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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
from ______ to ______
For the quarterly period ended SEPTEMBER 30, 2003
Commission file number 1-3560
P. H. GLATFELTER COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-0628360
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
96 SOUTH GEORGE STREET, SUITE 500
YORK, PENNSYLVANIA 17401 (717) 225-4711
(Address of principal executive (Registrant's telephone number, including
offices) area code)
N/A
(Former name or former address, if changed since last report)
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 at least the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the filer is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes [X] No [ ].
As of October 31, 2003, P. H. Glatfelter Company had 43,767,175 shares of common
stock outstanding.
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P.H. GLATFELTER COMPANY
REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2003
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Consolidated Statements of Income for the three months and
nine months ended September 30, 2003 and 2002 (unaudited) 3
Condensed Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2003 and 2002 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Independent Accountants' Report 21
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 22
ITEM 3 Quantitative and Qualitative Disclosures About Market Risks 38
ITEM 4 Controls and Procedures 39
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 39
SIGNATURES 41
EXHIBIT INDEX 42
-2-
GLATFELTER
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
P. H. GLATFELTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
In thousands, except per share amounts 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 131,904 $ 135,105 $ 403,810 $ 403,086
Energy sales - net 2,615 2,735 7,667 7,434
------------------------------------------------
Total revenues 134,519 137,840 411,477 410,520
Cost of products sold 114,562 104,281 342,944 313,810
------------------------------------------------
Gross profit 19,957 33,559 68,533 96,710
Operating expenses
Selling, general and administrative expenses 14,525 13,445 44,296 42,072
Restructuring charges 602 - 602 -
Unusual items 11,501 (3,508) 11,501 (3,508)
Losses (gains) on disposition of plant, equipment and 257 (931) (31,144) (1,975)
------------------------------------------------
Total operating expenses 26,885 9,006 25,255 36,589
------------------------------------------------
Operating income (loss) (6,928) 24,553 43,278 60,121
Other nonoperating income (expense)
Interest expense (3,674) (3,542) (10,728) (11,230)
Interest income 564 156 1,251 1,218
Other - net (196) 41 (1,239) 38
------------------------------------------------
Total other income (expense) (3,306) (3,345) (10,716) (9,974)
------------------------------------------------
Income (loss) from continuing operations before income
taxes (10,234) 21,208 32,562 50,147
Income tax provision (benefit)
Current 1,502 4,326 4,151 10,651
Deferred (5,071) 3,533 7,705 7,448
------------------------------------------------
Total (3,569) 7,859 11,856 18,099
------------------------------------------------
Income (loss) from continuing operations (6,665) 13,349 20,706 32,048
Discontinued operations
Income (loss) from discontinued operations - (58) (513) (57)
Income tax provision (benefit) - (20) (188) (20)
------------------------------------------------
Loss from discontinued operations - (38) (325) (37)
------------------------------------------------
Net income (loss) $ (6,665) $ 13,311 $ 20,381 $ 32,011
================================================
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) from continuing operations $ (0.15) $ 0.31 $ 0.47 $ 0.74
Loss from discontinued operations - - (0.01) -
------------------------------------------------
Net income (loss) $ (0.15) $ 0.31 $ 0.46 $ 0.74
================================================
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) from continuing operations $ (0.15) $ 0.30 $ 0.47 $ 0.73
Loss from discontinued operations - - (0.01) -
------------------------------------------------
Net income (loss) $ (0.15) $ 0.30 $ 0.46 $ 0.73
================================================
Weighted average shares outstanding
Basic 43,751 43,588 43,717 43,318
Diluted 43,751 43,865 43,745 43,797
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.09 $ 0.175 $ 0.44 $ 0.525
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
GLATFELTER
P. H. GLATFELTER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
SEPTEMBER 30 December 31
In thousands 2003 2002
- --------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,665 $ 32,219
Accounts receivable - net 64,282 59,171
Inventories 73,359 69,890
Prepaid expenses and other current assets 14,768 9,401
Assets held for sale - 4,241
--------------------------
Total current assets 167,074 174,922
PLANT, EQUIPMENT AND TIMBERLANDS - NET 538,815 517,053
OTHER ASSETS 310,436 261,227
--------------------------
Total assets $ 1,016,325 $ 953,202
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 817 $ 795
Short-term debt 1,207 1,028
Accounts payable 27,924 27,042
Dividends payable 3,939 7,638
Income taxes payable 5,959 1,550
Environmental liabilities 27,525 1,500
Accrued compensation, other expenses and deferred income taxes 56,457 53,383
Liabilities of discontinued operations - 1,608
--------------------------
Total current liabilities 123,828 94,544
LONG-TERM DEBT 251,318 218,709
DEFERRED INCOME TAXES 197,852 183,758
OTHER LONG-TERM LIABILITIES 64,297 82,358
--------------------------
Total liabilities 637,295 579,369
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common stock 544 544
Capital in excess of par value 40,530 40,798
Retained earnings 496,418 495,278
Accumulated other comprehensive loss (1,106) (3,708)
--------------------------
536,386 532,912
Less cost of common stock in treasury (157,356) (159,079)
--------------------------
Total shareholders' equity 379,036 373,833
--------------------------
Total liabilities and shareholders' equity $ 1,016,325 $ 953,202
==========================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
GLATFELTER
P.H. GLATFELTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2003 2002
- --------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 20,381 $ 32,011
Loss from discontinued operations 325 37
----------------------
Income from continuing operations 20,706 32,048
Adjustments to reconcile to net cash provided
by continuing operations:
Depreciation, depletion and amortization 38,740 34,506
Pension income (12,883) (23,927)
Deferred income tax provision 7,705 7,448
Gain on dispositions of plant, equipment and timberlands (31,144) (1,975)
Unusual items 11,501 (3,508)
Other 573 1,028
Change in operating assets and liabilities
Accounts receivable (2,050) (5,127)
Inventories (615) (5,215)
Other assets and prepaid expenses (3,731) (2,771)
Accounts payable, accrued compensation and other expenses, deferred income taxes
and other long term liabilities (2,489) 2,773
Income taxes payable 3,762 12,035
----------------------
Net cash provided by continuing operations 30,075 47,315
Net cash provided (used) by discontinued operations (244) 130
----------------------
Net cash provided by operating activities 29,831 47,444
INVESTING ACTIVITIES
Purchase of plant, equipment and timberlands (56,012) (42,564)
Proceeds from disposal of fixed assets 1,881 419
Proceeds from sale of subsidiaries, net of cash divested 1,499 -
----------------------
Net cash used by investing activities of continuing operations (52,632) (42,145)
Net cash used by investing activities of discontinued operations (60) (20)
----------------------
Net cash used by investing activities (52,692) (42,165)
FINANCING ACTIVITIES
Repayment of debt under previous revolving credit agreement - (135,829)
Net proceeds from (repayments of) revolving credit facility (7,248) 76,496
Proceeds from borrowing from SunTrust Financial 34,000 -
Payment of dividends (22,940) (22,674)
Proceeds from stock options exercised 597 11,527
----------------------
Net cash provided (used) by financing activities 4,409 (70,480)
Effect of exchange rate changes on cash 898 914
----------------------
Net change in cash and cash equivalents (17,554) (64,286)
Cash and cash equivalents at the beginning of period 32,219 88,015
----------------------
Cash and cash equivalents at the end of period $ 14,665 $ 23,730
======================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) for
Interest expense $ 14,750 $ 14,325
Income taxes (809) 5,613
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-5-
GLATFELTER
P. H. GLATFELTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION
P. H. Glatfelter Company and subsidiaries ("Glatfelter") is a manufacturer of
specialty papers and engineered products. Headquartered in York, Pennsylvania,
our manufacturing facilities are located in Spring Grove, Pennsylvania; Neenah,
Wisconsin; Gernsbach, Germany; Scaer, France and the Philippines. Our products
are marketed throughout the United States and in many foreign countries, either
through wholesale paper merchants, brokers and agents or directly to customers.
2. BASIS OF PRESENTATION
These unaudited condensed consolidated interim financial statements ("Financial
Statements") have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules and regulations
of the Securities and Exchange Commission and include the accounts of Glatfelter
and its wholly-owned subsidiaries. These Financial Statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in Glatfelter's 2002 Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
These Financial Statements do not include all of the information and footnotes
required for complete financial statements. In management's opinion, these
Financial Statements reflect all adjustments, which are of a normal, recurring
nature, necessary for a fair presentation of the results for the interim periods
presented. Results for these interim periods are not necessarily indicative of
results to be expected for the full year. Certain prior period amounts have been
reclassified, where necessary, to conform to the current period presentation.
3. DISCONTINUED OPERATIONS
In July 2003, we sold our Wisches, France subsidiary for approximately $2.0
million and the assumption of approximately $1.1 million of debt owed to us by
our subsidiary. At closing, we received $1.5 million in cash, net of cash
divested, and the remaining amounts are to be paid in annual installments over 2
years beginning July 2004. This subsidiary is reported as discontinued
operations for all prior periods presented. Prior to the sale, the underlying
assets were recorded at the lower of carrying amount or fair value less cost to
sell. Accordingly, loss from discontinued operations for the nine months ended
September 30, 2003, includes a charge of $0.5 million, after tax, to write-down
the carrying value of the assets prior to the sale. Revenue included in
determining results from discontinued operations totaled $0 and $2.6 million for
the three months and nine months ended September 30, 2003, respectively, and
$0.9 million and $2.4 million for the three months and nine months ended
September 30, 2002, respectively. This operation was previously reported in the
Engineered Products business unit.
4. STOCK-BASED COMPENSATION
Stock-based compensation is accounted for in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, as
permitted by Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." Compensation expense for both
restricted stock and performance stock awards is recognized ratably over the
performance period based on changes in quoted market prices of Glatfelter stock
and the likelihood of achieving the performance goals. This variable plan
accounting recognition is due to the uncertainty of achieving performance goals
and determining the number of shares ultimately to be issued. No stock-based
employee compensation cost for stock options is reflected in results of
operations for any period presented as all options granted had an exercise price
equal to the market value of the underlying common stock on the date of grant.
-6-
GLATFELTER
PRO FORMA INFORMATION Options granted in 2003 and 2002 had a weighted-average
grant-date fair value, estimated using the Black-Scholes option-pricing model,
of $2.54 and $2.48, respectively. Had compensation expense for stock options
been determined consistent with the fair value method of SFAS No. 123, our net
income (loss) and earnings (loss) per share would have been reduced to the
following pro forma amounts:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
In thousands, except per share amounts 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------
Net income (loss)
As reported $ (6,665) $ 13,311 $ 20,381 $ 32,011
Stock-based compensation expense,
after tax (135) (296) (401) (889)
---------------------------------------------------
Pro forma $ (6,800) $ 13,015 $ 19,980 $ 31,122
===================================================
Earnings (loss) per share
Reported - basic $ (0.15) $ 0.31 $ 0.46 $ 0.74
Pro forma - basic (0.16) 0.30 0.45 0.72
Reported - diluted (0.15) 0.30 0.46 0.73
Pro forma - diluted (0.16) 0.30 0.45 0.71
---------------------------------------------------
5. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in June
2001 and applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset. We adopted SFAS No. 143 on
January 1, 2003, and it did not impact our consolidated financial position or
results of operations.
SFAS No. 145, "Recission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and
Technical Corrections," was issued April 2002 and 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. We adopted SFAS No. 145 on January 1,
2003, and it did not impact our consolidated financial position or results of
operations.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002 and 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. We adopted SFAS No. 146 on January 1, 2003, and, it did not impact our
consolidated financial position or results of operations.
SFAS No. 148, "Accounting for Stock-Based Compensation Transition and
Disclosure, an Amendment to SFAS No. 123," was issued in December 2002. This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We have elected to continue
accounting for stock-based compensation in accordance with APB Opinion No. 25
and we have included the appropriate disclosure requirements herein.
In November of 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of the Indebtedness of Others" ("FIN No. 45"). FIN No. 45 requires
entities to establish liabilities for certain types of guarantees, and expands
financial statement disclosures for others. The accounting requirements of FIN
No. 45 were effective for guarantees issued or modified after December 31, 2002,
and the disclosure requirements were effective for financial statements for
interim or annual periods ending after December 15, 2002. The adoption on
January 1, 2003, of
-7-
GLATFELTER
FIN No. 45 did not have any significant accounting implications for us as all of
our commitments and guarantees are on behalf of our subsidiaries.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," was issued in April 2003, amends and clarifies accounting for
derivative instruments including derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. This standard was
effective for contracts entered into or modified after June 30, 2003 and its
adoption did not have an impact on our consolidated financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
requires an issuer to classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, except
for certain provisions that have been deferred, and otherwise was effective at
the beginning third quarter of 2003. Based on the financial instruments we
currently use, the adoption of SFAS No. 150 had no impact, and is not expected
to have any impact, on our consolidated financial position or results of
operations.
6. GAIN ON SALE OF TIMBERLANDS
On March 21, 2003, we sold 25,500 acres of timberlands in Maryland (the
"Maryland Timberlands", with a carrying amount of $6.0 million, to a subsidiary
of The Conservation Fund (the "Timberland Buyer"). As consideration for the
Maryland Timberlands, we received a 10-year note from the Timberland Buyer in
the principal amount of $37.9 million (the "Note"), which is included in "Other
Assets" in the consolidated balance sheet. The Note bears interest at 3.22% per
annum with interest-only payments due in quarterly installments. After five
years the interest rate on the Note will be adjusted to the then existing bank
prime rate. The Note is secured by a letter of credit issued by a financial
institution. Net of transaction fees, a $31.2 million pre-tax gain was
recognized from this transaction.
The Company pledged the Note as collateral under a $34.0 million promissory note
payable to SunTrust Financial (the "Note Payable"). The Note Payable bears a
fixed rate of interest at 3.82% for five years at which time the Company can
elect to renew the obligation.
7. NEENAH RESTRUCTURING
In September 2003, we announced the strategic decision to reallocate resources
and abandon a paper making machine and the deinking facility at our Neenah, WI
facility (the "Neenah Restructuring"). The machines and processes to be
abandoned had been primarily supporting our Printing & Converting business unit.
The Neenah Restructuring was initiated to allow us to reallocate resources to
more fully support opportunities in higher growth, more profitable specialty
markets and increase operating flexibility. These initiatives, which are
expected to be substantially completed by the end of 2003, will result in the
elimination of approximately 200 positions, or 55% of the facility's total
workforce. The results of operations for the third quarter of 2003 include
related pre-tax charges of $2.1 million, of which $1.5 million are reflected in
the consolidated income statements as components of cost of products sold, and
$0.6 million are reflected as "restructuring charges." The $1.5 million pre-tax
charge relates to accelerated depreciation and an adjustment to net realizable
value for spare parts and supplies inventory related to equipment to be
abandoned. The $0.6 million pre-tax restructuring charge relates to the
curtailment of pension and other retirement benefits associated with the
termination of salaried employees.
-8-
GLATFELTER
The following table sets forth information with respect to Neenah Restructuring
charges:
THREE MONTHS
ENDED EXPECTED IN FOURTH
SEPTEMBER 30 QUARTER 2003
In thousands 2003 LOW HIGH
- -------------------------------------------------------------------------
Depreciation on equipment to be
abandoned $ 973 $ 5,000 $ 5,000
Employee severance - 600 775
Pension and other retirement benefits 602 7,325 12,975
Contract termination and other costs 507 1,500 5,800
------------------------------
Total $ 2,082 $14,425 $24,550
==============================
The ultimate charges to be recorded in the fourth quarter of 2003 depend, in
part, on the outcome of on going negotiations with labor unions and other
parties.
8. RESTRUCTURING RESERVE
The following schedule summarizes activity in our restructuring reserve
during the first nine months of 2003:
NINE MONTHS ENDED
SEPTEMBER 30, 2003
----------------------------
Neenah 2002
In thousands Restructuring Restructuring
----------------------------
Beginning balance $ - $ 2,572
Amounts accrued 262 350
Payments made - (2,395)
----------------------
Ending balance $ 262 $ 527
======================
As of September 30, 2003, the amounts accrued related to the Neenah
Restructuring represent only those charges that are expected to result in cash
payments and consist of medical retirement benefits. Pension curtailment charges
are recorded as a reduction of the prepaid pension benefit costs. The cash
required to complete this initiative is expected to total approximately
$3.1 million to $8.4 million.
The 2002 restructuring charge related to the company-wide reduction of our
workforce by 76 positions, including 36 positions eliminated through attrition.
The workforce reduction was substantially completed in the first quarter of
2003. During the second quarter of 2003, we accrued and paid an additional
$350,000 for severance payments related to the workforce reduction.
9. UNUSUAL ITEMS
Unusual items in the three months and nine months ended September 30, 2003
reflect a $11.5 million charge relating to our former Ecusta Division, which was
sold in 2001. Under the Ecusta Division acquisition agreement, we are
indemnified for certain liabilities that have been assumed by the buyers. We had
previously accrued liabilities related to certain post-retirement benefits,
workers compensation claims and vendor payables and established a corresponding
receivable due from the buyers. We paid the portion of these liabilities that
became due and sought reimbursement from the buyers, which, to date, they have
refused. The 2003 charge includes $5.5 million to fully reserve such receivables
and an additional $6.0 million related to contingent landfill closure costs at
the Ecusta facility (see Note 15).
In the three months and nine months ended September 30, 2002, we recognized a
$3.5 million gain from the settlement of an escrow account with the previous
owners of our Schoeller & Hoesch Division.
-9-
GLATFELTER
10. EARNINGS PER SHARE
The following table sets forth the details of basic and diluted earnings (loss)
per share (EPS):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
In thousands, except per share amounts 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------
Income (loss) from continuing
operations $(6,665) $ 13,349 $ 20,706 $ 32,048
Income (loss) from discontinued
operations - (38) (325) (37)
---------------------------------------------
Net income (loss) $(6,665) $ 13,311 $ 20,381 $ 32,011
=============================================
Weighted average common shares
outstanding used in basic EPS 43,751 43,588 43,717 43,318
Common shares issuable upon exercise
of dilutive stock options,
restricted stock awards and
performance awards - 277 28 479
---------------------------------------------
Weighted average common shares
outstanding and common share
equivalents used in diluted EPS 43,751 43,865 43,745 43,797
=============================================
BASIC EPS
Income (loss) from continuing
operations $ (0.15) $ 0.31 $ 0.47 $ 0.74
Income (loss) from discontinued
operations - - (0.01) -
---------------------------------------------
Net income (loss) $ (0.15) $ 0.31 $ 0.46 $ 0.74
=============================================
DILUTED EPS
Income (loss) from continuing
operations $ (0.15) $ 0.30 $ 0.47 $ 0.73
Income (loss) from discontinued
operations - - (0.01) -
---------------------------------------------
Net income (loss) $ (0.15) $ 0.30 $ 0.46 $ 0.73
=============================================
11. INVENTORIES
Inventories, net of reserves were as follows:
SEPTEMBER 30 December 31
In thousands 2003 2002
- -------------------------------------------------------
Raw materials $ 12,780 $ 12,545
In-process and finished 36,246 35,419
Supplies 24,333 21,926
--------------------------
Total $ 73,359 $ 69,890
==========================
-10-
GLATFELTER
12. LONG-TERM DEBT
Long-term debt is summarized as follows:
SEPTEMBER 30 December 31
In thousands 2003 2002
----------------------------
Revolving credit facility, due June 2006 $ 66,650 $ 67,681
6 7/8 % Notes, due July 2007 150,000 150,000
Note payable - SunTrust, due March 2008 34,000 -
Other notes, various 1,575 1,823
---------------------------
Total long-term debt 252,135 219,504
Less current portion (817) (795)
---------------------------
Long-term debt, excluding current portion $ 251,318 $ 218,709
===========================
On June 24, 2002, we entered into an unsecured $102.5 million multi-currency
revolving credit facility (the "Facility") with a syndicate of three major
banks. An additional $22.5 million was added to the Facility on September 24,
2002 with a fourth major bank. The Facility, which replaced an old facility,
enables Glatfelter or its subsidiaries to borrow up to the equivalent of $125.0
million in certain currencies. Borrowings can be made for any time period from
one day to six months and incur interest based on the domestic prime rate or a
Eurocurrency rate, at our option, plus a margin ranging from .525% to 1.05%. The
margin and a facility fee on the commitment balance are based on the higher of
our debt ratings as published by Standard & Poor's and Moody's. The Facility
requires us to meet certain leverage and interest coverage ratios, with both of
which we are in compliance at September 30, 2003.
On July 22, 1997, we issued $150.0 million 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 our option at any
time at a calculated redemption price plus accrued and unpaid interest to the
date of redemption, and constitute unsecured and unsubordinated indebtedness.
The net proceeds from the sale of the Notes were used primarily to repay certain
short-term unsecured debt and related interest.
On March 21, 2003, we sold approximately 25,500 acres of timberlands and
received as consideration a $37.9 million 10-year interest bearing note
receivable from the Timberland Buyer (see Note 6). We pledged the Note as
collateral under a $34.0 million promissory note payable to SunTrust Financial
(the "Note Payable"). The Note Payable bears interest at a fixed rate of 3.82%
for five years at which time we can elect to renew the obligation.
P. H. Glatfelter Company guarantees debt obligations of all its subsidiaries.
All such obligations are recorded in these consolidated financial statements.
At September 30, 2003 and December 31, 2002, we had $3.3 million of letters of
credit issued to us by a financial institution. The letters of credit are for
the benefit of certain state workers compensation insurance agencies in
conjunction with our self-insurance program. No amounts were outstanding under
the letters of credit. We bear the credit risk on this amount to the extent that
we do not comply with the provisions of certain agreements. The letters of
credit do not reduce the amount available under our lines of credit.
-11-
GLATFELTER
13. FINANCIAL DERIVATIVES
In conjunction with our 2002 refinancing, we entered into a cross-currency swap
transaction effective June 24, 2002. Under this transaction, we swapped $70.0
million for approximately E73.0 million and pay interest on the Euro
portion of the swap at a floating Eurocurrency Rate, plus applicable margins and
receive interest on the dollar portion of the swap at a floating U.S. Dollar
LIBOR, plus applicable margins. The contract matures on June 24, 2006. The
cross-currency swap is designed to provide protection from the impact that
changes in currency rates have on certain U.S. Dollar-denominated debt
obligations recorded at our subsidiary in Gernsbach, Germany. The cross currency
swap is recorded at a negative fair value of $15.3 million in the Consolidated
Balance Sheets under the caption "Accrued compensation, other expenses and
deferred income taxes". Changes in fair value are recognized in earnings as
"Other income (expense)" in the Consolidated Statements of Income. The
mark-to-market adjustment was completely offset by a gain on the related
remeasurement of the U.S. Dollar denominated debt obligations.
The credit risks associated with our financial derivatives are controlled
through the evaluation and monitoring of the creditworthiness of the
counterparties. Although we may be exposed to losses in the event of
nonperformance by counterparties, we do not expect such losses, if any, to be
significant.
14. COMPREHENSIVE INCOME
The following table sets forth comprehensive income and its components:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
In thousands 2003 2002 2003 2002
- -------------------------------------------------------------------------
Net income (loss) $(6,665) $13,311 $20,381 $ 32,011
Foreign currency translation
adjustment 1,006 (747) 2,602 321
---------------------------------------
Comprehensive income (loss) $(5,659) $12,564 $22,983 $ 32,332
=======================================
15. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
ECUSTA DIVISION MATTERS
In August 2001, pursuant to an acquisition agreement (the "Acquisition
Agreement") we sold the assets of our Ecusta Division to four related entities,
consisting of Purico (IOM) Limited, an Isle of Man limited liability company
("Purico"), and RF&Son Inc. ("RF"), RFS US Inc. ("RFS US") and RFS Ecusta Inc.
("RFS Ecusta"), each of which is a Delaware corporation, (collectively, the
"Buyers"). As part of the Acquisition Agreement, the Buyers assumed certain
liabilities related to the operation of the Ecusta Division. In July 2002, we
received notice from the Buyers' legal counsel asserting claims for
indemnification for certain alleged damages incurred by the Buyers, pursuant to
the Acquisition Agreement. During October 2003, the Buyers informed us that the
total value of these claims was approximately $3.5 million. We believe that
these claims are without merit and intend to vigorously defend our position.
In August 2002, the Buyers shut down the manufacturing operation of the paper
mill in Pisgah Forest, North Carolina, which was the most significant operation
of the Ecusta Division. On October 23, 2002, RFS Ecusta and RFS US filed for
bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. During the fourth
quarter of 2002, in accordance with the provisions of the Acquisition Agreement,
we notified the Buyers of third party claims ("Third Party Claims") made against
us for which we are seeking indemnification from the Buyers. The Third Party
Claims primarily relate to certain post-retirement benefits, workers
compensation claims and vendor payables.
Effective August 8, 2003, the assets of RFS Ecusta and RFS US, which
substantially consist of the paper mill and related real property, were sold to
an unrelated third party (the "New Buyer"), whose business plan is to continue
certain mill-related operations and to convert portions of the mill site into a
business park.
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GLATFELTER
Beginning in April 2003, governmental authorities, including the North Carolina
Department of Environment and Natural Resources ("DENR") began discussions with
us and the New Buyer regarding, among other environmental issues, certain
potential landfill closure liabilities ("Landfill Closure Costs") associated
with the Ecusta mill and its properties. The discussions focused on DENR's
desire to establish a plan and secure financial resources to eventually close
three landfills located at the Ecusta facility and to address other
environmental matters at the site. During the third quarter of 2003, the
discussions ended with DENR's conclusion to hold us responsible for the closure
of the landfills. We intend to pursue reimbursement for such claims from the
Buyers under the indemnification provisions of the Acquisition Agreement.
Based on our analysis of currently available information and our landfill
closure experience, we estimate the Landfill Closure Costs will total
approximately $7.6 million, of which $1.6 million was accrued in the second
quarter of 2003 and $6.0 million was accrued in the third quarter of 2003. The
second quarter 2003 accrual related to a specific landfill and was recorded
based on our conclusion it was probable that we would incur the closure costs
because the landfill was already in the process of being closed and thus was of
no potential value to the New Buyer. In the second quarter of 2003, we
established an offsetting receivable due from the Buyers for landfill closure
costs of $1.6 million pursuant to the Acquisition Agreement indemnification
provisions. We believe the Landfill Closure Costs are liabilities for which the
Buyers are obligated to indemnify us.
In addition to Landfill Closure Costs, we recorded liabilities for Third Party
Claims totaling $3.3 million. Pursuant to the terms of the Acquisition
Agreement, we believe the Buyers assumed all of these liabilities and agreed to
indemnify and hold us harmless for damages. Accordingly, we had previously
recorded a receivable for amounts due from Purico and RF, the Buyers that have
not filed for bankruptcy. However, in September 2003, the Buyers failed to honor
their obligation to reimburse us for the portion of the liabilities that we had
paid. Therefore, in the third quarter of 2003, we fully reserved for the amounts
recorded related to the receivables due from Purico and RF.
In the third quarter of 2003, our Board of Directors terminated post-retirement
medical benefits previously provided to certain former employees of Ecusta.
Pursuant to a separate agreement with the Buyers, we continued to provide these
benefits and were to be reimbursed by the Buyers. In connection with the
termination of such benefits we reduced recorded Third Party Claims by
approximately $1.0 million. The corresponding offsetting receivable was reduced
as well but only to the extent we had not previously expended cash for such
post-retirement benefits.
The charge included in our results of operations for the three months and nine
months ended September 30, 2003 was $11.5 million. We continue to believe the
Buyers are responsible for the Landfill Closure Costs and the Third Party Claims
and believe we have a strong legal basis to seek indemnification. We intend to
pursue appropriate avenues to enforce the provisions of the Acquisition
Agreement.
The governmental authorities are continuing to investigate the environmental
conditions at the mill. We are uncertain as to what additional Ecusta-related
claims, including environmental matters, if any, may be asserted against us. The
above discussions with the governmental authorities concerning certain other
environmental related matters at the former Ecusta facility resulted in the New
Buyer agreeing to be held responsible for the resolution thereof. Based on
information currently available, we estimate the cost of resolution of these
issues could range from between $0 and $4 million in addition to amounts
accrued. The likelihood and extent of potential claims against us could be
mitigated by the successful execution of the New Buyer's business plan. Should
any claims be made against us, we would seek indemnification for such damages to
the extent possible in accordance with the terms of the Acquisition Agreement.
We cannot ascertain at this time what additional impact, if any, these matters
will have on our consolidated financial position and/or results of operations
and no amounts with respect thereto have been recorded.
In addition to the amounts discussed above, as of September 30, 2003, our trade
accounts receivable included $0.8 million for products sold by our S&H
subsidiary pursuant to a supply agreement with a German company affiliated with
Purico. Such accounts receivable balances totaled $0.9 million at November 6,
2003, reflecting additional sales offset by $0.6 million of cash collections.
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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. 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.
SPRING GROVE, PENNSYLVANIA 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 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 to be
approximately $36.8 million to be incurred before April 2004. The New Century
Project includes improvements in brownstock washing, installation of an oxygen
delignification bleaching process, 100 percent chlorine dioxide substitution and
a hardwood ozone bleaching system. Through September 30, 2003, we have invested
approximately $31.6 million in this project. We presently do not anticipate
difficulties in implementing the New Century Project. While we have obtained all
the required governmental approvals, we have yet to bring all the necessary
equipment on-line.
We voluntarily cooperated with an investigation by the Pennsylvania Department
of Environmental Protection (the "PA DEP") which commenced in February 2002,
related to certain discharges by our Spring Grove facility to the Codorus Creek.
On June 13, 2003, we entered into a Consent Order and Agreement with the PA DEP
regarding such discharges. Under the terms of this agreement, we agreed to pay a
civil penalty of $1.5 million over three years, beginning June 15, 2003, and to
implement various remedial measures related to the facility's operations and to
the facility's historical piping network. We accrued $1.5 million in the 2002
fourth quarter results of operations for this obligation. The remedial measures
are expected to be recorded as capital expenditures.
In 1999, EPA and the Pennsylvania DEP issued 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.
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, if any, involved.
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GLATFELTER
NEENAH, WISCONSIN 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 nine 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
other identified PRPs are NCR Corporation, Appleton Papers Inc., Georgia Pacific
(formerly Fort Howard Corp. and Fort James), WTM I Co. (a subsidiary of
Chesapeake Corp.), Riverside Paper Corporation, U.S. Paper Mills Corp. (a
subsidiary of Sonoco Products Company), Sonoco Products Company, and Menasha
Corporation. We believe some of these PRPs may have corporate or contractual
relationships with unidentified entities that may shift monetary obligations
arising from the lower Fox River and Bay of Green Bay.
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
for response costs, 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.
The areas of the lower Fox River and in the Bay of Green Bay in which the
contamination exists are commonly referred to as Operable Unit 1 ("OU1"), which
consists of Little Lake Butte des Morts, the portion of the river that is
closest to our Neenah facility, Operable Unit 2 ("OU2") which is the portion of
the river between dams at Appleton and Little Rapids and Operable Units 3
through 5 ("OU3-5"), an area approximately 20 miles downstream of our Neenah
facility.
The following summarizes the status of our potential exposure:
RESPONSE ACTIONS
OU1 AND OU2 On January 7, 2003, the Wisconsin Department of Natural Resources
(the "Wisconsin DNR") and EPA issued a Record of Decision ("ROD") for the
cleanup of OU1 and OU2. Subject to extenuating circumstances and alternative
solutions arising during the cleanup, the ROD requires the removal of
approximately 784,000 cubic yards of sediment from OU1 and no active remediation
of OU2. The ROD also requires the monitoring of the two operable units.
Wisconsin DNR and EPA estimate that the remedy for these two reaches will cost
approximately $75 million but could cost within a range from approximately $52
million to $112 million.
On July 1, 2003, WTM I entered into an Administrative Order on Consent ("AOC")
with EPA and the Wisconsin DNR regarding to the implementation of the Remedial
Design for OU1. On October 1, 2003, the U.S. Department of Justice lodged a
consent decree regarding OU1 (the "OU1 Consent Decree") with the U.S. District
Court for the Eastern District of Wisconsin. Under terms of the OU1 Consent
Decree, Glatfelter and WTM I each agreed to pay approximately $27 million. This
includes $25 million to be escrowed to fund response work associated with
remedial actions specified in the December 2002 ROD. In addition, the U.S. EPA
agreed to take steps to place $10 million from another source into escrow for
the OU1 cleanup. The response work will be managed and/or performed by
Glatfelter and WTM I, with governmental oversight, and funded by the amounts
placed into escrow. We believe the required remedial actions can be completed
with the amount of monies expected to be escrowed. If the Consent Decree is
terminated due to a lack of escrow funds, Glatfelter and WTM I each remain
potentially responsible for the costs necessary to complete the remedial
actions.
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GLATFELTER
The terms of the OU1 Consent Decree include provisions to be followed should the
escrow account be depleted prior to completion of the response work. In this
event, each company would be notified and be provided an opportunity to
contribute additional funds to the escrow account and thereby to preserve the
OU1 Consent Decree. Should the OU1 Consent Decree be terminated, each company
would lose the protections contained in the settlement and the governments may
turn to one or both of us for the completion of work in OU1. In such a
situation, the governments may also seek response work from a third party, or
perform the work themselves and seek response costs from any of the identified
PRPs, including Glatfelter.
In addition to the $25 million escrow amount discussed above, the OU1 Consent
Decree requires that each company pay the governments $375,000 for past response
costs. These payments are being made in return for credit to be applied toward
each settling company's potential liability for response costs associated with
the river, as a whole. The OU1 Consent Decree also requires the companies to pay
certain NRD-related amounts, which are discussed below.
The United States has lodged the OU1 Consent Decree with the United States
District Court for the Eastern District of Wisconsin, for court review. The
United States Department of Justice published a notice of the lodging of the OU1
Consent Decree in the Federal Register on October 17, 2003, opening a 30-day
public comment period. A public meeting was held on October 29, 2003. After
compiling any written comments received, the United States Department of Justice
will, if appropriate, move the Court to enter the OU1 Consent Decree.
OU3 - 5 On July 28, 2003, the EPA and the Wisconsin DNR issued a ROD (the
"Second ROD") for the cleanup of OU3 - 5. The Second ROD calls for the removal
of 6.5 million cubic yards of sediment and certain monitoring at an estimated
cost of $324.4 million, but according to the Second ROD, could cost within a
range from approximately $227.0 million to $486.6 million. The most significant
component of the estimated costs is attributable to large-scale sediment removal
by dredging. We are currently analyzing the Second ROD to determine the
feasibility of the remedy set forth therein and its impact, if any, on our
potential liability.
We do not believe that we have any responsibility for a share of liability with
respect to OU3-5 after taking into account the location of our Neenah facility
relative to the site and considering other work or funds committed or expended
by us. However, uncertainty regarding these sites continues due to disagreement
over a fair allocation or apportionment of responsibility.
NATURAL RESOURCE DAMAGES
The ROD and Second ROD do not place any value on claims for NRDs associated with
this matter. As noted above, NRD claims are 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, the United States Fish and Wildlife
Service ("FWS"), the National Oceanic and Atmospheric Administration ("NOAA"),
four Indian tribes and the Michigan Attorney General have asserted that they
possess NRD claims related to the lower Fox River and the Bay of Green Bay.
In June 1994, FWS notified the then 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. 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 million and $333
million. We believe that the federal NRD assessment is technically and
procedurally flawed. We also believe that the NRD claims alleged by the various
alleged trustees 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 (downstream from OU1 and
OU2). 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.
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GLATFELTER
We submitted comments on the proposed Fort James consent decree to the U.S.
Department of Justice. These comments suggest that the United States, the State
of Wisconsin and certain alleged natural resource trustees not move to enter
this proposed consent decree, due to various procedural and substantive
infirmities. Nevertheless, on March 28, 2003, the federal government made such a
motion with respect to which the courts have not yet ruled. Because the factual
and legal justification the plaintiffs provided for the settlement is vague and
specific to the Fort James situation, we are not able to extrapolate an
estimated settlement amount for Glatfelter from the proposed consent decree.
In addition to the amounts discussed above, the OU1 Consent Decree requires that
Glatfelter and WTM I each pay the governments $1.5 million for NRDs for the Fox
River site, and $150,000 for NRD assessment costs. Each of these payments is
being made in return for credit to be applied toward each settling company's
potential liability for NRDs associated with the river, as a whole.
OTHER INFORMATION
The Wisconsin DNR and FWS have published studies, the latter in draft form,
estimating the amount of PCBs discharged by each identified PRP to the lower Fox
River and the Bay of Green Bay. These reports estimate our Neenah facility's
share of the volumetric discharge 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 than the estimates. 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
PRPs, pursuant to which such 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 identified PRPs is much less than our per
capita share.
We also believe that there exist additional potentially responsible parties
other than the identified PRPs. For instance, certain of the identified PRPs
discharged their wastewater through public wastewater treatment facilities,
which we believe makes the owners of 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 believe the OU1 Consent Decree is a significant milestone in our continuing
negotiations to resolve any exposure we may have with regard to the Fox River
site and that the agreement provides further clarity on the financial
commitment that may be required of us. Notwithstanding these developments,
the OU1 Consent Decree does not completely resolve our potential liability
related to the Fox River site. We continue to believe that this matter may
result in litigation, but cannot predict the timing, nature, extent or magnitude
of such litigation. We currently are unable to predict our ultimate cost related
to this matter.
RESERVES FOR ENVIRONMENTAL LIABILITIES We have reserves for environmental
liabilities with contractual obligations and for those environmental matters for
which it is probable that a claim will be made, that an obligation may exist and
for which the amount of the obligation is reasonably estimable. As of September
30, 2003 and December 31, 2002, we had accrued reserves for asserted and
unasserted liabilities related to environmental matters of approximately $29.8
million and $30.3 million, respectively. As of September 30, 2003, $27.5 million
of the reserves are recorded as current liabilities in the caption
"environmental liabilities" and $2.3 million are included in "other long-term
liabilities," on the Consolidated Balance Sheets. At December 31, 2002, these
accruals are primarily included in "other long-term liabilities." During 2003,
the reserve balance declined $0.5 million as a result of the first of three
installment payments made to the PA DEP. No adjustments were made to the reserve
during the first nine months of 2002. Other than with respect to the OU1 Consent
Decree, 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,
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GLATFELTER
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.
RANGE OF REASONABLY POSSIBLE OUTCOMES - NEENAH, WISCONSIN As discussed above,
the OU1 Consent Decree provides clarity on the financial commitment that may be
required of us regarding response costs related to OU1. We believe that the
remediation of OU1 will be satisfactorily completed for the amounts currently
expected to be committed under the OU1 Consent Decree. The OU1 Consent Decree
does not address response costs necessary to remediate the remainder of the Fox
River site and only addresses NRDs and claims for reimbursement of government
expenses to a limited extent. Due to interpretations that CERCLA imposes joint
and several liability, uncertainty persists regarding our exposure with respect
to the remainder of Fox River site.
Based on analysis of currently available information and experience regarding
the cleanup of hazardous substances, we believe that it is reasonably possible
that our costs associated with the lower Fox River and the Bay of Green Bay may
exceed current reserves by amounts that may prove to be insignificant or that
could range, in the aggregate, up to approximately $125 million, over a period
that is undeterminable but could range beyond 20 years. We believe that the
likelihood of an outcome in the upper end of the monetary 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 monetary range is remote. In our
estimate of the upper end of the range, we have considered i) the remedial
actions agreed to in the OU1 Consent Decree and our belief that the required
actions can be accomplished with the funds to be escrowed; and ii) no active
remediation of OU2. We have also assumed full-scale dredging for the remainder
of the River and the Bay of Green Bay, as set forth in the Second ROD, although
at a significantly higher cost than estimated in the Second ROD. We have also
assumed our share of the ultimate liability to be 18%, which is significantly
higher than we believe is appropriate or than we will incur 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 and arranged for the disposal of the wastepaper 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 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. On July 30, 2003, we filed a Complaint in the Circuit Court for the
County of Milwaukee, Wisconsin, against our insurers, seeking damages for breach
of contract and declaratory relief related to such losses. One of the insurers
that is a defendant in our Wisconsin complaint has filed a counter-suit against
us in the U.S. District Court for the Middle District of Pennsylvania. The
filing of our lawsuit followed the issuance of a Wisconsin Supreme Court opinion
regarding environmental coverage issues that is favorable to policyholders.
While we believe that we will be successful in this action and recoveries may be
significant, we are uncertain as to what the timing or extent of any ultimate
recovery will be and whether it will be significant in relation to the potential
losses associated with the Fox River. Our financial statements do not include
any amounts for such potential recoveries.
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GLATFELTER
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 position,
liquidity and/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 position, 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 implementation of the OUI Consent Decree
and/or if we are ordered to implement the remedy proposed in the Second ROD,
such developments would have a material adverse effect on our consolidated
financial position, liquidity and results of operations and would result in a
default under our loan covenants.
We are also involved in other lawsuits that are ordinary and incidental to our
business. 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, liquidity or results of operations.
16. SEGMENT INFORMATION
We manage our organization along separate business units: Engineered Products,
Long-Fiber & Overlay Papers, and Printing and Converting Papers, as well as
Tobacco Papers, which is being exited. In the latter part of 2002, we completed
the implementation of a new information system to provide, among other things,
more complete business unit reporting. However, we are unable to provide detail
business unit profitability reporting for periods prior to the system
implementation.
Results of individual business units are presented based on our management
accounting practices and management structure. There is no comprehensive,
authoritative body of guidance for management accounting equivalent to
accounting principles generally accepted in the United States of America;
therefore, the financial results of individual business units are not
necessarily comparable with similar information for any other company. The
management accounting process uses assumptions and allocations to measure
performance of the business units. Methodologies are refined from time to time
as management accounting practices are enhanced and businesses change. The costs
incurred by support areas not directly aligned with the business unit are
allocated primarily based on an estimated utilization of support area services.
The following tables set forth net sales by business unit:
THREE MONTHS ENDED
SEPTEMBER 30
Dollars in thousands 2003 2002
- ----------------------------------------------------------
BUSINESS UNIT
Engineered Products $ 37,194 $ 31,122
Long-Fiber & Overlay Papers 32,026 26,034
Printing and Converting Papers 61,070 72,596
Tobacco Papers 1,614 5,353
-----------------------
Total $ 131,904 $ 135,105
=======================
NINE MONTHS ENDED
SEPTEMBER 30
Dollars in thousands 2003 2002
- ----------------------------------------------------------
BUSINESS UNIT
Engineered Products $ 103,005 $ 95,294
Long-Fiber & Overlay Papers 96,696 77,470
Printing and Converting Papers 195,974 214,979
Tobacco Papers 8,135 15,343
-----------------------
Total $ 403,810 $ 403,086
=======================
-19-
GLATFELTER
The following table sets forth profitability information by business unit and
the composition of consolidated income before income taxes:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
Operating Operating
Profit Operating Profit Operating
Dollars in thousands (Loss) Margin (Loss) Margin
- ------------------------------------------------------------------------------ ----------------------
BUSINESS UNIT
Engineered Products $ 1,253 3.4% $ 2,229 2.2%
Long-Fiber & Overlay Papers 1,156 3.6 8,463 8.8
Printing and Converting Papers (831) (1.4) (1,546) (0.8)
Tobacco Papers (1,166) (72.2) (3,979) (48.9)
--------- ---------
Total Business Unit 412 0.3 5,167 1.3
Energy sales, net 2,615 7,667
Pension income, net 3,885 12,883
Neenah Restructuring - recorded as cost of products
sold (1,480) (1,480)
Restructuring charges (602) (602)
Unusual items (11,501) (11,501)
(Loss) gain on disposition of plant, equipment and
timberlands (257) 31,144
--------- ---------
Total consolidated operating income (loss) (6,928) 43,278
Interest expense, net (3,674) (10,728)
Other income (expense), net 368 12
--------- ---------
Income (loss) from continuing operations before
income taxes $ (10,234) $ 32,562
========= =========
Management evaluates results of operations before energy sales, non-cash pension
income, restructuring related charges, unusual items and effects of asset
disposition because it believes this is a more meaningful representation of the
operating performance of its core papermaking businesses and the profitability
of business units. This presentation is closely aligned with the management and
operating structure of our company. It is also on this basis that management
performance is evaluated internally and by the Company's Board of Directors.
17. SUBSEQUENT EVENTS
On October 7, 2003, we entered into a Contract of Sale with Sussex County, of
the State of Delaware (the "Buyer"), under which we agreed to sell approximately
1,187 acres of timberland (the "Delaware Timberland") for cash consideration
totaling $17.1 million. The transaction is expected to close in January 2004,
subject to, among others, the Buyer's completion of site usability evaluations.
Upon closing, the Delaware Timberland sale is expected to result in a pre-tax
gain of approximately $16.9 million.
On November 3, 2003, we entered into an Agreement of Purchase and Sale with the
Nature Conservancy, a non-profit corporation, under which we agreed to sell
approximately 900 acres of timberland commonly known as Ponders (the "Ponders
Timberland") for $7.7 million in cash. The transaction is expected to close in
March 2004, subject to certain conditions, including approval by the Nature
Conservancy's Board of Governors. Upon closing, the Ponders Timberland sale is
expected to result in a pre-tax gain of approximately $7.5 million.
-20-
GLATFELTER
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 September 30, 2003, and the related
condensed consolidated statements of income for the three months and nine months
ended September 30, 2003 and 2002, and cash flows for the nine months ended
September 30, 2003 and 2002. These interim 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 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 interim 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, 2002, and the related
consolidated statements of income, shareholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated February 28,
2003 (which includes an explanatory paragraph concerning the Company's adoption
of Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, effective January 1, 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, 2002 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
November 11, 2003
-21-
GLATFELTER
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF INCOME
The following discussion should be read in conjunction with the information in
the unaudited condensed consolidated financial statements and notes thereto
included herein and Glatfelter's Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in its 2002 Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact, including statements
regarding industry prospects and future consolidated financial position or
results of operations, made in this Quarterly Report on Form 10-Q are forward
looking. We use words such as anticipates, believes, expects, future, intends
and similar expressions to identify forward-looking statements. Forward-looking
statements reflect management's current expectations and are inherently
uncertain. Our actual results may differ significantly from management's
expectations. The following discussion includes forward-looking statements
regarding expectations of, among others, net sales, cost of products sold,
restructuring charges, non-cash pension income, environmental costs and
liquidity, all of which are inherently difficult to predict. Although we make
such statements based on assumptions that we believe to be reasonable, there can
be no assurance that actual results will not differ materially from our
expectations. Accordingly, we identify the following important factors, among
others, which could cause our results to differ from any results that might be
projected, forecasted or estimated in any such forward-looking statements:
i. variations in demand for, or pricing of, our products;
ii. changes in the cost or availability of raw materials we use, in
particular market pulp, pulp substitutes and wastepaper, abaca fiber,
and changes in energy-related costs;
iii. our ability to develop new, high value-added engineered products and
long fiber & overlay papers;
iv. 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;
v. variations in, or changes to, our Neenah Restructuring action plans;
vi. cost and other effects of environmental compliance, cleanup, damages,
remediation or restoration, or personal injury or property damages
related thereto, such as costs associated with the NOVs issued by the
EPA and the 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;
the costs of environmental matters at our former Ecusta Division mill;
and the effect of complying with the wastewater discharge limitations
of the Spring Grove mill permits;
vii. the gain or loss of significant customers and/or on-going viability of
such customers;
viii. risks associated with our international operations, including local
economic and political environments and fluctuations in currency
exchange rates;
ix. geopolitical events, including war and terrorism;
x. enactment of adverse state, federal or foreign legislation or changes
in government policy or regulation;
xi. our ability to identify, finance and consummate future alliances or
acquisitions;
xii. adverse results in litigation;
xiii. disruptions in production and/or increased costs due to labor disputes;
xiv. the effect on us, if any, associated with the financial condition of
the Buyers of the Ecusta Division and any failure to satisfy their
indemnification obligations to us;
xv. our ability to realize the value of our timberlands; and
xvi. level of declared common stock dividends
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of our consolidated financial position and
results of operations is based upon our condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
condensed consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosures of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates, including those related to sales
returns, doubtful accounts, inventories, investments and financial derivative
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
-22-
GLATFELTER
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.
i. 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.
ii. 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.
iii. 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 amounts
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, 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.
iv. Accounting for defined-benefit pension plans, and any curtailments
thereof, requires various assumptions, including, but not limited to,
discount rates, expected rates of return on plan assets and future
compensation growth rates. Accounting for our retiree medical plans,
and any curtailments thereof, also requires various assumptions, which
include, but are not limited to, discount rates and annual rates of
increase in the per capita costs of health care benefits. We evaluate
these assumptions at least once each year or as facts and
circumstances dictate and make changes as conditions warrant. Changes
to these assumptions will increase or decrease our reported income,
which will result in changes to the recorded benefit plan assets and
liabilities.
v. 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 assured beyond a reasonable doubt.
vi. We have made estimates and accrued for liabilities assumed by the
buyers of the Ecusta Division. In addition, we have recorded
receivables due from the buyers to reimburse us for such liabilities
as well as for other expenses we were to pay on the buyers' behalf. We
continue to evaluate the collectibility of the receivables due from
the buyers and, at September 30, 2003, have determined that a reserve
for the full amount of such receivables was necessary.
Reference is made to our Annual Report on Form 10-K for the year ended December
31, 2002, Item 8 -- Financial Statements and Supplementary Data -- Note 2 and
the Notes included in this Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2003, for a discussion of our accounting policies
with respect to these and other items.
-23-
GLATFELTER
OVERVIEW
We are one of the world's leading manufacturers of specialty papers and
engineered products. During 2002 we completed the reorganization of the way we
manage our business. We now operate three business units: Engineered Products,
Long-Fiber & Overlay Papers and Printing and Converting Papers as well as
Tobacco Papers, which is being exited. We also completed our IMPACT project,
which included the installation of a worldwide enterprise resource planning
("ERP") information system.
RECENT DEVELOPMENTS
A number of events occurred over the comparative periods that impacted our
results of operations and financial condition, including:
- - In September 2003, we initiated the restructuring of our Neenah, WI
facility (the "Neenah Restructuring") which includes reallocating
resources, permanently shutting down certain equipment and processes and
eliminating approximately 200 positions. These actions resulted in pre-tax
charges totaling $2.1 million in the third quarter of 2003. Additional
charges are expected in the fourth quarter of 2003 totaling $14.4 million
to $24.3 million.
- - In the third quarter of 2003, we recorded an $11.5 million pre-tax charge
relating to our former Ecusta Division. Of this amount, $5.5 million was to
fully reserve for receivables due from parties that purchased the Ecusta
Division from us. The remaining $6.0 million is for contingent landfill
closure costs.
- - On October 1, 2003, we entered into a Consent Decree with certain
governmental agencies that requires us to contribute a total of $27.0
million, over the next eight months, in large part to fund the clean-up of
contamination of the Lower Fox River near our Neenah facility.
- - Our Board of Directors declared, in September 2003, a $0.09 per common
share cash dividend, or 49% lower than the previous dividend. On an
annualized basis, this reduction in the dividend will conserve
approximately $15.0 million in cash.
NEENAH RESTRUCTURING
In September 2003, we announced the strategic decision to reallocate resources
and abandoning a paper making machine and the deinking facility at our Neenah,
WI facility. The machines and processes to be abandoned had been primarily
supporting our Printing & Converting business unit. The Neenah Restructuring was
initiated to allow us to reallocate resources to more fully support
opportunities in higher growth, more profitable specialty markets and increase
operating flexibility. These initiatives, which are expected to be substantially
completed by the end of 2003, will result in the elimination of approximately
200 positions, or 55% of the facility's total workforce. The results of
operations for the third quarter of 2003 include related pre-tax charges of $2.1
million, of which $1.5 million are reflected in the consolidated income
statements as components of cost of products sold, and $0.6 million are
reflected as "restructuring charges." The $1.5 million pre-tax charge relates to
accelerated depreciation and an adjustment to net realizable value for spare
parts and supplies inventory related to equipment to be abandoned. The $0.6
million pre-tax restructuring charge relates to the curtailment of pension and
other retirement benefits associated with the termination of salaried employees.
The following table sets forth information with respect to Neenah Restructuring
charges.
THREE MONTHS
ENDED EXPECTED IN FOURTH
SEPTEMBER 30 QUARTER 2003
In thousands 2003 LOW HIGH
- ---------------------------------------------------------------------------
Depreciation on equipment to be
abandoned $ 973 $ 5,000 $ 5,000
Employee severance - 600 775
Pension and other retirement benefits 602 7,325 12,975
Contract termination and related costs 507 1,500 5,800
------- ------- ------
Total $ 2,082 $14,425 $24,550
======= ======= =======
-24-
GLATFELTER
RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 2003 VERSUS FIRST NINE MONTHS OF 2002
The following table sets forth summarized results of operations:
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2003 2002 CHANGE
- ---------------------------------------------------------------------------------------
Net sales $ 403,810 $ 403,086 $ 724
Energy sales, net 7,667 7,434 233
--------- --------- ---------
Total revenue 411,477 410,520 957
Cost of products sold 342,944 313,810 29,134
--------- --------- ---------
Gross profit 68,533 96,710 (28,177)
Operating expenses
Selling, general and administrative expenses 44,296 42,072 2,224
Restructuring charge 602 - 602
Unusual items 11,501 (3,508) 15,009
Loss (gain) on disposition of plant, equipment
and timberlands (31,144) (1,975) (29,169)
--------- --------- ---------
Total operating expenses 25,255 36,589 (11,334)
--------- --------- ---------
Operating income (loss) 43,278 60,121 (16,843)
Interest expense (10,728) (11,230) 502
Interest income 1,251 1,218 33
Other income (expense), net (1,239) 38 (1,277)
--------- --------- ---------
Nonoperating income (expense) (10,716) (9,974) (742)
--------- --------- ---------
Income from continuing operations before
income taxes 32,562 50,147 (17,585)
Income tax provision 11,856 18,099 (6,243)
--------- --------- ---------
Income from continuing operations 20,706 32,048 (11,342)
Discontinued operations
Loss from discontinued operations before income
taxes (513) (57) (456)
Income tax benefit (188) (20) (168)
--------- --------- ---------
Net loss from discontinued operations (325) (37) (288)
--------- --------- ---------
Net income $ 20,381 $ 32,011 $ (11,630)
========= ========= =========
Net income and diluted earnings per share for the first nine months of 2003 were
$20.4 million and $0.46, respectively, compared to $32.0 million and $0.73,
respectively, for the comparable period in 2002. The results for the first nine
months of 2003 and 2002 include the following significant items:
PRE-TAX AFTER-TAX EPS
-------------------------------
In thousands, except per share data Income (loss)
2003
Gain (loss) on disposition of plant, equipment
and timberlands
Gain on sale of timberlands $ 31,196 $ 19,965 $ 0.46
Loss on disposal of certain paper making
equipment (2,481) (1,582) (0.04)
Neenah Restructuring
Included as cost of products sold (1,480) (941) (0.02)
Restructuring charges (602) (383) (0.01)
Ecusta related charges (11,500) (7,315) (0.17)
2002
Escrow settlement 3,501 2,315 0.05
-25-
GLATFELTER
The above items increased earnings for the first nine months of 2003 by $9.7
million, or $0.22 per diluted share, and $2.3 million, or $0.05 per diluted
share, in the same period of 2002. Offsetting this increase in the first nine
months of 2003 was lower non-cash pension income, lower sales volumes and
selling prices and higher costs of products sold. Reported earnings in the
period-to-period comparison were favorably impacted by the weakening of the U.S.
Dollar versus the Euro and the resulting impact on translated results of
international operations. The weaker U.S. Dollar had an estimated favorable
impact on net income of approximately $2.6 million in the first nine months of
2003.
NET SALES
Our consolidated net sales totaled $403.8 million for the first nine months of
2003 compared to $403.1 million for the year-earlier first nine months, an
increase of $0.7 million. Reported net sales reflects the benefits of a weaker
U.S. Dollar relative to the Euro, which more than offset a decrease in
constant-currency average net selling price. In the period-to-period comparison,
the weaker U.S. Dollar benefited translated consolidated net sales of
international operations by approximately $20.7 million. Increased volumes in
our Long Fiber & Overlay and Engineered Products business units were more than
offset by lower volumes in Printing & Converting.
During the first nine months of 2003, sales volume for our Engineered Products
increased by approximately 8.4% compared to the first nine months of 2002, and
average net selling prices decreased slightly. Our Long-Fiber & Overlay Papers
business unit experienced 15.2% increased sales volume for its products and
average net selling prices increased 8.3%, although this price increase was
entirely due to a weaker U.S. Dollar in the comparison. In the Printing and
Converting Papers business unit, net sales volume declined 6.0% compared to the
same period a year ago, primarily due to weaker market-related demand in this
segment together with our decisions in early in 2003 not to pursue volume at
unattractive pricing. In addition, during the second and third quarters of 2003,
Printing & Converting Papers volume was adversely impacted by a current
willingness of some customers to purchase lower-cost, lower-quality alternatives
offered by competitors, particularly in the book publishing market. Average net
selling prices in this business unit declined slightly in the period-to-period
comparison.
Tobacco Papers represent a business unit that we are exiting pending completion
of our agreement to provide tobacco papers to an affiliate of one of the buyers
of our Ecusta Division. We expect sales from this unit to approximate $8.0
million to $10.0 million in 2003. The lower proportion of tobacco papers sales
relative to our total sales is expected to have a favorable impact on our gross
margin percentage.
ENERGY SALES, NET
Energy sales, net, totaled $7.7 million in the first nine months of 2003
compared with $7.4 million in the comparable period of 2002. Energy sales
represent net revenue earned from the sale of excess power generated by our
Spring Grove, PA facility.
COST OF PRODUCTS SOLD AND GROSS PROFIT
Cost of products sold ("COS") for the first nine months of 2003 includes $1.5
million of Neenah Restructuring related charges, and $1.2 million to adjust the
carrying amount of certain inventory to their lower of cost or market ("LCM").
Including these charges, COS increased $29.1 million, or 9.3%, in the
period-to-period comparison. Despite lower sales volumes, COS increased
primarily due to a $14.4 million unfavorable effect of the weakening of the U.S.
Dollar relative to the Euro, and the resulting impact on translated COS of our
international operations. The increase in COS also was attributable to
approximately $8.8 million of lower non-cash pension income, $5.4 million of
higher market pulp and wastepaper costs, and $2.8 million of higher
energy-related costs. In addition, due to soft demand, we took market-related
downtime at the Spring Grove, PA and Neenah, WI facilities. Further, beginning
in the second quarter of 2003, we commenced the scheduled shutdown and rebuild
of a long-fiber & overlay paper machine in Gernsbach. (This rebuild was
completed in September 2003.) Shutdowns result in reduced production leading to
unfavorable manufacturing variances that negatively affect costs of products
sold.
Gross profit in the first nine months of 2003 totaled $68.5 million, a decline
of $28.2 million from the first nine months of 2002. Our gross margin was 17.0%
and 24.0% in the first nine months of 2003 and 2002, respectively, reflecting
the net effect of the factors discussed above in Net Sales and Cost of Products
Sold and Gross Profit.
-26-
GLATFELTER
Net non-cash pension income reduced COS by $11.3 million in the first nine
months of 2003 compared with $20.1 million in the same period of 2002. Our net
non-cash pension income allocable to cost of products sold is expected to total
$14.7 million for the full year 2003 compared to $26.9 million in 2002. Non-cash
pension income is estimated each year using certain actuarial assumptions and
certain other factors, including the fair value of our pension assets as of the
first date of the calendar year. Although our pension plan is considerably
overfunded, during 2002, the fair value of our pension assets decreased
significantly.
Additional Neenah Restructuring charges that will be recorded as COS in the
fourth quarter of 2003 are expected to be approximately $6.5 million to $10.8
million. Such charges are to fully depreciate equipment to be abandoned and for
other costs related to the restructuring.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES
In the first nine months of 2003, SG&A expenses totaled $44.3 million compared
with $42.1 million in the same period a year ago. Effective cost control
initiatives were more than offset by a $2.3 million reduction in non-cash
pension income, a $1.5 million increase in depreciation expense related to our
investment in a worldwide ERP information system and a $1.2 million unfavorable
effect of a weaker U.S. Dollar.
Net non-cash pension income reduced SG&A expenses in the first nine months of
2003 by $1.6 million compared with $3.9 million in the same period of 2002. For
the full year 2003, non-cash pension income allocable to SG&A expenses is
projected to be $2.0 million compared to $5.7 million in 2002.
RESTRUCTURING CHARGE
We recorded a $0.6 million charge in the third quarter of 2003 related to the
curtailment of pension and other retirement benefits for salaried employees to
be terminated at our Neenah facility. We expect to record in the fourth quarter
of 2003, as restructuring charges related to the Neenah facility, additional
pension and other retirement benefits and severance costs totaling $7.9 million
to $13.7 million.
UNUSUAL ITEMS
Unusual items in the first nine months of 2003 reflect a $11.5 million charge
relating to our former Ecusta Division, which was sold in 2001. Under the Ecusta
Division acquisition agreement, we are indemnified for certain liabilities that
have been assumed by the buyers. We had previously accrued liabilities related
to certain post-retirement benefits, workers compensation claims and vendor
payables and established a corresponding receivable due from the buyers. We paid
the portion of these liabilities that became due and sought reimbursement from
the buyers, which, to date, they have refused. The charge includes $5.5 million
to fully reserve such receivables and an additional $6.0 million related to
contingent landfill closure costs at the Ecusta facility for which we are
likewise indemnified.
In the first nine months of 2002, we recognized a $3.5 million gain from the
settlement of an escrow account with the previous owners of our Schoeller &
Hoesch Division.
LOSS (GAIN) ON DISPOSITION OF PLANT, EQUIPMENT AND TIMBERLANDS
During the first nine months of 2003 we recognized a net gain from the sale of
plant, equipment and timberlands of $31.1 million. This primarily represents a
$31.2 million gain from the sale in March 2003 of approximately 25,500 acres of
timberlands (the "Maryland Timberlands") to a subsidiary of The Conservation
Fund, a non-profit land conservation fund (the "Timberland Buyer").
As consideration for the Maryland Timberlands, we received a 10-year note from
the Timberland Buyer in the principal amount of $37.9 million (the "Note"). The
Note bears interest at 3.22% per annum with interest-only payments due in
quarterly installments. After five years the interest rate on the Note will be
adjusted to the then existing bank prime rate. The full amount of the Note is
secured by a letter of credit issued by a financial institution. As more fully
discussed in Liquidity and Capital Resources, we pledged the Note and letter of
credit as collateral for a $34.0 million term loan from a financial institution.
In connection with the Maryland Timberland sale, we entered into a Supply
Agreement (the "Agreement") with the Timberland Buyer pursuant to which we
agreed to purchase from the Timberland Buyer a minimum of 275,400 tons of pine
pulpwood at market prices over the eight-year term of the Agreement.
In the first quarter of 2004, we expect to complete the sale of approximately
2,100 acres of timberlands for a total of $24.8 million in cash. These
transactions are expected to result in pre-tax gains of approximately $24.4
million.
-27-
GLATFELTER
INTEREST EXPENSE, NET
Interest expense, net consisted of the following:
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2003 2002 CHANGE
- --------------------------------------------------------------------------------------------
Interest expense $(10,728) $(11,230) $502
Interest income 1,251 1,218 33
-------- -------- ----
Interest expense, net $ (9,477) $(10,012) $535
======== ======== ====
Interest expense decreased in the comparison primarily due to lower average debt
outstanding in the first nine months of 2003 compared to the prior-year period.
On average, total debt outstanding declined approximately $11.8 million. The
weakening of the U.S. Dollar compared to the Euro, and the resulting impact on
translated interest expense for U.S. Dollar results partially offset the
favorable effect of lower debt balances.
OTHER INCOME (EXPENSE), NET
Other income (expense), net totaled $1.2 million in the first nine months of
2003, primarily due to realized foreign currency transaction losses and net
expense on cross-currency swaps.
INCOME TAXES
Income taxes decreased $6.2 million to $11.9 million for the first nine months
of 2003 compared to the same period of 2002. The reduction was primarily due to
a $17.6 million decrease in earnings before income taxes.
DISCONTINUED OPERATIONS
In July 2003, we sold our Wisches, France subsidiary for approximately $2.0
million and the assumption of approximately $1.1 million of debt owed to us by
our subsidiary. At closing, we received $1.5 million, net of cash divested, and
the remaining amounts are to be paid in annual installments over 2 years
beginning July 2004. This subsidiary is reported as discontinued operations for
all prior periods presented. Prior to the sale, the underlying assets were
recorded at the lower of carrying amount or fair value less cost to sell.
Accordingly, loss from discontinued operations for the nine months ended
September 30, 2003, includes a charge of $0.5 million, after tax, to write-down
the carrying value of the assets prior to the sale. Revenue included in
determining results from discontinued operations totaled $0 and $2.6 million for
the three months and nine months ended September 30, 2003, respectively, and
$0.9 million and $2.4 million for the three months and nine months ended
September 30, 2002, respectively. This operation was previously reported in the
Engineered Products business unit.
-28-
GLATFELTER
THIRD QUARTER OF 2003 VERSUS THIRD QUARTER OF 2002
The following table sets forth summarized results of operations for the third
quarter of 2003 and 2002:
THREE MONTHS ENDED
SEPTEMBER 30
In thousands 2003 2002 CHANGE
- ---------------------------------------------------------------------------------------------
Net sales $131,904 $135,105 $ (3,201)
Energy sales, net 2,615 2,735 (120)
-------- -------- --------
Total revenue 134,519 137,840 (3,321)
Cost of products sold 114,562 104,281 10,281
-------- -------- --------
Gross profit 19,957 33,559 (13,602)
Operating expenses
Selling, general and administrative expenses 14,525 13,445 1,080
Restructuring charge 602 - 602
Unusual items 11,501 (3,508) 15,009
Loss (gain) on disposition of plant, equipment
and timberlands 257 (931) 1,188
-------- -------- --------
Total operating expenses 26,885 9,006 17,879
-------- -------- --------
Operating income (6,928) 24,553 (31,481)
Interest expense (3,674) (3,542) (132)
Interest income 564 156 408
Other income (expense), net (196) 41 (237)
-------- -------- --------
Nonoperating income (expense) (3,306) (3,345) 39
-------- -------- --------
Income (loss) from continuing operations
before income taxes (10,234) 21,208 (31,442)
Income tax provision (benefit) (3,569) 7,859 (11,428)
-------- -------- --------
Income (loss) from continuing operations (6,665) 13,349 (20,014)
Discontinued operations
Loss from discontinued operations before taxes - (58) 58
Income tax benefits - (20) 20
-------- -------- --------
Net loss from discontinued operations - (38) 38
-------- -------- --------
Net income (loss) $ (6,665) $ 13,311 $(19,976)
======== ======== ========
A net loss for the third quarter of 2003 totaled $6.7 million, or $0.15 per
diluted share, compared to earnings of $13.3 million, or $0.30 per diluted
share, in the third quarter of 2002. The third quarter 2003 and 2002 results
include the following significant items:
PRE-TAX AFTER-TAX EPS
--------------------------------------
In thousands, except per share data Income (loss)
2003
Gain (loss) on disposition of plant, equipment
and timberlands
Loss on disposal of certain paper making
equipment (1,459) (928) (0.02)
Neenah Restructuring
Included as cost of products sold (1,480) (941) (0.02)
Restructuring charges (602) (383) (0.01)
Ecusta related charges (11,500) (7,315) (0.17)
2002
Escrow settlement 3,501 2,315 0.05
The above items decreased earnings for the third quarter of 2003 by $9.6
million, or $0.22 per diluted share, and increased the third quarter of 2002 by
$2.3 million, or $0.05 per diluted share. In addition to the effect of these
items in the third quarter of 2003, lower non-cash pension income, lower sales
volumes and selling prices and higher costs of products sold adversely impacted
earnings in the comparison. The weakening of the U.S. Dollar versus the Euro and
the resulting impact on translated results of international operations favorably
impacted earnings in the quarter-to-quarter comparison by approximately $0.5
million.
-29-
GLATFELTER
NET SALES
Our consolidated net sales totaled $131.9 million for the third quarter of 2003
compared to $135.1 million for the year-earlier quarter, a decrease of $3.2
million, or 2.4%. The decline was primarily attributable to weaker demand and
pricing pressure in the Printing & Converting business unit and to lower tobacco
paper sales related to the Company's previously stated intention to eliminate
tobacco paper products. These factors more than offset a $5.0 million favorable
effect of a weaker U.S. dollar on translated results of international
operations. On a constant currency basis, average net selling prices declined
moderately in the quarter-to-quarter comparison. The Company's Engineered
Products and Long-Fiber & Overlay business units experienced solid sales growth
in the quarter-to-quarter comparison.
ENERGY SALES, NET
Energy sales, net, totaled $2.6 million in the third quarter of 2003 compared
with $2.7 million in the comparable quarter of 2002. Energy sales represent net
revenue earned from the sale of excess power generated by our Spring Grove, PA
facility.
COST OF PRODUCTS SOLD AND GROSS PROFIT
COS for the third quarter of 2003 includes $1.5 million of Neenah Restructuring
related charges, and $1.2 million to adjust the carrying amount of certain
inventory to their lower of cost or market. Including these charges, COS
increased $10.3 million, or 9.9%, in the quarter-to-quarter comparison. COS
increased despite lower sales volumes primarily due to several items, including
approximately $3.4 million unfavorable impact of a weaker U.S. Dollar relative
to the Euro. In addition, the increase in COS consisted of approximately $3.2
million of lower non-cash pension income, $1.7 million of higher market pulp and
wastepaper costs, and $0.5 million of energy-related costs. In addition, due to
soft demand, we took market-related downtime at the Spring Grove, PA and Neenah,
WI facilities in the third quarter of 2003. Further, in the third quarter of
2003 we completed the scheduled shutdown and rebuild of a long-fiber & overlay
paper machine in Gernsbach. Downtime results in reduced production leading to
unfavorable manufacturing cost variances that adversely affect cost of products
sold.
Net non-cash pension income reduced COS by $3.4 million in the third quarter
of 2003 compared with $6.6 million in the year-earlier quarter.
Gross profit in the third quarter of 2003 totaled $20.0 million, a decline of
$13.6 million from the year-earlier quarter. Our gross margin was 15.1% and
24.8% in the third quarter of 2003 and 2002, respectively, reflecting the net
effect of the factors discussed above in Net Sales and Cost of Products Sold and
Gross Profit.
Additional Neenah Restructuring charges that will be recorded as COS in the
fourth quarter of 2003 are expected to be approximately $6.5 million to $10.8
million. Such charges are to fully depreciate equipment to be abandoned and for
other costs related to the restructuring.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES
In the third quarter of 2003, SG&A expenses totaled $14.5 million compared with
$13.4 million in the year-earlier quarter. Effective cost control initiatives
were more than offset by a $0.8 million reduced amount of non-cash pension
income, $0.7 million unfavorable effect of a weaker U.S. Dollar on translated
SG&A expenses of international operations, and a $0.5 million increase in
depreciation expense related to our investment in a worldwide ERP information
system. Net non-cash pension income reduced SG&A expenses by $0.5 million in
the third quarter of 2003 compared with $1.3 million in the third quarter of
2002.
RESTRUCTURING CHARGE
We recorded a $0.6 million charge related to the curtailment of pension and
other retirement benefits for salaried employees to be terminated at our Neenah
facility. We expect to record in the fourth quarter of 2003, as Restructuring
charges, additional pension and other retirement benefits and severance costs
totaling $7.9 million to $13.7 million.
UNUSUAL ITEMS
Unusual items in the first nine months of 2003 reflect a $11.5 million charge
relating to our former Ecusta Division, which was sold in 2001. Under the Ecusta
Division acquisition agreement, we are indemnified for certain liabilities that
have been assumed by the buyers. We had previously accrued liabilities related
to certain post-retirement benefits, workers compensation claims and vendor
payables and established a corresponding receivable due from the buyers. We paid
the portion of these liabilities that became due and sought reimbursement from
the buyers, which, to date, they have refused. The 2003 charge includes $5.5
million to fully reserve such receivables and an additional $6.0 million related
to contingent landfill closure costs at the Ecusta facility for which we are
likewise indemnified.
-30-
GLATFELTER
In the third quarter of 2002, we recognized a $3.5 million gain from the
settlement of an escrow account with the previous owners of our Schoeller &
Hoesch Division.
INTEREST EXPENSE, NET
Interest expense, net consisted of the following:
THREE MONTHS ENDED
SEPTEMBER 30
In thousands 2003 2002 CHANGE
- ----------------------------------------------------------------------------------------------
Interest expense $(3,674) $(3,542) $ 132
Interest income 564 156 (408)
------- ------- -----
Interest expense, net $(3,110) $(3,386) $(276)
======= ======= =====
Interest expense increased in the quarter-to-quarter comparison primarily due to
a $17.6 million increase in average debt outstanding in the current quarter
compared to the prior-year quarter, partially offset by lower rates. Interest
income increased $0.4 million in the comparison primarily due to interest earned
on a note receivable in connection with the Maryland Timberland sale.
INCOME TAXES
Income tax benefits totaled $3.6 million in the third quarter of 2003 compared
with income tax provision of $7.9 million in the year-ago quarter. The change in
the comparison is due to the loss from continuing operations in the 2003 third
quarter compared with pre-tax income of $21.2 million in the third quarter of
2002.
-31-
GLATFELTER
BUSINESS UNITS
We manage our organization along separate business units: Engineered Products,
Long-Fiber & Overlay Papers, and Printing and Converting Papers, as well as
Tobacco Papers, which is being exited. In the latter part of 2002, we completed
the implementation of a new information system to provide, among other things,
more complete business unit reporting. However, we are unable to provide
detailed business unit profitability reporting for periods prior to the system
implementation.
Results of individual business units are presented based on our management
accounting practices and management structure. There is no comprehensive,
authoritative body of guidance for management accounting equivalent to
accounting principles generally accepted in the United States of America;
therefore, the financial results of individual business units are not
necessarily comparable with similar information for any other company. The
management accounting process uses assumptions and allocations to measure
performance of the business units. Methodologies are refined from time to time
as management accounting practices are enhanced and businesses change. The costs
incurred by support areas not directly aligned with the business unit are
allocated primarily based on an estimated utilization of support area services.
The following tables set forth net sales by business unit:
THREE MONTHS ENDED
SEPTEMBER 30 PERCENT OF TOTAL
Dollars in thousands 2003 2002 CHANGE 2003 2002
- ------------------------------------------------------------------------------------------------------
BUSINESS UNIT
Engineered Products $ 37,194 $ 31,122 $ 6,072 28.2% 23.0%
Long-Fiber & Overlay Papers 32,026 26,034 5,992 24.3 19.3
Printing and Converting Papers 61,070 72,596 (11,526) 46.3 53.7
Tobacco Papers 1,614 5,353 (3,739) 1.2 4.0
-------- -------- ------- ----- -----
Total $131,904 $135,105 $(3,201) 100.0% 100.0%
======== ======== ======= ===== =====
NINE MONTHS ENDED
SEPTEMBER 30 PERCENT OF TOTAL
Dollars in thousands 2003 2002 CHANGE 2003 2002
- ------------------------------------------------------------------------------------------------------
BUSINESS UNIT
Engineered Products $103,005 $ 95,294 $ 7,711 25.5% 23.7%
Long-Fiber & Overlay Papers 96,696 77,470 19,226 24.0 19.2
Printing and Converting Papers 195,974 214,979 (19,005) 48.5 53.3
Tobacco Papers 8,135 15,343 (7,208) 2.0 3.8
-------- -------- -------- ----- -----
Total $403,810 $403,086 $ 724 100.0% 100.0%
======== ======== ======== ===== =====
-32-
GLATFELTER
The following table sets forth profitability information by business unit and
the composition of consolidated income before income taxes:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
Operating Operating
Profit Operating Profit Operating
Dollars in thousands (Loss) Margin (Loss) Margin
- ----------------------------------------------------------------------------------------------------------
BUSINESS UNIT
Engineered Products $ 1,253 3.4% $ 2,229 2.2%
Long-Fiber & Overlay Papers 1,156 3.6 8,463 8.8
Printing and Converting Papers (831) (1.4) (1,546) (0.8)
Tobacco Papers (1,166) (72.2) (3,979) (48.9)
-------- --------
Total Business Unit 412 0.3 5,167 1.3
Energy sales, net 2,615 7,667
Pension income, net 3,885 12,883
Neenah Restructuring - recorded as cost of
products sold (1,480) (1,480)
Restructuring charges (602) (602)
Unusual items (11,501) (11,501)
(Loss) gain on disposition of plant, equipment and
timberlands (257) 31,144
-------- --------
Total consolidated operating income (6,928) 43,278
Interest expense, net (3,674) (10,728)
Other income (expense), net 368 12
-------- --------
Income from continuing operations before income
taxes $(10,234) $ 32,562
======== ========
As discussed above, due to soft demand, during the second and third quarters of
2003, we took market-related downtime at the Spring Grove, Neenah, WI and
Gernsbach, Germany mills. Further, we commenced the scheduled shutdown and
rebuild of a long-fiber & overlay paper machine in Gernsbach. During the second
quarters of 2003 and 2002, we completed our annually scheduled maintenance
shutdown at our Spring Grove mill. Shutdowns result in reduced production
leading to unfavorable manufacturing variances that negatively affect costs of
products sold.
Management evaluates results of operations before energy sales, non-cash pension
income, restructuring related charges, unusual items and effects of asset
disposition because it believes this is a more meaningful representation of the
operating performance of its core papermaking businesses and the profitability
of business units. This presentation is closely aligned with the management and
operating structure of our company. It is also on this basis that management
performance is evaluated internally and by the Company's Board of Directors.
OUTLOOK
Thus far in 2003, demand for printing and converting papers has remained
sluggish and pricing has been under intense pressure. Historically, changes in
pulp price have preceded changes in selling price for this business unit by
several months. However, notwithstanding recent upward trends in pulp market
prices relative to prior years, this trend may not repeat itself due to the
competitive climate in the marketplace. The outlook for the Engineered Products
and Long-Fiber & Overlay Papers business units is relatively stable.
COS is subject to variations in market prices for, among others, market pulp,
wastepaper and energy, in addition to fluctuations in the value of the U.S.
Dollar relative to the Euro on translated results of international operations.
Although we are unable to predict with certainty the extent or composition of
further changes, if any, we believe the extent or magnitude of any additional
cost changes may be moderate during the balance of 2003 relative to current
levels. The cost of market pulp and wastepaper is expected to be higher in 2003
than in 2002 based on price increases in the pulp market during the first nine
months of 2003, our evaluation of market trends, and indicators including, but
not limited to, short term prices for market pulp, chip availability, capacity
and market consumption.
-33-
GLATFELTER
Market prices for natural gas significantly influence our Neenah and Gernsbach
facilities' production costs. The Neenah and Gernsbach facilities require
approximately 1.4 million decatherms and 0.9 million decatherms of heat,
respectively, annually. A significant portion of the Neenah facility's steam
requirements is met through a long-term supply agreement with Minergy
Corporation. The cost of steam purchased from Minergy is based on the market
price for natural gas. Based on expected production levels, a hypothetical $1
per decatherm increase in the cost of gas (approximately 20%) would increase the
cost of operating our Neenah facility by approximately $1.4 million per year. In
some instances, we can partially mitigate the effects of price increases in
natural gas by internally generating a portion of our steam needs at the Neenah
facility. Under a supply contract, the cost of gas consumed by Gernsbach is
based on the price of oil. Thus far during 2003, Gernsbach has experienced much
less volatility in its cost of natural gas than that of our Neenah facility.
LIQUIDITY AND CAPITAL RESOURCES
Total assets were $1.0 billion and $953.2 million, and shareholders' equity was
$379.1 million and $373.8 million, at September 30, 2003 and December 31, 2002,
respectively. Our business is capital intensive and requires significant
expenditures for new or enhanced equipment, for environmental compliance matters
and to support our business strategy and research and development efforts to
develop new or enhanced products. Liquidity is provided primarily from operating
cash flow together with credit facilities. In addition, during the first nine
months of 2003, we completed the 25,500-acre sale of timberlands as part of our
ongoing initiative to realize value from all of our assets.
The following table summarizes cash flow information.
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2003 2002 CHANGE
- --------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period $ 32,219 $ 88,015 $(55,796)
Cash provided by (used for)
Operating activities 30,075 47,316 (17,241)
Investing activities (52,632) (42,145) (10,487)
Financing activities 4,409 (70,480) 74,889
Discontinued operations (304) 110 (414)
Effect of exchange rate changes on cash 898 914 (16)
-------- -------- --------
Net cash used (17,554) (64,286) 46,732
-------- -------- --------
Cash and cash equivalents at end of period $ 14,665 $ 23,730 $ (9,065)
======== ======== ========
An analysis of cash flows follows:
Operating Activities. Cash provided by operating activities totaled $30.1
million for the first nine months of 2003 and $47.3 million in the comparable
period in 2002. Operating cash flow declined primarily due to lower earnings and
an increase in accounts receivable and inventory. Although the Maryland
Timberland sale resulted in an after-tax gain of $20.0 million, cash will be
received from the Timberland Buyer upon payment of its 10-year Note. Cash from
the Maryland Timberland sale was realized by pledging the Note as collateral for
a $34.0 million term loan. The resulting cash proceeds are reflected as cash
provided by financing activities.
Investing Activities. Net cash used in investing activities totaled $52.6
million in the first nine months of 2003 compared with $42.1 million in the
first nine months of 2002. Capital expenditures during 2003 primarily relate to
the New Century Project and the rebuild of a papermaking machine in Gernsbach,
Germany.
Financing Activities. Net financing activities provided $4.4 million of cash
during the first nine months of 2003 compared with a $70.5 million use of cash
in the first nine months of 2002. The primary source of cash from financing
activities during the first nine months of 2003 was the $34.0 million borrowed
under a term loan secured by the pledge of the Note received in connection with
the Maryland Timberland sale. Proceeds from this borrowing were partially offset
by a $7.2 million net reduction in borrowings under our revolving credit
facility and $23.0 million of cash dividends paid on our common stock during the
first nine months of 2003. In the first nine months of 2002, we completed a
refinancing
-34-
GLATFELTER
of our old revolving credit facility and repaid $133.0 million of debt
using 71.1 million of existing cash and $61.9 of borrowings under a new
facility. During the first nine months of 2002, $22.7 million of cash
dividends paid were partially offset by $11.5 million of proceeds from the
exercise of stock options at a time when the market price of our common
stock exceeded the exercise price of stock options. In September 2003, the
Board of Directors declared a common stock cash dividend that was 49% lower
than the previous dividend amount. On an annualized basis, this reduction
in the dividend will conserve approximately $15.0 million in cash.
The following table sets forth our outstanding indebtedness:
SEPTEMBER 30 December 31
In thousands 2003 2002
- ---------------------------------------------------------------------------------
Revolving credit facility, due June 2006 $ 66,560 $ 67,681
6 7/8% Notes, due July 2007 150,000 150,000
Note payable - SunTrust, due March 2008 34,000 -
Other notes, various 1,575 1,823
-------- --------
Total long-term debt 252,135 219,504
Less current portion (817) (795)
-------- --------
Long-term debt, excluding current portion $251,318 $218,709
======== ========
On June 24, 2002, we entered into an unsecured $102.5 million multi-currency
revolving credit facility (the "Facility") with a syndicate of three major
banks. An additional $22.5 million was added to the Facility on September 24,
2002 with a fourth major bank. The Facility, which replaced an old facility,
enables us to borrow up to the equivalent of $125.0 million in certain
currencies. Borrowings incur interest based on the domestic prime rate or a
Eurocurrency rate, at our option, plus a margin ranging from .525% to 1.05%.
Borrowings can be made for any time period from one day to six months. The
margin and a facility fee on the commitment balance are based on the higher of
our debt ratings as published by Standard & Poor's and Moody's. The Facility
requires us to meet certain leverage and interest coverage ratios, with both of
which we are in compliance at September 30, 2003.
The Facility also provides an additional source of liquidity in the form of a
$50.0 million accounts receivable securitization program. Should we elect to do
so, we have the ability to securitize certain eligible domestic accounts
receivable. Although the Facility provides this financing vehicle, we have no
plans to use it in the foreseeable future.
As the Facility matures on June 24, 2006, it has been classified on the Balance
Sheet as "Long-term debt." As of September 30, 2003, $66.6 million was
outstanding and an additional $58.4 million was available for borrowing under
the Facility.
In conjunction with our refinancing, we entered into a cross-currency swap
transaction with a major financial institution, effective June 24, 2002, with a
termination date of June 24, 2006. Under this transaction, we swapped $70.0
million for approximately E73 million. We pay interest on the Euro portion
of the swap at a floating Eurocurrency Rate, plus applicable margins and receive
interest on the dollar portion of the swap at a floating U.S. Dollar LIBOR rate,
plus applicable margins. The cross-currency swap effectively hedges exposure to
foreign currency risk associated with certain intercompany borrowings through
2006.
On March 21, 2003, we sold approximately 25,500 acres of timberlands and
received as consideration a $37.9 million 10-year interest-bearing Note from the
buyer. We pledged the Note as collateral under a $34.0 million promissory note
payable to SunTrust Financial (the "Note Payable"). The Note Payable bears
interest at a fixed rate of 3.82% for five years at which time we can elect to
renew the obligation.
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 the retired Regional Chairman of PNC Bank National
Association, Philadelphia/South Jersey markets.
-35-
GLATFELTER
In 1997, we issued $150.0 million 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 our option at any time at a
calculated redemption price plus accrued and unpaid interest to the date of
redemption, and constitute unsecured and unsubordinated indebtedness. The net
proceeds from the sale of the Notes were used primarily to repay certain
short-term unsecured debt and related interest.
CAPITAL SPENDING During the first nine months of 2003, capital expenditures
totaled $56.0 million compared with $42.6 million in the first nine months of
2002, and $51.2 million for the full year 2002. Capital expenditures are
expected to be $65.3 million for the full year 2003. Beginning in 2004 and for
the foreseeable future thereafter, capital expenditures are expected to be at or
below levels of annual depreciation. Major capital spending initiatives
currently underway consist of the following:
New Century Project - The New Century Project is an initiative underway
at our Spring Grove facility under the Voluntary Advanced Technical
Incentive Program as set forth by the EPA's "Cluster Rule". This project
includes new hardwood brownstock washing, installation of hardwood oxygen
delignification, 100% chlorine dioxide substitution on both the hardwood
and softwood fiber lines, and a hardwood ozone bleaching system. To comply
with the Cluster Rule, we will also install equipment to reduce air
emissions of air pollutants and odorous compounds.
Long-Fiber & Overlay Papers ("L&OP") Gernsbach - During 2002, we began
our project to expand long-fiber and overlay papers capacity in Gernsbach,
Germany. The rebuild of our #9 paper machine was completed in the third
quarter of 2003 and is expected to allow us to produce new and advanced
products and achieve greater cost efficiency.
The following table summarizes capital spending by major project, by year:
L&OP
In thousands New Century Gernsbach
- -------------------------------------------------------------------------------
Prior to 2003 $12.3 $ 5.6
During the first nine months of 2003 19.3 24.4
----- -----
Through September 30, 2003 31.6 30.0
Forecast
2003 3.7 3.9
After 2003 1.5 -
----- -----
Project total $36.8 $33.9
===== =====
DIVIDEND PAYMENTS During the first nine months of 2003 and 2002, and for the
full year 2002, cash dividends paid on common stock totaled $22.9 million, $22.7
million and $30.3 million, respectively. Our Board of Directors determines what,
if any, dividends will be paid to our shareholders. Dividend payment decisions
are based upon then-existing factors and conditions and, therefore, historical
trends of dividend payments are not necessarily indicative of future payments.
Our Board of Directors declared, in September 2003, a $0.09 per common share
cash dividend, or 49% lower than the previous dividend amount. On an annualized
basis, this reduction in the dividend will conserve approximately $15.0 million
in cash.
NEENAH RESTRUCTURING The Neenah Restructuring plan is expected to be completed
during the end of the fourth quarter of 2003 and includes, among other actions,
the elimination of approximately 200 positions and costs to terminate or modify
certain contractual arrangements. The cash required to complete this initiative
is expected to total approximately $3.1 million to $8.4 million.
-36-
GLATFELTER
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. 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. (See Item 1 - Financial Statements - Note 15 for a summary of
significant environmental matters.)
On October 1, 2003, the U.S. Department of Justice lodged a consent decree
regarding Operable Unit 1 of the Fox River site ("the OU1 Consent Decree") with
the U.S. District Court for the Eastern District of Wisconsin. Under terms of
the OU1 Consent Decree, Glatfelter and WTM I each agreed to pay approximately
$25 million for remediation costs. The OU1 Consent Decree also requires that
Glatfelter and WTM I each pay the governments $375,000 for past response costs,
$1.5 million for NRDs for the Fox River site, and $150,000 for NRD assessment
costs. Each of these payments is being made in return for credit to be applied
toward each settling company's potential liability for response costs and NRDs
associated with the river, as a whole. The OU1 Consent Decree does not resolve
our potential liability related to the Fox River site, other than with regard to
the remediation of OU1 (as discussed above).
We previously recorded reserves totaling $28.8 million for potential liabilities
associated with the Fox River environmental matters. Based on our assessment of
potential exposure to losses related to this matter, we believe this reserve to
be adequate and no additional amounts have been recorded. Should facts and
circumstances change, additional reserves may be necessary.
The OU1 Consent Decree requires the Company to pay amounts under the following
schedule:
In thousands
November 1, 2003 $ 525
January 31, 2004 250
March 31, 2004 10,500
June 30, 2004 15,750
-------
Total $27,025
=======
The amount due on November 1, 2003 was paid.
We expect to meet all of our other near- and longer-term cash needs from a
combination of operating cash flow, cash and cash equivalents, sale of
additional timberlands, our existing credit facility or other bank lines of
credit and other long-term debt. However, as discussed in Item 1 - Financial
Statements - - Note 15, an unfavorable outcome of various environmental matters
could have a material adverse impact on our consolidated financial position,
liquidity and/or results of operations.
-37-
GLATFELTER
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Our market risk exposure primarily results from changes in interest rates and
currency exchange rates. At September 30, 2003, we had debt outstanding of
approximately $252.1 million, of which $66.6 million, or 26.4% was at variable
interest rates.
The table below presents average principal outstanding and related interest
rates for the next five years and the amounts of cross-currency swap agreements.
Fair values included herein have been determined based upon rates currently
available to us for debt with similar terms and remaining maturities.
Period or Year Ended December 31 At September 30, 2003
-----------------------------------------------------------------------------
Carrying Fair
Dollars in thousands 2003 2004 2005 2006 2007 Value Value
-----------------------------------------------------------------------------
LONG-TERM DEBT
Average principal outstanding
At fixed interest rates $180,349 $184,654 $184,187 $184,000 $115,250 $185,575 $195,317
At variable interest rates 65,416 66,560 66,560 32,171 - 66,560 66,560
Weighted-average interest rate
On fixed interest rate debt 6.38% 6.31% 6.31% 6.31% 5.97%
On variable interest rate debt 2.75 2.45 2.45 2.45 -
CROSS-CURRENCY SWAP
Pay variable - EURIBOR E 72,985 E 72,985 E 72,985 E 72,985 $(15,312) $(15,312)
Variable rate payable 2.89% 2.89% 2.89% 2.89%
Receive variable - US$ LIBOR $ 70,000 $ 70,000 $ 70,000 $ 70,000
Variable rate receivable 1.79% 1.79% 1.79% 1.79%
Variable-rate debt outstanding represents borrowings under our revolving credit
facility that incur interest based on the domestic prime rate or a Eurocurrency
rate, at our option, plus a margin. At September 30, 2003, the interest rate
paid was 2.45%. A hypothetical 100 basis point increase or decrease in the
interest rate on variable rate debt would increase or decrease annual interest
expense by $0.6 million. At September 30, 2003, approximately $35.0 million of
variable-rate debt was recorded at S&H, our wholly-owned subsidiary in
Gernsbach, Germany, where the functional currency is the Euro.
At September 30, 2003, we had a cross-currency swap agreement outstanding with a
termination date of June 24, 2006. Under this transaction, we swapped $70.0
million for approximately E73.0 million and pay interest on the Euro
portion of the swap at a floating Eurocurrency Rate (EURIBOR), plus applicable
margins and receive interest on the dollar portion of the swap at a floating
U.S. Dollar LIBOR rate, plus applicable margins. The cross-currency swap is
designed to provide protection from the impact that changes in currency rates
have on certain U.S. Dollar-denominated debt obligations recorded at our S&H
subsidiary in Gernsbach, Germany. The cross currency swaps are recorded at fair
value on the Consolidated Balance Sheet under the caption "Accrued compensation,
other expenses and deferred income taxes." Changes in fair value are recognized
in earnings as "Other income (expense)" in the Consolidated Statements of
Income. Changes in fair value of the cross-currency swap transaction are
substantially offset by changes in the value of U.S. Dollar denominated
obligations when they are re-measured in Euros, the functional currency of S&H.
We are subject to certain risks associated with changes in foreign currency
exchange rates to the extent our operations are conducted in currencies other
than the U.S. Dollar. During the nine months ended September 30, 2003,
approximately 71% of our net sales were shipped from the United States, 24% from
Germany, and 5% from other international locations.
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ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our chief executive officer and our principal financial officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of September 30,
2003, have concluded that, as of the evaluation date, our disclosure controls
and procedures were effective.
CHANGES IN INTERNAL CONTROLS
There was no change in our internal control over financial reporting during the
three months ended September 30, 2003, that has materially affected or is
reasonably likely to materially affect our internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are incorporated by reference or filed herewith.
10.1 Consent Decree for Remedial Design and Remedial Action at
Operable Unit 1 of the Lower Fox River and Green Bay site
by and among the United States of America and the State
of Wisconsin v. P. H. Glatfelter Company and WTMI Company
(f/k/a Wisconsin Tissue Mills, Inc.), incorporated herein
by reference to Exhibit 10.2 of our Form 8-K/A (Amendment
No. 1) dated October 1, 2003.
15 Letter in lieu of consent regarding review report of
unaudited interim financial information.
31.1 Certification of George H. Glatfelter II, Chairman and
Chief Executive Officer of Glatfelter, pursuant to
Section 302 of the Sarbanes-Oxley Act of.
31.2 Certification of John C. van Roden, Jr., Senior Vice
President and Chief Financial Officer, of Glatfelter,
pursuant to Section 302 of the Sarbanes-Oxley Act of.
32.1 Certification of George H. Glatfelter II, Chairman and
Chief Executive Officer of Glatfelter, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section.
32.2 Certification of John C. van Roden, Jr., Senior Vice
President and Chief Financial Officer, of Glatfelter,
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section.
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(b) REPORTS ON FORM 8-K
During the quarter ended September 30, 2003, the Company filed the
following Current Reports on Form 8-K.
i. Form 8-K dated July 23, 2003, to report the issuance of the
Company's earnings press release for the three months and six
months ended June 30, 2003, filed pursuant to Items 5 and 12.
ii. Form 8-K dated August 15, 2003, to report Patricia Foulkrod's
resignation as a Director of the Company, pursuant to Item 5.
iii. Form 8-K dated September 18, 2003, to report the issuance of
a press release announcing actions being taken to reduce
costs, enhance product profitability, and improve cash flow,
pursuant to Item 5.
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SIGNATURES
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.
Date: November 13, 2003 By: /s/ John C. van Roden, Jr.
----------------------------
John C. van Roden, Jr.
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------------------
10.1 Consent Decree for Remedial Design and Remedial Action at Operable Unit 1 of
the Lower Fox River and Green Bay site by and among the United States of
America and the State of Wisconsin v. P. H. Glatfelter Company and WTMI
Company (f/k/a Wisconsin Tissue Mills, Inc.), incorporated herein by reference
to Exhibit 10.2 of our Form 8-K/A (Amendment No. 1) dated October 1, 2003.
15 Letter in lieu of consent regarding review report of unaudited interim
financial information, filed herewith.
31.1 Certification of George H. Glatfelter II, Chairman and Chief Executive Officer
of Glatfelter, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350 - Chief Executive Officer, filed herewith.
31.2 Certification of John C. van Roden, Jr., Senior Vice President and Chief
Financial Officer, of Glatfelter, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 - Chief Financial Officer, filed herewith.
32.1 Certification of George H. Glatfelter II, Chairman and Chief Executive Officer
of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - -
Chief Executive Officer, filed herewith.
32.2 Certification of John C. van Roden, Jr., Senior Vice President and Chief
Financial Officer, of Glatfelter, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 - Chief Financial
Officer, filed herewith
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