UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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
For the quarterly period ended June 30, 2004
Commission file number 1-3560
P. H. Glatfelter Company
Pennsylvania | 23-0628360 | |
(State or other jurisdiction of | (IRS Employer Identification No.) | |
incorporation or organization) | ||
96 South George Street, Suite 500 | ||
York, Pennsylvania 17401 | (717) 225-4711 | |
(Address of principal executive offices) | (Registrants telephone number, including 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 July 30, 2004, P. H. Glatfelter Company had 43,826,830 shares of common stock outstanding.
P. H. GLATFELTER COMPANY
REPORT ON FORM 10-Q
for the QUARTERLY PERIOD ENDED
JUNE 30, 2004
Table of Contents
PART I
P. H. GLATFELTER COMPANY
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
In thousands, except per share |
2004 |
2003 |
2004 |
2003 |
||||||||||||
Net sales |
$ | 129,029 | $ | 129,620 | $ | 261,106 | $ | 271,906 | ||||||||
Energy sales net |
2,894 | 2,775 | 5,308 | 5,052 | ||||||||||||
Total revenues |
131,923 | 132,395 | 266,414 | 276,958 | ||||||||||||
Cost of products sold |
115,881 | 114,126 | 229,873 | 228,382 | ||||||||||||
Gross profit |
16,042 | 18,269 | 36,541 | 48,576 | ||||||||||||
Selling, general and administrative expenses |
15,691 | 14,737 | 30,513 | 29,771 | ||||||||||||
Restructuring charges |
867 | | 867 | | ||||||||||||
Gains on dispositions of plant, equipment and timberlands, net |
(392 | ) | (854 | ) | (33,430 | ) | (31,401 | ) | ||||||||
Gains from insurance recoveries |
(300 | ) | | (25,500 | ) | | ||||||||||
Operating income |
176 | 4,386 | 64,091 | 50,206 | ||||||||||||
Non-operating income (expense) |
||||||||||||||||
Interest expense |
(3,280 | ) | (3,655 | ) | (6,695 | ) | (7,054 | ) | ||||||||
Interest income |
453 | 500 | 896 | 687 | ||||||||||||
Other net |
(271 | ) | (153 | ) | (58 | ) | (1,043 | ) | ||||||||
Total other income (expense) |
(3,098 | ) | (3,308 | ) | (5,857 | ) | (7,410 | ) | ||||||||
Income (loss) from continuing operations before income
taxes |
(2,922 | ) | 1,078 | 58,234 | 42,796 | |||||||||||
Income tax provision (benefit) |
(1,293 | ) | 396 | 23,604 | 15,425 | |||||||||||
Income (loss) from continuing operations |
(1,629 | ) | 682 | 34,630 | 27,371 | |||||||||||
Discontinued operations |
||||||||||||||||
Loss from discontinued operations |
| (648 | ) | | (513 | ) | ||||||||||
Income tax benefit |
| (235 | ) | | (188 | ) | ||||||||||
Loss from discontinued operations |
| (413 | ) | | (325 | ) | ||||||||||
Net income (loss) |
$ | (1,629 | ) | $ | 269 | $ | 34,630 | $ | 27,046 | |||||||
Basic and diluted earnings (loss) per share |
||||||||||||||||
Income (loss) from continuing operations |
$ | (0.04 | ) | $ | 0.02 | $ | 0.79 | $ | 0.63 | |||||||
Income (loss) from discontinued operations |
| (0.01 | ) | | (0.01 | ) | ||||||||||
Net income (loss) |
$ | (0.04 | ) | $ | 0.01 | $ | 0.79 | $ | 0.62 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
GLATFELTER
-2-
P. H. GLATFELTER COMPANY
June 30 | December 31 | |||||||
In thousands |
2004 |
2003 |
||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 11,097 | $ | 15,566 | ||||
Accounts receivable - net |
63,443 | 59,882 | ||||||
Inventories |
69,913 | 71,569 | ||||||
Prepaid expenses and other current assets |
16,754 | 24,685 | ||||||
Total current assets |
161,207 | 171,702 | ||||||
Plant, equipment and timberlands net |
521,189 | 542,960 | ||||||
Other assets |
341,729 | 312,357 | ||||||
Total assets |
$ | 1,024,125 | $ | 1,027,019 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities |
||||||||
Current portion of long-term debt |
$ | 785 | $ | 806 | ||||
Short-term debt |
4,500 | 5,000 | ||||||
Accounts payable |
38,819 | 31,472 | ||||||
Dividends payable |
3,946 | 3,942 | ||||||
Environmental liabilities |
3,500 | 27,000 | ||||||
Other current liabilities |
50,880 | 44,250 | ||||||
Total current liabilities |
102,430 | 112,470 | ||||||
Long-term debt |
211,537 | 248,469 | ||||||
Deferred income taxes |
210,963 | 207,834 | ||||||
Other long-term liabilities |
103,217 | 86,815 | ||||||
Total liabilities |
628,147 | 655,588 | ||||||
Commitments and contingencies |
| | ||||||
Shareholders equity Common stock |
544 | 544 | ||||||
Capital in excess of par value |
42,181 | 40,469 | ||||||
Retained earnings |
511,497 | 484,756 | ||||||
Deferred compensation |
(1,581 | ) | | |||||
Accumulated other comprehensive income (loss) |
(308 | ) | 2,690 | |||||
552,333 | 528,459 | |||||||
Less cost of common stock in treasury |
(156,355 | ) | (157,028 | ) | ||||
Total shareholders equity |
395,978 | 371,431 | ||||||
Total liabilities and shareholders equity |
$ | 1,024,125 | $ | 1,027,019 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
GLATFELTER
-3-
P. H. GLATFELTER COMPANY
Six Months Ended | ||||||||
June 30 | ||||||||
In thousands |
2004 |
2003 |
||||||
Operating activities |
||||||||
Net income |
$ | 34,630 | $ | 27,046 | ||||
Loss from discontinued operations |
| (325 | ) | |||||
Income from continuing operations |
34,630 | 27,371 | ||||||
Adjustments to reconcile to net cash provided by continuing
operations: |
||||||||
Depreciation, depletion and amortization |
26,380 | 25,153 | ||||||
Pension income |
(8,683 | ) | (8,998 | ) | ||||
Deferred income tax provision |
17,243 | 12,776 | ||||||
Gains on dispositions of plant, equipment and timberlands, net |
(33,430 | ) | (31,401 | ) | ||||
Other |
345 | 397 | ||||||
Change in operating assets and liabilities |
||||||||
Accounts receivable |
(4,609 | ) | 5,522 | |||||
Inventories |
593 | (230 | ) | |||||
Other assets and prepaid expenses |
(13,822 | ) | (3,406 | ) | ||||
Accounts payable and other liabilities |
(1,817 | ) | 4,769 | |||||
Net cash provided by continuing operations |
16,830 | 31,953 | ||||||
Net cash used by discontinued operations |
| (244 | ) | |||||
Net cash provided by operating activities |
16,830 | 31,709 | ||||||
Investing activities |
||||||||
Purchases of plant, equipment and timberlands |
(11,121 | ) | (45,548 | ) | ||||
Proceeds from disposals of plant, equipment and timberlands |
34,108 | 1,080 | ||||||
Net cash provided (used) by investing activities from
continuing operations |
22,987 | (44,468 | ) | |||||
Net cash used by investing activities of discontinued
operations |
| (60 | ) | |||||
Net cash provided (used) by investing activities |
22,987 | (44,528 | ) | |||||
Financing activities |
||||||||
Net repayments of revolving credit facility |
(36,078 | ) | (12,507 | ) | ||||
Proceeds from SunTrust Financial borrowing |
| 34,000 | ||||||
Payment of dividends |
(7,890 | ) | (15,302 | ) | ||||
Proceeds from stock options exercised |
| 448 | ||||||
Net cash (used) provided by financing activities |
(43,968 | ) | 6,639 | |||||
Effect of exchange rate changes on cash |
(318 | ) | 1,384 | |||||
Net decrease in cash and cash equivalents |
(4,469 | ) | (4,796 | ) | ||||
Cash and cash equivalents at the beginning of period |
15,566 | 32,219 | ||||||
Cash and cash equivalents at the end of period |
$ | 11,097 | $ | 27,423 | ||||
Supplemental cash flow information |
||||||||
Cash paid (received) for
|
||||||||
Interest expense |
$ | 8,128 | $ | 8,356 | ||||
Income taxes |
(2,124 | ) | (833 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements,.
GLATFELTER
-4-
P. H. GLATFELTER COMPANY
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; Scaër, 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. ACCOUNTING POLICIES
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 Glatfelters 2003 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 managements 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.
Stock-based Compensation We account for Stock-based compensation 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 estimating the number of shares ultimately to be issued. Compensation expense for awards of nonvested Restricted Stock Units (RSUs) is recognized over their graded vesting period
based on the grant-date value. The grant-date value is determined based on the grant-date closing price of Glatfelter common stock. The exercise price of all employee stock options is at least equal to their grant-date market value. Accordingly, no compensation expense is recorded for stock options granted to employees.
Pro Forma Information No compensation expense has been recognized for the issuance of non-qualified stock options. The weighted-average grant-date fair value of options granted during 2004 and 2003 was $3.32 and $2.72, respectively. The following table sets forth pro forma information as if compensation expense for all stock-based compensation had been determined consistent with the fair value method of SFAS No. 123.
Three Months Ended June 30 |
||||||||
In thousands, except per share |
2004 |
2003 |
||||||
Net income (loss) as reported |
$ | (1,629 | ) | $ | 269 | |||
Add: stock-based compensation expense included
in reported net income, net of tax |
147 | 148 | ||||||
Less: stock-based compensation expense
determined under fair value based method for
awards, net of tax |
(499 | ) | (787 | ) | ||||
Pro forma net loss |
$ | (1,981 | ) | $ | (370 | ) | ||
Earnings (loss) per share
|
||||||||
Reported basic and diluted |
$ | (0.04 | ) | $ | 0.01 | |||
Pro forma basic and diluted |
(0.05 | ) | (0.01 | ) |
Six Months Ended June 30 |
||||||||
In thousands, except per share |
2004 |
2003 |
||||||
Net income as reported |
$ | 34,630 | $ | 27,046 | ||||
Add: stock-based compensation expense included
in reported
net income, net of tax |
360 | 282 | ||||||
Less: stock-based compensation expense
determined under fair value based method for
awards, net of tax |
(520 | ) | (1,013 | ) | ||||
Pro forma net income |
$ | 34,470 | $ | 26,315 | ||||
Earnings per share |
||||||||
Reported basic and diluted |
$ | 0.79 | $ | 0.62 | ||||
Pro forma basic and diluted |
0.78 | 0.60 |
GLATFELTER
- 5 -
3. RECENT PRONOUNCEMENTS
Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), issued in January 2003, clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and must be applied in the first period beginning after December 15, 2003 for entities in which an enterprise holds a variable interest entity that it acquired before February 1, 2003. We do not have entities with these characteristics. Accordingly, the provisions of FIN 46 and related revisions, FIN 46R, had no impact on our consolidated financial position or results of operations.
In May 2004, FASB Staff Position FAS No. 106-2 (FSP FAS 106-2), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the 2003 Act) was issued. FSP FAS 106-2 is applicable to employers that sponsor benefit plans providing post-age 65 prescription drug benefits and that are expected to receive a subsidy provided by the 2003 Act. FSP FAS 106-2 is effective for financial statements for periods beginning after June 15, 2004. We do not consider the 2003 Act to be a significant event for our plan nor is the adoption of FSP FAS 106-2 expected to have a material impact on our consolidated financial position or results of operations.
4. RESTRUCTURING RESERVES
North American Restructuring Program The North American Restructuring Program, which was initiated in the second quarter of 2004, is designed to improve operating results by enhancing product and service offerings in Printing & Converting Papers book publishing markets, reducing our workforce at our Spring Grove facility by approximately 20%, and implementing improved supply chain management processes. During the second quarter of 2004, we eliminated 25 non-union positions and recorded related restructuring charges totaling $0.7 million, for severance and related pension and other post employment benefits. Further, we negotiated a new labor agreement that enables us to achieve, by the end of 2004, targeted workforce reduction levels at our Spring Grove, PA facility. The union membership at this location ratified the agreement on July 20, 2004. Based on this contract, we
expect to record, in the third quarter of 2004, an additional restructuring charge related to the reduction in workforce of between $9 million and $20 million, substantially all of which is for enhanced pension benefits, post-retirement medical benefits and other related employee severance costs.
The amount of the charge ultimately recorded is dependent on, among other factors, the extent to which members of the union workforce elect to accept certain enhanced pension and related benefits offered by us as part of the workforce reduction initiative.
The following table summarizes activity in our North American Restructuring reserve:
Three and Six | ||||
months ended | ||||
In thousands |
June 30, 2004 |
|||
Beginning balance |
$ | | ||
Accruals |
520 | |||
Payments made |
(55 | ) | ||
Ending balance |
$ | 465 | ||
As of June 30, 2004, the amounts accrued related to the North American Restructuring Program represent only those charges that are expected to result in cash payments and primarily consist of severance and benefits continuation.
2003 Neenah Restructuring In September 2003, we announced the decision to permanently shut down a paper making machine and the deinking process at our Neenah, WI facility and eliminate approximately 50% of the workforce. The machines and processes abandoned had been primarily supporting our Printing & Converting Papers business unit. The following table summarizes activity in our Neenah Restructuring reserve during 2004:
Three Months | Six Months | |||||||
ended | ended | |||||||
In thousands |
June 30, 2004 |
June 30, 2004 |
||||||
Beginning balance |
$ | 1,185 | $ | 1,625 | ||||
Adjustments |
188 | 188 | ||||||
Payments made |
(379 | ) | (819 | ) | ||||
Ending balance |
$ | 994 | $ | 994 | ||||
During 2004, we accrued additional severance related costs attributable to the workforce reduction at the Neenah facility. As of June 30, 2004, the amounts accrued related to the Neenah restructuring represent only those charges that are expected to result in cash payments and primarily consist of severance payments and benefits continuation.
GLATFELTER
- 6 -
5. | GAIN ON DISPOSITIONS OF PLANT, EQUIPMENT AND TIMBERLANDS |
During the first six months of 2004 and 2003, we completed sales of timberlands and, in 2004, the corporate aircraft. The following table summarizes these transactions.
Dollars in thousands |
Acres |
Proceeds |
Gain |
|||||||||
Six Months Ended June 30, 2004 |
||||||||||||
Timberlands |
2,332 | $ | 30,283 | $ | 29,972 | |||||||
Corporate Aircraft |
n/a | 2,861 | 2,554 | |||||||||
Other |
n/a | 964 | 904 | |||||||||
Total |
$ | 34,108 | $ | 33,430 | ||||||||
Six Months Ended June 30, 2003 |
||||||||||||
Maryland |
$ | |||||||||||
Timberlands |
25,500 | $ | 37,850 | $ | 31,234 | |||||||
Other |
n/a | 1,080 | 167 | |||||||||
Total |
$ | 38,930 | $ | 31,401 | ||||||||
Substantially all of the transactions were completed during the first quarter of each respective year. All property sales completed in 2004 were sold for cash. As consideration for the Maryland Timberlands, we received a 10-year note from a subsidiary of The Conservation Fund in the principal amount of $37.9 million (the Note), which is included in Other assets in the Condensed Consolidated Balance Sheet.
6. EARNINGS PER SHARE
The following table sets forth the details of basic and diluted earnings per share (EPS):
Three Months Ended | ||||||||
June 30 |
||||||||
In thousands, except per share |
2004 |
2003 |
||||||
Income (loss) from continuing operations |
$ | (1,629 | ) | $ | 682 | |||
Loss from discontinued operations |
| (413 | ) | |||||
Net income (loss) |
$ | (1,629 | ) | $ | 269 | |||
Weighted average common shares outstanding used
in basic EPS |
43,834 | 43,717 | ||||||
Common shares issuable upon exercise of dilutive
stock options, restricted stock awards and
performance awards |
| 32 | ||||||
Weighted average common shares outstanding and
common share equivalents used in diluted EPS |
43,834 | 43,749 | ||||||
Basic and diluted EPS |
||||||||
Income (loss) from continuing operations |
$ | (0.04 | ) | $ | 0.02 | |||
Loss from discontinued operations |
| (0.01 | ) | |||||
Net income (loss) |
$ | (0.04 | ) | $ | 0.01 | |||
Six Months Ended | ||||||||
June 30 |
||||||||
In thousands, except per share |
2004 |
2003 |
||||||
Income from continuing operations |
$ | 34,630 | $ | 27,371 | ||||
Loss from discontinued operations |
| (325 | ) | |||||
Net income |
$ | 34,630 | $ | 27,046 | ||||
Weighted average common shares outstanding used
in basic EPS |
43,820 | 43,699 | ||||||
Common shares issuable upon exercise of dilutive
stock options, restricted stock awards and
performance awards |
119 | 30 | ||||||
Weighted average common shares outstanding and
common share equivalents used in diluted EPS |
43,939 | 43,729 | ||||||
Basic and diluted EPS |
||||||||
Income from continuing operations |
$ | 0.79 | $ | 0.63 | ||||
Loss from discontinued operations |
| (0.01 | ) | |||||
Net income |
$ | 0.79 | $ | 0.62 | ||||
The following tables set forth the potential common shares outstanding for options to purchase shares of common stock, restricted stock awards and restricted stock units that were outstanding but were not included in the computation of diluted EPS for the period indicated, because their effect would be anti-dilutive.
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
In thousands |
2004 |
2003 |
2004 |
2003 |
||||||||||||
Potential common
shares |
2,448 | 2,048 | 2,172 | 2,480 |
7. GAIN ON INSURANCE RECOVERIES
During the first six months of 2004, we reached successful resolution of certain claims under insurance policies related to the Fox River environmental matter. Insurance recoveries included in the results of operations for the first six months of 2004 totaled $25.5 million and were received in cash prior to June 30, 2004.
GLATFELTER
- 7 -
8. STOCK-BASED COMPENSATION
During 2004, 165,680 nonvested RSUs were awarded, under the 1992 Key Employee Long-Term Incentive Plan, to executive officers and other key employees. Under terms of the awards, the RSUs vest based solely on the passage of time on a graded scale over a three-year to five-year period. On the grant date, the RSUs were valued at $1.8 million and were recorded as Deferred compensation, a contra-equity account in the accompanying Condensed Consolidated Balance Sheet. Stock-based compensation expense with respect to the RSUs totaled $0.2 million during the first six months of 2004.
9. RETIREMENT PLANS AND OTHER POST-
RETIREMENT BENEFITS
We have both funded and, with respect to our international operations, unfunded noncontributory defined benefit pension plans covering substantially all of our employees. The benefits are based, in the case of certain plans, on average salary and years of service and, in the case of other plans, on a fixed amount for each year of service. Plan provisions and funding meet the requirements of the Employee Retirement Income Security Act of 1974. The Company uses a December 31 measurement date for all of its defined benefit plans.
We also provide certain healthcare benefits to eligible retired employees. These benefits include a comprehensive medical plan for retirees prior to age 65, and fixed supplemental premium payments to retirees over age 65 to help defray the costs of Medicare. The plan is not funded and claims are paid as reported.
The following tables set forth information with respect to our defined benefit plans.
Three Months Ended | ||||||||
June 30 |
||||||||
In millions |
2004 |
2003 |
||||||
Pension Benefits |
||||||||
Service cost |
$ | 0.9 | $ | 0.8 | ||||
Interest cost |
4.1 | 3.9 | ||||||
Expected return on plan assets |
(9.5 | ) | (9.2 | ) | ||||
Amortization of transition assets |
(0.2 | ) | (0.3 | ) | ||||
Amortization of prior service cost |
0.4 | 0.6 | ||||||
Recognized actuarial (gain) loss |
0.1 | 0.1 | ||||||
Net periodic benefit cost (income) |
(4.2 | ) | (4.1 | ) | ||||
Special termination benefits |
0.1 | | ||||||
Total net periodic benefit (income) cost |
$ | (4.1 | ) | $ | (4.1 | ) | ||
Other Benefits |
||||||||
Service cost |
$ | 0.2 | $ | 0.2 | ||||
Interest cost |
0.7 | 0.5 | ||||||
Amortization of prior service cost |
(0.2 | ) | (0.2 | ) | ||||
Recognized actuarial (gain) loss |
0.3 | 0.2 | ||||||
Net periodic benefit cost |
$ | 1.0 | $ | 0.7 | ||||
Six Months Ended | ||||||||
June 30 |
||||||||
In millions |
2004 |
2003 |
||||||
Pension Benefits |
||||||||
Service cost |
$ | 1.9 | $ | 2.0 | ||||
Interest cost |
8.2 | 8.0 | ||||||
Expected return on plan assets |
(19.7 | ) | (19.5 | ) | ||||
Amortization of transition assets |
(0.5 | ) | (0.6 | ) | ||||
Amortization of prior service cost |
1.1 | 1.3 | ||||||
Recognized actuarial (gain) loss |
0.2 | (0.2 | ) | |||||
Net periodic benefit cost (income) |
(8.8 | ) | (9.0 | ) | ||||
Special termination benefits |
0.1 | | ||||||
Total net periodic benefit
(income) cost |
$ | (8.7 | ) | $ | (9.0 | ) | ||
Other Benefits |
||||||||
Service cost |
$ | 0.5 | $ | 0.6 | ||||
Interest cost |
1.3 | 1.3 | ||||||
Amortization of prior service cost |
(0.4 | ) | (0.3 | ) | ||||
Recognized actuarial (gain) loss |
0.6 | 0.6 | ||||||
Net periodic benefit cost |
$ | 2.0 | $ | 2.2 | ||||
GLATFELTER
- 8 -
10. 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 $1.7 million and the remaining amounts are to be paid in annual installments, the first of which was received in July 2004. This subsidiary is reported as discontinued operations for all periods presented. Prior to the sale, the underlying assets were recorded at the lower of carrying amount or fair value less cost to sell. Revenue included in determining results from discontinued operations totaled $1.3 million and $2.6 million in the first three months and first six months of 2003, respectively. This operation was previously reported in the Engineered Products business unit.
11. COMPREHENSIVE INCOME
The following tables sets forth comprehensive income and its components:
Three Months Ended | ||||||||
June 30 |
||||||||
In thousands |
2004 |
2003 |
||||||
Net income (loss) |
$ | (1,629 | ) | $ | 269 | |||
Foreign currency translation adjustment |
(502 | ) | 618 | |||||
Comprehensive income (loss) |
$ | (2,131 | ) | $ | 887 | |||
Six Months Ended | ||||||||
June 30 |
||||||||
In thousands |
2004 |
2003 |
||||||
Net income |
$ | 34,630 | $ | 27,046 | ||||
Foreign currency translation adjustment |
(2,998 | ) | 1,596 | |||||
Comprehensive income |
$ | 31,632 | $ | 28,642 | ||||
12. INVENTORIES
Inventories, net of reserves, were as follows:
June 30, | December 31, | |||||||
In thousands |
2004 |
2003 |
||||||
Raw materials |
$ | 14,116 | $ | 15,106 | ||||
In-process and finished |
31,643 | 32,145 | ||||||
Supplies |
24,154 | 24,318 | ||||||
Total |
$ | 69,913 | $ | 71,569 | ||||
13. LONG-TERM DEBT
Long-term debt is summarized as follows:
June 30, | December 31, | |||||||
In thousands |
2004 |
2003 |
||||||
Revolving credit facility, due June 2006 |
$ | 27,528 | $ | 64,047 | ||||
6 7/8% Notes, due July 2007 |
150,000 | 150,000 | ||||||
Note payable SunTrust, due March 2008 |
34,000 | 34,000 | ||||||
Other notes, various |
794 | 1,228 | ||||||
Total long-term debt |
212,322 | 249,275 | ||||||
Less current portion |
(785 | ) | (806 | ) | ||||
Long-term debt, excluding current portion |
$ | 211,537 | $ | 248,469 | ||||
On June 24, 2002, we entered into an unsecured $102.5 million multi-currency revolving credit facility due June 2006, (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 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 & Poors and Moodys. The Facility requires us to meet certain leverage and interest coverage ratios, with both of which we are in compliance at June 30, 2004.
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. 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.
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P. H. Glatfelter Company guarantees debt obligations of all its subsidiaries. All such obligations are recorded in these condensed consolidated financial statements.
At June 30, 2004, we had $4.3 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.
14. 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 73.0 million, 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 inter-company obligations recorded at our subsidiary in Gernsbach, Germany.
The cross-currency swap is recorded in the Condensed Consolidated Balance Sheets at fair value of $(18.7) and $(22.0) million at June 30, 2004 and December 31, 2003, respectively, under the caption Other long-term liabilities. Changes in fair value are recognized in current earnings as Other income (expenses) in the Condensed Consolidated Statements of Income. The mark-to-market adjustment was offset by the related remeasurement of the U.S. dollar denominated inter-company obligations.
The credit risks associated with our financial derivatives are controlled through the evaluation and monitoring of creditworthiness of the counterparties. Although counterparties may expose us to losses in the event of nonperformance, we do not expect such losses, if any, to be significant.
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 pulp and 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 7 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 pulp and paper mill and related real property, were sold to an unrelated third party (the New Buyer). We understand the New Buyers business plan was to continue certain mill-related operations and to convert portions of the mill site into a business park.
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Beginning in April 2003, governmental authorities, including the North Carolina Department of Environment and Natural Resources (NCDENR), initiated 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 NCDENRs desire to establish a plan and secure financial resources to close three landfills located at the Ecusta facility and to address other environmental matters at the facility. During the third quarter of 2003, the discussions ended with NCDENRs conclusion to hold us responsible for the closure of the landfills. We intend to pursue reimbursement for any such Landfill Closure Costs 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. During 2003, we established a reserve in this amount through charges to our results of operations. As of June 30, 2004, our reserve for Landfill Closure Costs declined to $7.5 million, reflecting costs incurred to date.
In addition to Landfill Closure Costs, prior to 2003 we had recorded liabilities for Third Party Claims, primarily related to certain post-retirement benefits, workers compensation claims and vendor payables, totaling approximately $2.3 million. We intend to pursue reimbursement for any Third Party Claims from the Buyers under the indemnification provisions of the Acquisition Agreement.
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 monitor the environmental conditions at the Ecusta mill. We are uncertain as to what additional Ecusta-related claims, including environmental matters, if any, may be asserted against us. We believe that the New Buyer continues to have discussions with the governmental authorities concerning certain other environmental related matters at the former Ecusta facility. The likelihood and extent of potential claims against us could be mitigated by the successful execution of the New Buyers business plan. Should any claims be made against us, we would seek indemnification therefore 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.
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.
We undertook 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, required capital expenditures of approximately $36 million, substantially all of which were made prior to 2004. The New Century Project included improvements in brownstock washing, installation of an oxygen delignification bleaching process, 100% chlorine dioxide substitution, and a hardwood ozone bleaching system.
In 1999, the Pennsylvania DEP issued to us a Notice of Violation (NOV) alleging violations of air pollution control laws primarily for purportedly failing to obtain appropriate pre-construction air quality permits in conjunction with the installation of a turbine generator at our Spring Grove facility.
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The Pennsylvania DEPs NOV pertained to a 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 the Pennsylvania DEP was not required. We have been informed that the Pennsylvania DEP will seek substantial emissions reductions, as well as civil penalties, to which we believe we have meritorious defenses. We are also in discussions with the Pennsylvania DEP and, based on these discussions, we do not expect that the resolution of these matters will have a material impact on our consolidated financial position or results of operations. We are unable to predict whether we will be successful in these discussions or whether our defenses would prevail in litigation. Should the Pennsylvania DEP obtain a judgment against us regarding these matters, it could be material to our consolidated financial position and our results of operations.
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 used 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®-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 us, 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.
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 liabilities 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 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. In the first quarter of 2004, the United States District Court for the Eastern District of Wisconsin entered the OU1 Consent Decree. Under terms of the OU1 Consent Decree, Glatfelter and WTM I each agreed to pay approximately $27 million. This includes $25.5 million from each to be escrowed to fund response work associated with remedial actions specified in the ROD. In addition, 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
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amounts placed into escrow. Based on information currently available to us, we believe the required remedial actions can be completed with the amount of monies agreed upon within under the Consent Decree. If the Consent Decree is terminated due to a insufficiency of escrow funds, Glatfelter and WTM I each remain potentially responsible for the costs necessary to complete the remedial actions.
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 for this reason, each company would lose the protections contained in the settlement and the governments may turn to one or both parties for the completion of OU1 clean up. 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.
The following table sets forth payments made by us pursuant to the terms of the OU1 Consent Decree:
In thousands |
Amount |
|||
Payment for: |
||||
Remediation activities |
$ | 25,000 | ||
NRD and NRD assessment |
1,650 | |||
Past Costs |
375 | |||
Total |
$ | 27,025 | ||
During the first six months of 2004, pursuant to the terms of the OU1 Consent Decree, we transferred approximately $26.3 million to an escrow account at a financial institution. The terms of the OU1 Consent Decree and the underlying escrow agreement restrict the use of the funds to qualifying remediation activities or restoration activities at the lower Fox River. At June 30, 2004, $3.0 million is recorded in the accompanying Condensed Consolidated Balance Sheet under the caption Prepaid expenses and other current assets and $23.3 million is included under the caption Other assets.
The OU1 Consent Decree required that each company pay the governments $375,000 for past response costs. These payments were made in return for credit to be applied toward each settling companys potential liability for governmental response costs associated with the entire river. The OU1 Consent Decree also required the companies to pay certain NRD-related amounts, which are discussed below.
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 could, according to the Second ROD, 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.
During the first quarter of 2004, NCR Corp. and Georgia Pacific Corp. entered into an AOC with the United States Environmental Protection Agency under which they agreed to perform the Remedial Design for OU3-5, thereby accomplishing a first step towards remediation.
We do not believe that we have more than a de minimis share of any equitable distribution of responsibility for 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 responsibilities for the cleanup of 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 has yet to be completed, 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 March 19, 2004, the U.S. District Court for the Eastern District of Wisconsin entered a consent decree
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among the United States, the State of Wisconsin and the Fort James Operating Company (Fort James). The consent decree resolves certain outstanding claims, primarily NRD claims, against Fort James and a related entity. Under the terms of the 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.
Because the factual and legal justification the plaintiffs provided for the settlement is both vague and specific to the Fort James situation, and because the courts decision entering the decree is similarly situation specific, we are not able to extrapolate an estimated settlement amount for Glatfelter from the Fort James consent decree.
The OU1 Consent Decree required 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 was made in return for credit to be applied toward each settling companys potential liability for NRDs associated with the entire river.
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 facilitys 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 exists 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 partys 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 of the cost sharing agreement.
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 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. The following table summarizes information with respect to such reserves as of June 30, 2004 and December 31, 2003.
June 30, | December 31, | |||||||
In millions |
2004 |
2003 |
||||||
Recorded as: |
||||||||
Environmental liabilities |
$ | 3.5 | $ | 27.0 | ||||
Other long-term liabilities |
25.2 | 2.4 | ||||||
Total |
$ | 28.7 | $ | 29.4 | ||||
The classification of our environmental liabilities is based on the development of the underlying remediation plan and execution of the related escrow agreement for the funding thereof. The reserve balance declined as a result of payments associated with the OU1 Consent Decree and items related to the Fox River matter. We did not record charges to our results of operations during 2004 or 2003 related to these matters.
Other than with respect to the OU1 Consent Decree, the amount and timing of future expenditures for environmental compliance, cleanup, remediation and
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personal injury, NRDs and property damage liabilities 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 parties.
Range of Reasonably Possible Outcomes Neenah, Wisconsin Based on currently available information, we believe that the remediation of OU1 will be satisfactorily completed for the amounts 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 judicial interpretations that find CERCLA imposes joint and several liability, uncertainty persists regarding our exposure with respect to the remainder of the 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 under the OU1 Consent Decree; and (ii) no active remediation of OU2. We have also assumed 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 reserves 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, generally based on their financial condition and probable contribution. Our evaluation of the other PRPs financial condition included the review of publicly disclosed financial information. Furthermore, we believe certain of these PRPs have corporate or contractual relationships with additional entities that may shift monetary obligations arising from the lower Fox River and Bay of Green Bay. 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 facilities were under the ownership of large multinational companies that 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 litigation 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. During the first six months of 2004, we reached successful resolution of certain claims under insurance policies related to the Fox River environmental matter. Insurance recoveries included in the results of operations for the first six months of 2004 totaled $25.5 million and were fully received in cash prior to June 30, 2004.
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Summary Our current assessment is that we should be able to manage these environmental matters without a long-term, material adverse impact on the Company. 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 OU1 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 may 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 & Converting Papers, as well as Tobacco Papers, which are sold pursuant to a supply agreement that expires in mid-2004. Effective January 1, 2004, we implemented organizational changes and as a result we realigned and reclassified the presentation of certain product offerings of the business units. The following segment data for prior periods has been restated to give effect to the further refinement of our organizational structure discussed above.
The following tables set forth our operating profit (loss) by business unit and the composition of consolidated income from continuing operations before income taxes:
Three Months Ended | ||||||||
June 30 |
||||||||
In millions |
2004 |
2003 |
||||||
Business Unit |
||||||||
Engineered Products |
$ | (2.8 | ) | $ | (2.2 | ) | ||
Long Fiber & Overlay Papers |
3.1 | 2.3 | ||||||
Printing & Converting Papers |
(6.9 | ) | (1.8 | ) | ||||
Tobacco Papers |
(0.1 | ) | (1.6 | ) | ||||
Total Business Unit |
(6.7 | ) | (3.3 | ) | ||||
Energy sales, net |
2.9 | 2.8 | ||||||
Pension income, net |
4.2 | 4.1 | ||||||
Restructuring charge |
(0.9 | ) | | |||||
Gain on dispositions of plant, equipment
and timberlands |
0.4 | 0.8 | ||||||
Gain on insurance recoveries |
0.3 | | ||||||
Total operating income |
0.2 | 4.4 | ||||||
Interest expense |
(3.3 | ) | (3.7 | ) | ||||
Other income (expense), net |
0.2 | 0.4 | ||||||
Income (loss) from continuing operations
before income taxes |
$ | (2.9 | ) | $ | 1.1 | |||
Six Months Ended | ||||||||
June 30 |
||||||||
In millions |
2004 |
2003 |
||||||
Business Unit |
||||||||
Engineered Products |
$ | (3.3 | ) | $ | 1.0 | |||
Long Fiber & Overlay Papers |
6.9 | 7.3 | ||||||
Printing & Converting Papers |
(11.3 | ) | (0.7 | ) | ||||
Tobacco Papers |
(0.2 | ) | (2.8 | ) | ||||
Total Business Unit |
(7.9 | ) | 4.8 | |||||
Energy sales, net |
5.3 | 5.0 | ||||||
Pension income, net |
8.7 | 9.0 | ||||||
Restructuring charge |
(0.9 | ) | | |||||
Gain on dispositions of plant, equipment
and timberlands |
33.4 | 31.4 | ||||||
Gain on insurance recoveries |
25.5 | | ||||||
Total operating income |
64.1 | 50.2 | ||||||
Interest expense |
(6.7 | ) | (7.1 | ) | ||||
Other income (expense), net |
0.8 | (0.3 | ) | |||||
Income from continuing operations before
income taxes |
$ | 58.2 | $ | 42.8 | ||||
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.
GLATFELTER
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Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. Costs to produce products sold are allocated to the respective business unit based on standard costs and a proportion of manufacturing variances. The costs incurred by support areas not directly aligned with a business unit are allocated primarily based on an estimated utilization of support area services. Assets are not allocated to the business units for management reporting purposes and accordingly, are not presented herein.
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, the profitability of business units and the extent of cash flow generated from core operations. This presentation is closely aligned with the management and operating structure of our Company. It is also on this basis that the Companys performance is evaluated internally and by the Companys Board of Directors.
The following tables set forth information with respect to net sales for each business unit:
Three Months Ended | ||||||||
June 30 |
||||||||
In millions |
2004 |
2003 |
||||||
Business Unit |
||||||||
Engineered Products |
$ | 27.4 | $ | 26.8 | ||||
Long Fiber & Overlay Papers |
48.5 | 37.7 | ||||||
Printing & Converting Papers |
52.8 | 62.8 | ||||||
Tobacco Papers |
0.3 | 2.3 | ||||||
Total |
$ | 129.0 | $ | 129.6 | ||||
Six Months Ended | ||||||||
June 30 |
||||||||
In millions |
2004 |
2003 |
||||||
Business Unit
|
||||||||
Engineered Products |
$ | 55.1 | $ | 51.9 | ||||
Long Fiber & Overlay Papers |
97.3 | 79.7 | ||||||
Printing & Converting Papers |
107.9 | 134.0 | ||||||
Tobacco Papers |
0.8 | 6.3 | ||||||
Total |
$ | 261.1 | $ | 271.9 | ||||
17. SUBSEQUENT EVENT
On August 6, 2004, we received insurance proceeds totaling $7.3 million relating to recoveries for various environmental liabilities incurred by us associated with the Lower Fox River and Bay of Green Bay in Wisconsin. This recovery will be recorded in our results of operations for the third quarter of 2004.
GLATFELTER
- 17 -
Report of Independent Registered Public Accounting Firm
P. H. Glatfelter Company:
We have reviewed the accompanying condensed consolidated balance sheet of P. H. Glatfelter Company and subsidiaries as of June 30, 2004, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2004 and 2003, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2004 and 2003. These interim financial statements are the responsibility of the Companys management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 standards of the Public Company Accounting Oversight Board (United States), 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 standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of P. H. Glatfelter Company and subsidiaries as of December 31, 2003, 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 March 10, 2004 (which includes an explanatory paragraph concerning the Companys 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, 2003 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
August 6, 2004
GLATFELTER
- 18 -
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Glatfelters Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of Operations included in its 2003 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 Report on Form 10-Q are forward looking. We use words such as experts, will continue, estimates, we believe, and similar expressions to identify forward-looking statements. Forward-looking statements reflect our current expectations and are inherently uncertain. Our actual results may differ significantly from our expectations. The following discussion includes forward-looking statements regarding expectations of, among others, net sales, costs 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, 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. | the impact of competition, 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. | our ability to execute our North American Restructuring Program, growth strategies and cost reduction initiatives; |
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 Pennsylvania DEP, the costs of natural resource restoration or damages related to the presence of polychlorinated biphenyls (PCBs) in the lower Fox River on which our Neenah mill is located; and the costs of environmental matters at our former Ecusta Division mill; | |||
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 tax or other legislation or changes in government policy or regulation; | |||
xi. | adverse results in litigation; | |||
xii. | disruptions in production and/or increased costs due to labor disputes; | |||
xiii. | our ability to realize the value of our timberlands; | |||
xiv. | the recovery of environmental-related losses under our insurance policies; and | |||
xv. | our ability to identify, finance and consummate future alliances or acquisitions. |
Introduction
We manufacture, both domestically and internationally, a wide array of specialty papers and engineered products. Substantially all of our revenue is earned from the sale of our products to customers in numerous markets, including book publishing, food and beverage, decorative laminates for furniture and flooring, and other highly technical niche markets.
A number of events occurred that impacted our results of operations and financial condition in the first six months of 2004, including:
| Unit volumes in Engineered Products increased by 10.4% and in Long Fiber & Overlay Papers by 12.0% when compared with the same period a year ago. |
| Pricing in our Printing & Converting Papers business declined throughout 2003 and, as a result, was significantly lower in the first half of 2004 compared to the same period of 2003. |
| Approximately 57% of total sales were from products developed, enhanced or improved in the last five years. |
GLATFELTER
- 19 -
| We completed $30.3 million in sales of timberlands and successfully negotiated the receipt of $25.5 million in insurance recoveries related to the Fox River environmental matter, thereby strengthening our balance sheet. |
| We reduced our long-term debt outstanding by approximately $37 million since the end of 2003. |
NORTH AMERICAN RESTRUCTURING PROGRAM
The North American Restructuring Program, which was initiated in the second quarter of 2004, is designed to improve operating results by enhancing product and service offerings in Printing & Converting Papers book publishing markets, reducing our workforce at our Spring Grove facility by approximately 20%, and implementing improved supply chain management processes. The financial benefits from these efforts will begin to phase-in during the latter part of 2004, and are expected to approximate $15 million to $20 million annually, beginning in 2006.
During the second quarter of 2004, we eliminated 25 positions not represented by labor unions. Further, we negotiated a new labor agreement that enables us to reduce workforce levels at our Spring Grove, PA facility by approximately 20%. The union membership at this location ratified the agreement on July 20, 2004. Based on this contract, we expect to record, in the third quarter of 2004, a restructuring charge of between approximately $9 million and $20 million, primarily for pension and other retirement benefits and severance costs.
RESULTS OF OPERATIONS
First Six Months of 2004 Compared to First Six Months of 2003
The following table sets forth summarized results of operations:
Six Months Ended | ||||||||
June 30 |
||||||||
In thousands, except per share |
2004 |
2003 |
||||||
Net sales |
$ | 261,106 | $ | 271,906 | ||||
Gross profit |
36,541 | 48,576 | ||||||
Operating income |
64,091 | 50,206 | ||||||
Income from continuing operations |
34,630 | 27,371 | ||||||
Loss from discontinued operations |
| (325 | ) | |||||
Net income |
34,630 | 27,046 | ||||||
Earnings per diluted share from continuing
operations |
0.79 | 0.63 | ||||||
Earnings per diluted share |
0.79 | 0.62 |
The consolidated results of operations for the six months ended June 30, 2004 and 2003 include the following significant items:
In thousands, except per share |
After-tax |
EPS |
||||||
Income (loss) | ||||||||
2004 |
||||||||
Timberland sales |
$ | 18,103 | $ | 0.41 | ||||
Insurance recoveries |
15,402 | 0.35 | ||||||
Corporate aircraft sale |
1,543 | 0.04 | ||||||
Restructuring charge |
(524 | ) | (0.01 | ) | ||||
2003 |
||||||||
Timberland sales |
$ | 19,965 | $ | 0.46 | ||||
Write-off of of certain papermaking equipment |
(654 | ) | (0.02 | ) |
The above items increased earnings from continuing operations by $34.5 million, or $0.79 per diluted share, in the first six months of 2004 and by $19.3 million, or $0.44 per share, in the comparable period of 2003. The decline in earnings before the items discussed above was primarily due to lower selling prices in our Printing & Converting Papers business unit and, to a lesser extent, in the Engineered Products and Long Fiber & Overlay Papers business units.
Business Units
We manage our organization along separate business units: Engineered Products, Long-Fiber & Overlay Papers and Printing & Converting Papers, as well as Tobacco Papers, which were sold pursuant to a supply agreement that expired at the end of July 2004. Effective January 1, 2004, we implemented organizational changes and as a result we realigned and reclassified the presentation of certain product offerings of the business units. All segment data herein for prior periods has been restated to give effect to the further refinement of our organizational structure discussed above.
GLATFELTER
- 20 -
The following table sets forth operating profit (loss) by business unit and the composition of consolidated income from continuing operations before income taxes:
Six Months Ended | ||||||||
June 30 |
||||||||
In millions |
2004 |
2003 |
||||||
Business Unit |
||||||||
Engineered Products |
$ | (3.3 | ) | $ | 1.0 | |||
Long-Fiber & Overlay Papers |
6.9 | 7.3 | ||||||
Printing & Converting Papers |
(11.3 | ) | (0.7 | ) | ||||
Tobacco Papers |
(0.2 | ) | (2.8 | ) | ||||
Total Business Unit |
(7.9 | ) | 4.8 | |||||
Energy sales, net |
5.3 | 5.0 | ||||||
Pension income, net |
8.7 | 9.0 | ||||||
Restructuring charge |
(0.9 | ) | | |||||
Gain on dispositions of plant, equipment and
timberlands |
33.4 | 31.4 | ||||||
Gain on insurance recoveries |
25.5 | | ||||||
Total operating income |
64.1 | 50.2 | ||||||
Interest expense |
(6.7 | ) | (7.1 | ) | ||||
Other income (expense), net |
0.8 | (0.3 | ) | |||||
Income from continuing operations before income
taxes |
$ | 58.2 | $ | 42.8 |
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. Costs to produce products sold are allocated to the respective business unit based on standard costs and a proportion of manufacturing variances. The costs incurred by support areas not directly aligned with a business unit are allocated primarily based on an estimated utilization of support area services.
Management evaluates results of operations before energy sales, non-cash pension income, restructuring related charges, unusual items and effects of asset dispositions because it believes this is a more meaningful representation of the operating performance of its core papermaking businesses, the profitability of business units and the extent of cash flow generated from core operations. This presentation is closely aligned with the management and operating structure of our Company. It is also on this basis that the
Companys performance is evaluated internally and by our Board of Directors.
Sales and Costs of Products Sold
The following table sets forth information with respect to net sales, costs of products sold and gross profit:
Six Months Ended | ||||||||||||
June 30 |
||||||||||||
Dollars in thousands |
2004 |
2003 |
Change |
|||||||||
Net sales |
$ | 261,106 | $ | 271,906 | $ | (10,800 | ) | |||||
Energy sales
- - net |
5,308 | 5,052 | 256 | |||||||||
Total revenues |
266,414 | 276,958 | (10,544 | ) | ||||||||
Cost of products sold |
229,873 | 228,382 | 1,491 | |||||||||
Gross profit |
36,541 | 48,576 | $ | (12,035 | ) | |||||||
Gross margin as a percent of Net
Sales |
14.0 | % | 17.9 | % |
The decline in net sales was primarily attributable to lower sales volumes totaling $3.6 million primarily related to the fourth quarter of 2003 shutdown of a papermaking machine at our Neenah, WI facility, which primarily served our Printing & Converting Papers business unit. In addition, average selling prices declined, on a constant currency basis, an aggregate of $12.7 million, primarily in the Printing & Converting Papers business unit and, to a lesser extent, in Engineered Products and Long Fiber & Overlay Papers. Pricing for Printing & Converting Papers products improved in the second quarter of 2004 relative to the first quarter of 2004 and prices for certain of the units product offerings are expected to increase further during the third quarter of this year.
The impact of the decline in selling prices and the Neenah shutdown was partially offset by a 10.4% and 12.0% unit volume increase in our Engineered Products and Long Fiber & Overlay Papers business units, respectively. In addition, the favorable effect of a weaker U.S. dollar on translated results of international operations increased reported net sales by approximately $8.5 million. However, the weaker U.S. dollar relative to the Euro adversely affected the price competitiveness of Long Fiber & Overlay Papers products in certain geographic markets.
GLATFELTER
- 21 -
The following tables set forth net sales information by business unit:
Six Months Ended June 30 |
||||||||
Dollars in millions |
2004 |
2003 |
||||||
Business Unit |
||||||||
Engineered Products |
$ | 55.1 | $ | 51.9 | ||||
Long-Fiber & Overlay Papers |
97.3 | 79.7 | ||||||
Printing & Converting Papers |
107.9 | 134.0 | ||||||
Tobacco Papers |
0.8 | 6.3 | ||||||
Total |
$ | 261.1 | $ | 271.9 | ||||
Percent of Total |
||||||||
2004 |
2003 |
|||||||
Business Unit |
||||||||
Engineered Products |
21.1 | % | 19.0 | % | ||||
Long-Fiber & Overlay Papers |
37.3 | 29.3 | ||||||
Printing & Converting Papers |
41.3 | 49.4 | ||||||
Tobacco Papers |
0.3 | 2.3 | ||||||
Total |
100.0 | % | 100.0 | % | ||||
Costs of products sold increased $1.5 million in the comparison. The increase was primarily due to a $6.5 million unfavorable effect of foreign currency translation adjustments, a $5.0 million increase in costs due to higher purchased fiber and energy costs at the Neenah facility and transition-related operating inefficiencies related to the 2003 Neenah restructuring, partially offset by $7.8 million of lower production costs related to the decline in sales volumes. During the second quarters of 2004 and 2003, the Company completed the annually scheduled maintenance shutdown of its Spring Grove facility. These shutdowns result in increased maintenance spending and reduced production leading to unfavorable manufacturing variances that increase costs of products sold. The Spring Grove maintenance shutdown had an estimated impact on gross profit of approximately $5.5 million in the first six months of 2004 and $6.1 million in the comparable period a year ago.
Non-Cash Pension Income
Non-cash pension income results from the considerably over-funded status of our plans. The amount of pension income recognized each year is determined using various actuarial assumptions and certain other factors, including the fair value of our pension assets as of the beginning of the year. The following summarizes non-cash pension income for each quarter:
Six Months Ended | ||||||||||||
June 30 |
||||||||||||
In thousands |
2004 |
2003 |
Change |
|||||||||
Recorded as: |
||||||||||||
Costs of products sold |
$ | 7,978 | $ | 7,884 | $ | 94 | ||||||
SG&A expense |
705 | 1,114 | (409 | ) | ||||||||
Total |
$ | 8,683 | $ | 8,998 | $ | (315 | ) | |||||
Non-cash pension income for the full year of 2004 is expected to approximate amounts recognized in 2003.
Operating Expenses
Six Months Ended | ||||||||||||
June 30 |
||||||||||||
In thousands |
2004 |
2003 |
Change |
|||||||||
SG&A expenses |
$ | 30,513 | $ | 29,771 | $ | 742 | ||||||
Restructuring Charges |
867 | | 867 | |||||||||
Gains on sales of plant,
equipment and timberlands |
(33,430 | ) | (31,401 | ) | (2,029 | ) | ||||||
Gains from insurance recoveries |
(25,500 | ) | | (25,500 | ) | |||||||
Selling, General and Administrative (SG&A) SG&A expenses increased during the first six months of 2004 compared to the same period of 2003 primarily due to higher legal fees associated with $25.5 million of insurance recoveries, costs associated with implementing the North American Restructuring Program, and the unfavorable impact of foreign currency translation adjustments.
Restructuring Charges Restructuring charges in the first six months of 2004 totaled $0.9 million for severance and related benefits associated with the elimination of approximately 25 non-union positions in connection with the North American Restructuring Program and for increases to the 2003 Neenah restructuring accrual.
As discussed earlier, we expect to record, in the third quarter of 2004, a restructuring charge of between approximately $9 million and $20 million. The charge is primarily for enhanced pension benefits, post-retirement medical benefits and other related employee severance costs associated with the reduction of our Spring Grove facility workforce. The workforce reduction is expected to be completed by the end of 2004. Pension related charges will be recorded as a reduction of the prepaid pension benefit costs. The cash required to complete the Spring Grove facility workforce reduction is expected to total approximately $3 million to $7 million.
GLATFELTER
- 22 -
Gain on Sales of Plant, Equipment and Timberlands
During the first six months of 2004 and 2003, we completed sales of timberlands and, in 2004, the corporate aircraft. The following table summarizes these transactions.
Dollars in thousands |
Acres |
Proceeds |
Gain |
|||||||||
Six Months Ended June 30, 2004 |
||||||||||||
Timberlands |
2,332 | $ | 30,283 | $ | 29,972 | |||||||
Corporate aircraft |
n/a | 2,861 | 2,554 | |||||||||
Other |
n/a | 964 | 904 | |||||||||
Total |
$ | 34,108 | $ | 33,430 | ||||||||
Six Months Ended June 30, 2003 |
||||||||||||
Maryland Timberlands |
25,500 | $ | 37,850 | $ | 31,234 | |||||||
Other |
n/a | 1,080 | 167 | |||||||||
Total |
$ | 38,930 | $ | 31,401 | ||||||||
All property sales completed in the first six months of 2004 were sold for cash. As consideration for the Maryland Timberlands, we received a 10-year note from a subsidiary of The Conservation Fund in the principal amount of $37.9 million (the Note), which is included in Other assets in the Condensed Consolidated Balance Sheet.
Insurance Recoveries
During the first six months of 2004, we reached successful resolution of certain claims under insurance policies related to the Fox River environmental matter. Insurance recoveries included in the results of operations for the first six months of 2004 totaled $25.5 million and were received in cash prior to June 30, 2004.
On August 6, 2004, we received an additional $7.3 million of insurance recoveries that will be recorded in the third quarter of 2004. We continue to pursue legal actions against certain other insurers that we believe are liable under similar policies related to the Fox River environmental matter.
Income Taxes
Our provision for income taxes for the first six months of 2004 and 2003, totaled $23.6 million and $15.4 million, respectively, and the effective tax rate in the same periods was 40.5% and 36.0%, respectively. The increase in the effective tax rate was due to the effect of changes in certain German tax laws that limited the deductibility of interest expense based on the ratio of debt to equity and other factors. In the first six months of 2004, substantially all of our income from operations, excluding gains from sales of property and insurance recoveries, was generated overseas where our
effective tax rate was 46%. Based on interpretations recently issued by German taxing authorities and our tax planning initiatives, we expect our effective tax rate for international operations to be approximately 46% for the 2004 fiscal year.
Foreign Currency
We own and operate paper and pulp mills in Germany, France and the Philippines. The local currency in Germany and France is the Euro, while in the Philippines the currency is the Peso. These operations generated approximately 33% of our sales and approximately 32% of our operating expenses during the first six months of 2004. The translation of the results from these international operations into U.S. dollars is subject to changes in foreign currency exchange rates.
The following table summarizes the effect from foreign currency translation on reported results compared to the first six months of 2003:
Six Months Ended | ||||
In millions |
June 30, 2004 |
|||
Favorable | ||||
(unfavorable) | ||||
Net sales |
$ | 8.5 | ||
Costs of products sold |
(6.5 | ) | ||
SG&A expenses |
(0.8 | ) | ||
Income taxes and other |
(0.1 | ) | ||
Net income |
$ | 1.1 | ||
The above table only presents the financial reporting impact of foreign currency translations. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in a global, multi-currency environment. The strengthening of the Euro relative to certain other currencies, in the first six months of 2004 compared to the same period of 2003, adversely affected average selling prices of products sold by our Long Fiber & Overlay Papers business unit that is based in Germany.
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 $1.7 million and the remaining amount is to be paid in annual installments, the first of which was received in July 2004. The financial results of this subsidiary are reported as discontinued operations for all periods presented. Revenue included in determining results from discontinued operations totaled $2.6 million for the first six months of 2003. The financial results of this operation were previously reported in the Engineered Products business unit.
GLATFELTER
- 23 -
Three
Months Ended June 30, 2004 Compared to
Three Months Ended June 30, 2003
The following table sets forth summarized results of operations:
Three Months Ended | ||||||||
June 30 |
||||||||
In thousands, except per share |
2004 |
2003 |
||||||
Net sales |
$ | 129,029 | $ | 129,620 | ||||
Gross profit |
16,042 | 18,269 | ||||||
Operating income |
176 | 4,386 | ||||||
Income (loss) from continuing operations |
(1,629 | ) | 682 | |||||
Loss from discontinued operations |
| (413 | ) | |||||
Net income (loss) |
(1,629 | ) | 269 | |||||
Earnings (loss) per diluted share from continuing
operations |
(0.04 | ) | 0.02 | |||||
Earnings (loss) per diluted share |
(0.04 | ) | 0.01 |
Business Units
The following table sets forth operating profit (loss) by business unit and the composition of consolidated income from continuing operations before income taxes:
Three Months Ended | ||||||||
June 30 |
||||||||
In millions |
2004 |
2003 |
||||||
Business Unit |
||||||||
Engineered Products |
$ | (2.8 | ) | $ | (2.2 | ) | ||
Long Fiber & Overlay Papers |
3.1 | 2.3 | ||||||
Printing & Converting Papers |
(6.9 | ) | (1.8 | ) | ||||
Tobacco Papers |
(0.1 | ) | (1.6 | ) | ||||
Total Business Unit |
(6.7 | ) | (3.3 | ) | ||||
Energy sales, net |
2.9 | 2.8 | ||||||
Pension income, net |
4.2 | 4.1 | ||||||
Restructuring charge |
(0.9 | ) | | |||||
Gain on dispositions of plant, equipment and
timberlands |
0.4 | 0.8 | ||||||
Gain on insurance recoveries |
0.3 | | ||||||
Total operating income |
0.2 | 4.4 | ||||||
Interest expense |
(3.3 | ) | (3.7 | ) | ||||
Other income (expense), net |
0.2 | 0.4 | ||||||
Income (loss) from continuing operations before
income taxes |
$ | (2.9 | ) | $ | 1.1 | |||
Sales and Costs of Products Sold
The following table sets forth information with respect to net sales, costs of products sold and gross profit:
Three Months Ended | ||||||||||||
June 30 |
||||||||||||
Dollars in thousands |
2004 |
2003 |
Change |
|||||||||
Net Sales |
$ | 129,029 | $ | 129,620 | $ | (591 | ) | |||||
Energy sales
- - net |
2,894 | 2,775 | 119 | |||||||||
Total revenues |
131,923 | 132,395 | (472 | ) | ||||||||
Cost of products sold |
115,881 | 114,126 | 1,755 | |||||||||
Gross profit |
$ | 16,042 | $ | 18,269 | $ | (2,227 | ) | |||||
Gross margin as a percent of Net
Sales |
12.4 | % | 14.1 | % |
The decline in net sales was primarily attributable to lower sales volumes in our Printing & Converting Papers business unit totaling $6.2 million that was related to the fourth quarter of 2003 shutdown of a papermaking machine at our Neenah, WI facility. In addition, average selling prices declined, on a constant currency basis, an aggregate of $5.2 million, primarily in the Printing & Converting Papers business unit and, to a lesser extent, in Engineered Products and Long Fiber & Overlay Papers. Pricing for Printing & Converting Papers products improved in the second quarter of 2004 relative to the first quarter of 2004 and prices for certain of the units product offerings are expected to increase further during the third quarter of this year.
The impact of the decline in selling prices and the Neenah shutdown was partially offset by a 8.6% and 17.0% unit volume increase in our Engineered Products and Long Fiber & Overlay Papers business units, respectively. In addition, the favorable effect of a weaker U.S. dollar on translated results of international operations increased reported net sales by approximately $2.4 million. However, the weaker U.S. dollar relative to the Euro adversely affected the price competitiveness of Long Fiber & Overlay Papers products in certain geographic markets.
GLATFELTER
- 24 -
The following tables set forth net sales information by business unit:
Three Months Ended June 30 |
||||||||
Dollars in millions |
2004 |
2003 |
||||||
Business Unit |
||||||||
Engineered Products |
$ | 27.4 | $ | 26.8 | ||||
Long-Fiber & Overlay Papers |
48.5 | 37.7 | ||||||
Printing & Converting Papers |
52.8 | 62.8 | ||||||
Tobacco Papers |
0.3 | 2.3 | ||||||
Total |
$ | 129.0 | $ | 129.6 | ||||
Percent of Total |
||||||||
2004 |
2003 |
|||||||
Business Unit |
||||||||
Engineered Products |
21.3 | % | 20.7 | % | ||||
Long-Fiber & Overlay Papers |
37.6 | 29.0 | ||||||
Printing & Converting Papers |
40.9 | 48.5 | ||||||
Tobacco Papers |
0.2 | 1.8 | ||||||
Total |
100.0 | % | 100.0 | % | ||||
The $1.8 million increase in costs of products sold was primarily due to a $1.8 million unfavorable effect of foreign currency translation adjustments, a $3.4 million increase in costs due to higher purchased fiber and energy costs at the Neenah facility and transition-related operating inefficiencies related to the 2003 Neenah restructuring, and changes in product mix. These increases were partially offset by lower sales volumes and lower production costs at certain facilities. During the second quarters of 2004 and 2003, the Company completed its annually scheduled maintenance shutdown of its Spring Grove, PA facility. These shutdowns result in increased maintenance spending and reduced production leading to unfavorable manufacturing variances that increase costs of products sold. The Spring Grove maintenance shutdown had an estimated impact on gross profit of approximately $5.5 million in the second quarter of 2004 and $6.1 million in the comparable quarter a year ago.
Non-Cash Pension Income
Non-cash pension income results from the considerably over-funded status of our plans. The amount of pension income recognized each year is determined using various actuarial assumptions and certain other factors, including the fair value of our pension assets as of the beginning of the year. The following summarizes non-cash pension income for each quarter:
Three Months Ended | ||||||||||||
June 30 |
||||||||||||
In thousands |
2004 |
2003 |
Change |
|||||||||
Recorded as: |
||||||||||||
Costs of products sold |
$ | 3,872 | $ | 3,554 | $ | 318 | ||||||
SG&A expense |
296 | 514 | (218 | ) | ||||||||
Total |
$ | 4,168 | $ | 4,068 | $ | 100 | ||||||
Non-cash pension income for the full year of 2004 is expected to approximate amounts recognized in 2003.
Selling, General and Administrative (SG&A) Selling, general and administrative (SG&A) expenses in the second quarter of 2004 totaled $15.7 million compared with $14.7 million in the year-earlier quarter. The $1.0 million increase was primarily due to higher legal fees related to $25.5 million of insurance recoveries received in 2004, and to costs associated with implementing the North American Restructuring Program.
Restructuring Charges Restructuring charges in the second quarter of 2004 totaled $0.9 million for severance and related benefits associated with the elimination of approximately 25 non-union positions in connection with the North American Restructuring Program and for increases to the 2003 Neenah restructuring severance related accrual.
Income Taxes For the three months ended June 30, 2004, we recorded an income tax benefit of $1.3 million compared to an income tax provision of $0.4 million in the year-earlier quarter. The effective tax rate in the same periods was 44.2% and 36.8%, respectively. The increase in the effective tax rate was due to the effect of changes in certain German tax laws that limited the deductibility of interest expense based on the ratio of debt to equity and other factors. In the second quarter of 2004, our effective tax rate on income generated from international operations was 21%, compared with 61.9% in the first quarter of 2004. The lower effective tax rate reflects the effect of recent interpretations of the new tax laws issued by the German tax authorities.
Foreign Currency
We own and operate paper and pulp mills in Germany, France and the Philippines. The local currency in Germany and France is the Euro, while in the Philippines the currency is the Peso. These operations generate approximately 33% of our sales and approximately 32% of our operating expenses during the three months ended June 30, 2004. The translation of the results from these international operations into U.S. dollars is subject to changes in foreign currency exchange rates.
GLATFELTER
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The following table summarizes the effect from foreign currency translation on reported results compared to the second quarter of 2003:
Three Months Ended | ||||
In millions |
June 30, 2004 |
|||
Favorable | ||||
(unfavorable) | ||||
Net sales |
$ | 2.4 | ||
Costs of products sold |
(1.8 | ) | ||
SG&A expenses |
(0.2 | ) | ||
Income taxes and other |
| |||
Net income |
$ | 0.4 | ||
The above table only presents the financial reporting impact of foreign currency translations. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in a global, multi-currency environment. In the second quarter of 2004, the strengthening of the Euro relative to certain other currencies adversely affected average selling prices of products sold by our Long Fiber & Overlay Papers business unit that is based in Germany.
LIQUIDITY AND CAPITAL RESOURCES
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.
The following table summarizes cash flow information for each of the periods presented.
Six Months Ended | ||||||||
June 30 |
||||||||
In millions |
2004 |
2003 |
||||||
Cash and cash equivalents at beginning of period |
$ | 15.6 | $ | 32.2 | ||||
Cash provided by (used for)
Operating activities |
16.8 | 32.0 | ||||||
Investing activities, net |
23.0 | (44.5 | ) | |||||
Financing activities |
(44.0 | ) | 6.6 | |||||
Discontinued operations |
| (0.3 | ) | |||||
Effect of exchange rate changes on cash |
(0.3 | ) | 1.4 | |||||
Net cash used |
(4.5 | ) | (4.8 | ) | ||||
Cash and cash equivalents at end of period |
$ | 11.1 | $ | 27.4 | ||||
The decrease in cash generated from operations was primarily due to the use of $26.5 million of cash to fund payments pursuant to the Fox River Consent Decree, a $12.0 million decline in gross profit and changes in working capital, that were partially offset by gains from insurance recoveries.
The changes in investing cash flows reflects cash proceeds in the first six months of 2004 from
dispositions of property, equipment and timberlands and lower capital expenditures compared to 2003. Capital expenditures for the full year 2004 are expected to approximate one-half of our annual depreciation expense. The reduction in capital expenditures is not expected to have a significant effect on our results of operations, as we will continue to complete necessary repairs and maintenance activities.
During the first half of 2004, excess cash flow from operating and investing activities were used to reduce long-term debt by approximately $37 million and to make dividend payments.
The following table sets forth our outstanding long-term indebtedness:
June 30, | December 31, | |||||||
In thousands |
2004 |
2003 |
||||||
Revolving credit facility, due June 2006 |
$ | 27,528 | $ | 64,047 | ||||
67/8% Notes, due July 2007 |
150,000 | 150,000 | ||||||
Note payable SunTrust, due March 2008 |
34,000 | 34,000 | ||||||
Other notes, various |
794 | 1,228 | ||||||
Total long-term debt |
212,322 | 249,275 | ||||||
Less current portion |
(785 | ) | (806 | ) | ||||
Long-term debt, excluding current portion |
$ | 211,537 | $ | 248,469 | ||||
The significant terms of the debt obligations are set forth in Item 1 Financial Statements, Note 13.
Dividend Payments During the first six months of 2004 and 2003, cash dividends paid on common stock totaled $7.9 million and $15.3 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.
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 mills we operate, or have operated. 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
GLATFELTER
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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.
As more fully discussed in Item 1 Financial Statements Note 15, we entered into a Consent Decree with the various governmental agencies related to the remediation of Operable Unit 1 (OU1) of the lower Fox River.
The OU1 Consent Decree required us 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 | ||
All amounts due through June 30, 2004 were paid pursuant to terms of the agreement.
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, potential additional proceeds from insurance recoveries, our existing credit facility or other bank lines of credit and other long-term debt. An unfavorable outcome of various environmental matters could have a material adverse impact on our consolidated financial position, liquidity and/or results of operations.
Off-Balance Sheet Arrangements As of June 30, 2004 and December 31, 2003, we had not entered into any off-balance-sheet arrangements. All derivative financial instruments to which we are a party and guarantees of indebtedness, which solely consist of our subsidiaries obligations, are reflected in the consolidated balance sheets included herein in Item 1 Financial Statements.
Outlook Our results for the first six months of 2004 compared to a year ago reflect the imbalance in our industry where global supply exceeded demand for certain of our products. This environment was most prevalent in our Printing & Converting Papers business unit, which experienced significant pricing declines throughout 2003. However, we believe that the economic environment for the business has improved.
Continuing a trend that began in the first quarter of 2004, pricing and demand in our Printing & Converting Papers business unit strengthened throughout the second quarter, reversing the declining conditions experienced throughout 2003. We continue to expect strong demand across many of our product offerings compared with the end of 2003 and we expect pricing improvements in the Printing & Converting Papers business unit during the third quarter of 2004.
We expect demand trends in our Engineered Products business unit to continue to be relatively stable. Further, we expect select price increases to be implemented during the third quarter of 2004.
Demand for our Long Fiber & Overlay Papers remains relatively stable, although certain products, primarily tea bag papers, experience seasonal fluctuations. We do not expect significant price variations, on a constant currency basis, in this business unit. However, the weakening of the U.S. dollar can adversely impact Long Fiber & Overlays price competitiveness in markets whose currencies are denominated in, or tied to, the dollar.
The costs to produce our products is dependent on, among other factors, market prices for wood pulp and pulp fibers, abaca fiber and energy. We expect pulp and fiber prices to be higher during the remainder of 2004 compared to the first half of 2004.
In September 2003, we announced a restructuring program designed to generate annual pre-tax financial benefits at our Neenah facility of $8 million to $11 million. As of June 30, 2004, we had largely completed the planned restructuring of the Neenah facility that included the shutdown of the recycled pulp mill and one paper machine, and a 50% workforce reduction at the facility. However, as a result of this facilitys higher purchased fiber and energy costs, and transition-related operating inefficiencies, we now expect that the actions taken at Neenah will not lead to a realization of the financial benefits originally expected to be achieved in 2004. We continue to expect that the benefits of the Neenah restructuring will be more fully reflected in the operating results of the facility as transition related issues are resolved and when fiber and energy costs return to more normalized levels.
GLATFELTER
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Year Ended December 31 |
At June 30, 2004 |
|||||||||||||||||||||||||||
Carrying | ||||||||||||||||||||||||||||
Dollars in thousands |
2004 |
2005 |
2006 |
2007 |
2008 |
Value |
Fair Value |
|||||||||||||||||||||
Long-term debt |
||||||||||||||||||||||||||||
Average principal outstanding
|
||||||||||||||||||||||||||||
At fixed interest rates |
$ | 184,785 | $ | 184,785 | $ | 184,785 | $ | 127,750 | $ | 8,500 | $ | 184,794 | $ | 195,474 | ||||||||||||||
At variable interest rates |
27,528 | 27,528 | 27,528 | | | 27,528 | 27,528 | |||||||||||||||||||||
Weighted-average interest rate
|
||||||||||||||||||||||||||||
On fixed interest rate debt |
6.31 | % | 6.31 | % | 6.31 | % | 6.06 | % | 6.06 | % | ||||||||||||||||||
On variable interest rate debt |
2.92 | % | 2.93 | % | 2.93 | % | | | ||||||||||||||||||||
Cross-currency swap |
||||||||||||||||||||||||||||
Pay variable EURIBOR |
| 72,985 | | 72,985 | | 34,993 | | | $ | (18,721 | ) | $ | (18,721 | ) | ||||||||||||||
Variable rate payable |
2.87 | % | 2.87 | % | 2.87 | % | | | ||||||||||||||||||||
Receive variable US$ LIBOR |
$ | 70,000 | $ | 70,000 | $ | 33,562 | | | ||||||||||||||||||||
Variable rate receivable |
2.20 | % | 2.20 | % | 2.20 | % | | |
The table above 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.
Our market risk exposure primarily results from changes in interest rates and currency exchange rates. At June 30, 2004, we had long-term debt outstanding of $212.3 million, of which $27.5 million, or 13.0%, was at variable interest rates.
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 June 30, 2004, the interest rate paid was 2.92%. A hypothetical 100 basis point increase or decrease in the interest rate on variable rate debt would increase or decrease annual interest expense by $0.3 million.
At June 30, 2004, 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 73 million, 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 inter-company obligations recorded at our subsidiary in Gernsbach, Germany, S&H. The cross-currency swaps are recorded at fair value on the Condensed Consolidated Balance Sheet under the caption Other long-term liabilities.
Changes in fair value are recognized in earnings as Other income (expense) in the Condensed 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 inter-company 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 six months ended June 30, 2004, approximately 68% of our net sales were shipped from the United States, 28% from Germany, and 4% from other international locations.
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 the end of the period covered by the report, have concluded that our disclosure controls and procedures were effective.
Changes in Internal Controls
There was no change in our internal control over financial reporting during the period covered by this report that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
GLATFELTER
- 28 -
PART II
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of holders of Glatfelter common stock was held on April 28, 2004. At this meeting, shareholders voted on the following matters (with the indicated tabulated results). |
i. | The election of three members of the Board of Directors to serve for full three-year terms expiring in 2007. |
Director |
For |
Withheld |
||||||
Kathleen A. Dahlberg |
39,478,744 | 208,543 | ||||||
Richard C. Ill |
39,484,889 | 202,398 | ||||||
Lee C. Stewart |
39,485,438 | 201,849 |
George H. Glatfelter II, Nicholas DeBenedictis, J. Robert Hall, M. Alanson Johnson II, Ronald J. Naples and Richard L. Smoot also serve as directors of Glatfelter, and their terms of office continued after the Annual Meeting. |
A shareholder proposal to redeem any poison pill previously issued, if any, and not adopt or extend any poison pill unless such adoption or extension has been submitted to a shareholder vote.
For |
15,086,079 | |||
Against |
20,075,332 | |||
Withheld |
405,950 | |||
Broker non-votes |
4,119,926 |
ITEM 5. OTHER INFORMATION
On July 8, 2004, we filed a registration statement on Form S-3 with the Securities and Exchange Commission for a proposed public offering of our common stock by certain existing shareholders. The registration statement has not yet become effective. The selling shareholders consist of trusts created by or for the benefit of descendants of Philip H. Glatfelter, the founder of our company. The selling shareholders intend to offer 6.5 million shares of common stock and grant the underwriters an option to purchase up to 975,000 additional shares of common stock to cover over-allotments, if any. We will not receive any proceeds from the sale of shares by the selling shareholders.
GLATFELTER
-29-
ITEM 6. EXHIBITS and REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith.
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 Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
31.2 | Certification of John C. van Roden, Jr., Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
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 1350. | |||
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. |
(b) Current Report on Form 8-K
The following Current Reports on Form 8-K were furnished during the quarter ended June 30, 2004:
Pursuant to | ||||
Date of Report |
Description |
Item No. |
||
April 22, 2004
|
Form 8-K dated April 22, 2004, to report the issuance of our earnings press release for the three months ended March 31, 2004. | 7, 12 |
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.
P. H. GLATFELTER COMPANY | ||||
(Registrant) | ||||
August 9, 2004 |
||||
By | /s/ John P. Jacunski | |||
John P. Jacunski | ||||
Vice President and | ||||
Corporate Controller | ||||
(as chief accounting officer) |
GLATFELTER
-30-
EXHIBIT INDEX
Exhibit | ||
Number |
Description |
|
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 Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. | |
31.2
|
Certification of John C. van Roden, Jr., Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 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. |
GLATFELTER
-31-