarily to increased costs related to resources dedicated to implementing
our strategic initiatives, including depreciation expense and increased service
fees related to information technology. In addition, compensation expense
related to certain stock awards that varies with the price of our common stock
was higher in the three- and six-month periods ended June 30, 2002 compared to
the similar periods in 2001 because of the increase in our stock price during
those periods in 2002. Non-cash pension income reduced SG&A expenses by
$1,744,000 and $1,300,000 for the second quarter of 2002 and the same quarter of
2001, respectively, and by $3,174,000 and $2,881,000, for the first six months
of 2002 and the first six months of 2001, respectively.
Interest on Debt - Net
Interest on debt - net increased $160,000, or 4.2%, for the second quarter of
2002 versus the comparable period of 2001 and decreased $538,000, or 6.5% for
the first six months of 2002 compared to the like period of 2001. On a
year-to-date basis lower average interest on debt - net is due to lower interest
rates on our variable-rate borrowings. Regarding the comparative second quarter
results, the increase in interest on debt is primarily due to higher average
debt balances.
Unusual Items
On May 16, 2001, we announced that we had entered into an agreement to sell our
Ecusta Division consisting of our Ecusta paper making facility and two of its
operating subsidiaries. Because our Board of Directors had committed to a plan
to dispose of the Ecusta Division by accepting an offer to sell the Division,
subject to certain closing conditions, at a loss, on that date the assets of the
Ecusta Division were reclassified as assets held-for-disposal. The resulting
pre-tax impairment charge relating to these assets was $50,000,000. The decision
to sell the Ecusta Division was made due to the determination that the business
of the Ecusta Division, principally tobacco papers, did not fit with our
long-term strategic plans.
On August 9, 2001, we completed the sale of the Ecusta Division including plant
and equipment, inventory, accounts receivable and essentially all other
operating assets and certain other receivables related to our tobacco papers
business. As part of this transaction, the buyer assumed certain liabilities
related to the operation of the Ecusta Division. Our total charge to earnings
associated with the sale was $58,408,000 including the $50,000,000 impairment
charge recognized during the second quarter of 2001.
We also recognized a $2,500,000 pre-tax charge in the second quarter of 2001 due
to the settlement of an environmental matter in connection with the Spring
Grove, Pennsylvania facility's wastewater discharge permit.
Income Tax Provision
The change in the income tax provision (benefit) for both the second quarter and
first six months of 2002 versus the comparable periods for 2001 is due primarily
to the changes in earnings (loss) before income taxes. Our effective tax rate
for each of these periods varied between 35.4% and 36.7%.
DRIVE AND IMPACT PROJECTS
As of November 1, 2001, we completed the implementation of cost reduction
programs designed to realize $40,000,000 at our current operations of annual
cash cost savings identified during our on-going DRIVE project. Our employees
generated over 7,000 cost savings ideas under DRIVE of which over 950 ideas were
identified for implementation. DRIVE ideas included, among others, procurement
initiatives and production process improvements to reduce the cost of raw
materials, efficiency increases to improve paper machine speeds and quality
yields, energy
20
conservation programs and the outsourcing of our sheeting operation at the
Neenah, Wisconsin facility. Because of the complex and highly integrated nature
of our operations and the number of projects implemented, it is extremely
difficult and cost prohibitive to determine the actual amount of cost savings
realized. We do recognize, however, that upon completing the implementation of
the DRIVE project, realized cost reductions have been largely offset by
increases in on-going operating costs such as wages and salaries, fringe
benefits, energy costs and professional and other costs. We continue to review
our manufacturing processes for opportunities to improve efficiencies and
effectiveness.
Our IMPACT project is focused on identifying and implementing changes in our
organization and business processes. We are currently in the second phase of
IMPACT, which includes the installation of an enterprise resource planning
("ERP") system. This system, which will provide a common platform for
purchasing, accounts payable, sales orders, cost accounting and general ledgers,
among other things, was implemented at our U.S. based locations on April 1,
2002. This portion of the implementation was completed on time, within budget
and with only minor operational interruptions. Installation at our Gernsbach,
Germany facility is in process and installation at our Scaer, France facility is
scheduled for completion during the fall of 2002. To date, the installation at
Gernsbach is proceeding as planned. Total spending on the IMPACT project is
expected to be approximately $49,000,000, of which approximately $45,000,000 is
capital related. Through June 30, 2002, we have capitalized approximately
$36,700,000 on the IMPACT project.
The implementation of an ERP system requires significant and pervasive change
and thus subjects our business to significant risk. Based on our progress to
date, we believe we will complete an effective implementation within budget and
without a material adverse impact on our business.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents decreased $75,274,000 during the first six months of
2002. Net repayment of debt ($66,498,000), investment in plant, equipment and
timberlands ($25,736,000) and the payment of dividends ($15,051,000) were
partially offset by cash generated from operations ($20,773,000) and cash
received in proceeds for stock options exercised by employees ($10,463,000).
Cash generated from operating activities included approximately $11,800,000
related to the collection of an income tax receivable.
On June 24, 2002, we entered into an unsecured $102,500,000 multi-currency
revolving credit facility (the "Facility") with a syndicate of three major
banks. The Facility enables us to borrow up to the equivalent of $102,500,000 in
certain currencies with a final maturity date of June 24, 2006. Under the
Facility, we have the option to borrow based upon the domestic prime rate or a
eurocurrency rate for any time period from one day to six months. The Facility
also provides for a facility fee on the commitment balance and an interest rate
margin on borrowings based on the higher of our debt ratings as published by
Standard & Poor's and Moody's. As provided for in the Facility, we are currently
negotiating with a bank to increase the total amount available under the
Facility to $125,000,000.
On June 24, 2002, we repaid (euro)138,700,000 in borrowings under the previously
existing $200,000,000 multi-currency revolving credit agreement. This repayment
was made using (euro)74,100,000 of our existing cash and a borrowing of
(euro)64,600,000 under the Facility.
In conjunction with our refinancing, we entered into a cross-currency interest
rate swap transaction effective June 24, 2002 with a termination date of June
26, 2006. Under this swap
21
transaction, we swapped $70,000,000 for (euro)72,985,090 and will pay interest
on the euro portion of the swap at a floating Eurocurrency Rate, plus applicable
margins and will receive interest on the dollar portion of the swap at a
floating US Dollar LIBOR rate, plus applicable margins.
Also in conjunction with the refinancing, we terminated two existing interest
rate swap agreements on June 24, 2002, each having a total notional principal
amount of DM 50,000,000 (approximately $25,035,000 as of June 24, 2002). Under
these agreements, which were effective April 6, 1999 and July 6, 1999 and which
had an expiration date of December 22, 2002, we received a floating rate of the
three-month DM LIBOR plus twenty basis points and paid a fixed rate of 3.41% and
3.43%, respectively. We recognized a $101,000 gain in connection with the early
termination of these swap arrangements and the repayment of the outstanding debt
under the previously existing $200,000,000 multi-currency revolving credit
agreement.
PNC Financial Services Group, Inc. ("PNC") beneficially owns approximately 35%
of our common stock, primarily as a trustee for numerous trusts for the benefit
of Glatfelter family members. PNC Bank, National Association, a subsidiary of
PNC, is a member of a syndicate of banks under the Facility. One member of our
Board of Directors is Regional Chairman of PNC Bank, National Association,
Philadelphia/South Jersey markets.
We expect to meet all our near- and long-term cash needs from a combination of
internally generated funds, cash, cash equivalents and our existing Revolving
Credit Facility or other bank lines of credit and other long-term debt. We are
subject to certain financial covenants under the Facility and are in compliance
with all such covenants. As the Facility matures on June 24, 2006, it has been
classified on the Balance Sheet as "Long-term debt." As of June 30, 2002, we had
(euro)64,600,000 (approximately $64,432,000) of borrowings under the Facility
and an additional (euro)38,167,000 (approximately $38,068,000) was available
under the Facility.
Interest Rate Risk
We use our Facility and proceeds from the issuance of our 6 7/8% Notes to
finance a significant portion of our operations. The Facility provides for
variable rates of interest and exposes us to interest rate risk resulting from
changes in the domestic prime rate or eurocurrency rate. All of our derivative
financial instrument transactions are entered into for non-trading purposes.
To the extent that our financial instruments expose us 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 our Facility, 6
7/8% Notes and other long-term debt as of June 30, 2002. Fair values included
herein have been determined based upon rates currently available to us for debt
with similar terms and remaining maturities.
Year of Maturity
---------------------------------------------------------------------- Fair
(dollar amounts in thousands) Value at
Debt: 2002 2003 2004 2005 2006 Thereafter Total 6/30/02
-------- -------- -------- -------- ----------- ----------- -------- --------
Fixed rate -- $ -- $ 332 $ 876 $ 526 $ 122 $ 150,000 $151,856 $156,507
Average interest rate -- 6.87% 6.87% 6.87% 6.87% 6.87%
Variable rate -- $ 1,915 $ -- $ -- $ -- $ 64,432 $ -- $ 66,347 $ 66,347
Average interest rate 3.11% -- -- -- 4.13% --
Capital Expenditures
During the first six months of 2002, we expended $25,736,000 on capital projects
compared to $23,398,000 for the like period of 2001. Of the year-to-date June
2002 capital spending, approximately $12,700,000 was spent on our IMPACT project
and approximately $1,500,000 was spent on the New Century Project. The New
22
Century Project is an environmental initiative intended to better control
certain emissions from our Spring Grove facility.
Total capital spending is expected to be approximately $59,000,000 in 2002.
Included in this total is an expected $21,000,000 capital expenditure for our
IMPACT project and $12,500,000 for the New Century Project. The New Century
Project will also require an estimated $18,000,000 and $2,100,000 in spending
during 2003 and 2004, respectively. The total capital spending on the New
Century Project is expected to be approximately $35,000,000. This represents an
increase in total spending on the New Century Project of approximately
$2,500,000 from the previously disclosed amount of $32,500,000 due to a change
in project scope that is expected improve our operating costs on an on-going
basis. The timing of cash payments regarding the New Century Project has also
been updated based upon our most recent information.
Other significant capital expenditures expected during 2002 include $6,000,000
to begin the expansion of our long-fiber and overlay paper capacity in
Gernsbach. Additional spending of $24,000,000 is expected on this project in
2003.
Business Strategies
We continue to develop strategies to position our business for the future.
Execution of these strategies is intended to capitalize on our strengths in
customer relationships, technology and people and our positions in certain
markets. Internally, we are working to improve the efficiency of our operations.
Externally, we are looking to strengthen our business through strategic
alliances and joint ventures, as well as potential acquisition opportunities or
dispositions of under-performing or non-strategic assets.
PENNSYLVANIA DROUGHT CONDITIONS
Pulp and paper manufacturing operations rely upon an adequate supply of water to
sustain production. Our Spring Grove, Pennsylvania facility is located in an
area that is currently under certain drought restrictions. We submitted a
drought contingency plan to the Commonwealth of Pennsylvania that outlines our
proposal to restrict water usage based upon current and potential future drought
conditions. The Commonwealth has approved the drought contingency plan and we
have begun water conservation measures in accordance with the plan. During the
second quarter of 2002, we estimate that the drought restrictions resulted in a
$150,000 negative impact on our pre-tax earnings, primarily from the partial
curtailment of the generation of electrical power. Based upon current water
supply levels, we have incurred additional operating costs during the third
quarter of 2002 to conserve water and have also further curtailed the generation
of electrical power. Under current conditions, we estimate the drought
restrictions to negatively impact our pre-tax earnings in the third quarter of
2002 by approximately $700,000.
Without moderate to heavy rainfall over the next several months, we may need to
curtail the production of pulp for our papermaking operations and further
curtail the generation of electrical power. Such curtailment would increase the
cost to manufacture paper at this location and decrease energy sales to our
customer but is not expected to impede our ability to supply our customers with
paper products.
LABOR AGREEMENTS STATUS
Hourly employees at our U.S. facilities are represented by different locals of
the Paper, Allied-Industrial, Chemical and Energy Workers International Union. A
five-year labor agreement covering approximately 300 employees at our Neenah,
Wisconsin facility expired on August 1, 2002. On July 30, 2002, the hourly
employees covered by this expired agreement voted on and rejected management's
23
offer for a new agreement; however, such employees are continuing to work under
the provisions of the expired agreement. Negotiations to settle this matter
continue.
A five-year labor agreement covering approximately 700 employees at our Spring
Grove, Pennsylvania expires in January 2003. Negotiations have commenced to
enter into a new agreement.
Various unions represent approximately 860 of our Schoeller & Hoesch employees.
Labor agreements covering approximately 640 employees at the Gernsbach, Germany
facility and 140 employees at the Scaer, France facility expired in the first
quarter of 2002. These agreements have since been settled with terms retroactive
to the expiration dates of the respective agreements. These one-year contracts
expire in the first quarter of 2003. An agreement covering approximately 50
employees at our abaca pulpmill in the Philippines expires in September 2002.
Negotiations are in process to enter into a new agreement.
SIGNIFICANT AND SUBJECTIVE ESTIMATES
The above discussion and analysis of our financial condition and results of
operations is based upon our unaudited condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to sales returns, doubtful
accounts, inventories, investments and derivative financial instruments,
long-lived assets, and contingencies, including environmental matters. 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.
We maintain reserves for expected sales returns and allowances based principally
on our return practices and our historical experience. If actual sales returns
differ from the estimated return rates projected, we may need to increase or
decrease our reserves for sales returns and allowances, which could affect our
reported income.
We maintain allowances for doubtful accounts for estimated losses resulting from
our customers' failure to make required payments. If customer payments were to
differ from our estimates, we may need to increase or decrease our allowances
for doubtful accounts, which could affect our reported income.
We maintain reserves for excess and obsolete inventories to reflect our
inventory at the lower of its stated cost or market value. Our estimate for
excess and obsolete inventory is based upon our assumptions about future demand
and market conditions. If actual market conditions are more or less favorable
than those we have projected, we may need to increase or decrease our reserves
for excess and obsolete inventories, which could affect our reported income.
We evaluate the recoverability of our long-lived assets, including property,
equipment and intangible assets, periodically or whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. Our
evaluations include analyses based on the cash flows generated by the underlying
assets, profitability information, including estimated future operating results,
24
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.
Accounting for defined-benefit pension plans require various assumptions,
including but not limited to, discount rates, expected rate of return on plan
assets and future compensation growth rates. Our retiree medical plans also
require 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. We evaluate these assumptions at least once each year and make changes
as conditions warrant. Changes to these assumptions will increase or decrease
our reported income, which will result in changes to the assets and liabilities
associated with our benefit plans.
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 undiscounted liabilities are exclusive of any insurance or other
claims against third parties. Recoveries of environmental remediation costs from
other parties, including insurance carriers, are recorded as assets when their
receipt is deemed probable.
ENVIRONMENTAL MATTERS
We are subject to loss contingencies resulting from regulation by various
federal, state, local and foreign governmental authorities with respect to the
environmental impact of our mills. To comply with environmental laws and
regulations, we have incurred substantial capital and operating expenditures in
past years. During 2001, 2000 and 1999, we incurred approximately $15,600,000,
$16,700,000 and $15,800,000, respectively, in operating costs related to
complying with environmental laws and regulations. We anticipate that
environmental regulation of our operations will continue to become more
burdensome and that capital and operating expenditures necessary to comply with
environmental regulations will continue, and perhaps increase, in the future. In
addition, we may incur obligations to remove or mitigate any adverse effects on
the environment allegedly resulting from our operations, including the
restoration of natural resources, and liability for personal injury and for
damages to property and natural resources.
In particular, we remain open to negotiations with the EPA and the Pennsylvania
DEP regarding the NOVs under the federal and state air pollution control laws.
In addition, we continue to negotiate with 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 our Neenah facility is located. We are also voluntarily cooperating with
an investigation by the Pennsylvania DEP, which commenced in February 2002 of
our Spring Grove facility related to certain discharges, which are alleged to be
unpermitted, to the Codorus Creek.
The costs associated with environmental matters are presently unknown but could
be substantial and perhaps exceed our available resources. Our current
assessment is that we should be able to manage these environmental matters
without a long-term, material adverse impact. These matters could, however, at
any particular time or for any particular year or years, have a material adverse
effect on our consolidated financial condition, liquidity or results of
operations or could
25
result in a default under our loan covenants. Moreover, there can be no
assurance that our reserves will be adequate to provide for future obligations
related to these matters, that our share of costs and/or damages for these
matters will not exceed our available resources, or that such obligations will
not have a long-term, material adverse effect on our consolidated financial
condition, liquidity or results of operations. With regard to the lower Fox
River and the Bay of Green Bay, if we are not successful in managing the matter
and are ordered to implement the remedy set forth in the proposed remedial
action plan issued by the State of Wisconsin and the United States, such order
would have a material adverse effect on our consolidated financial condition,
liquidity and results of operations and would result in a default under our loan
covenants. We have accrued an amount to cover this matter which represents our
best estimate within a range of possible outcomes. Changes to the accrual
reflect updates to our best estimate of the ultimate outcome and consider
changes in the extent and cost of the remedy, the status of negotiations with
various parties, including other PRPs, and our assessment of potential NRD
claims, claims for reimbursement of expenses of other parties and residual
liabilities. For further discussion, see Note 6 to the Condensed Consolidated
Financial Statements.
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 Condensed Consolidated Financial Statements.
PART II - OTHER INFORMATION
Item 5. Other Information
Cautionary Statement
Any statements we set forth in this Form 10-Q or otherwise made in writing or
orally with regard to our goals for revenues, cost reductions and return on
capital, execution of our business model in a timely manner, expectations as to
industry conditions and our financial results and cash flow, demand for or
pricing of our products, margin enhancement, retention of key accounts, income
growth, market penetration, development of new products and new and existing
markets for our products, environmental matters, implementation of our
integrated information technology platform, our ability to identify and execute
future acquisitions which will enhance both our business growth and return on
capital and other aspects of our business may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. 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 which might be projected, forecasted or estimated in any such
forward-looking statements: (i) variations in demand for or pricing of our
products; (ii) our ability to identify, finance and consummate future alliances
or acquisitions; (iii) our ability to develop new, high value-added engineered
products; (iv) our ability to realize cost reductions pursuant to our DRIVE
project and changes to business processes contemplated by our IMPACT project;
(v) changes in the cost or availability of raw materials we use, in particular
market pulp, pulp substitutes and wastepaper, and changes in energy-related
costs; (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 and/or on-going viability of such 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 Notices of Violation ("NOVs") issued by the United
States Environmental Protection Agency ("EPA") and the Pennsylvania Department
of
26
Environmental Protection ("Pennsylvania DEP"), the costs of natural resource
restoration or damages related to the presence of polychlorinated biphenyls
("PCBs") in the lower Fox River on which our Neenah mill is located and the
effect of complying with the wastewater discharge limitations of the Spring
Grove mill permit; (ix) enactment of adverse state, federal or foreign
legislation or changes in government policy or regulation; (x) adverse results
in litigation; (xi) fluctuations in currency exchange rates and or/interest
rates; (xii) disruptions in production and/or increased costs due to labor
disputes; (xiii) our ability to comply with the covenants of our debt facility;
(xiv) changes in non-cash income resulting from our defined-benefit pension
plans; and (xv) impact of drought restrictions on our earnings.
27
Item 6. Exhibits
(a) Exhibits -
Number Description of Documents
------ ------------------------
10.1 Credit Agreement among P. H. Glatfelter Co., Various
Subsidiary Borrowers, Deutsche Bank AG New York Branch, as
agent and Various Lending Institutions
10.2 Confirmation of Transaction dated as of June 20, 2002 between
S & H Verwaltungsgesellschaft mbH (a subsidiary of P. H.
Glatfelter Company) and PNC Bank, National Association
15 Letter in Lieu of Consent Regarding Review Report of Unaudited
Interim Financial Information
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Chief Executive Officer
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Acting Chief Financial Officer
(b) REPORTS ON FORM 8-K
none
28
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: August 14, 2002
C. Matthew Smith
Corporate Controller
29
INDEX OF EXHIBITS
Number Description of Documents
------ ------------------------
10.1 Credit Agreement among P. H. Glatfelter Co., Various
Subsidiary Borrowers, Deutsche Bank AG New York Branch, as
agent and Various Lending Institutions
10.2 Confirmation of Transaction dated as of June 20, 2002 between
S & H Verwaltungsgesellschaft mbH (a subsidiary of P. H.
Glatfelter Company) and PNC Bank, National Association
15 Letter in Lieu of Consent Regarding Review Report of Unaudited
Interim Financial Information
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Chief Executive Officer
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Acting Chief Financial Officer
30