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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-3560
P. H. GLATFELTER COMPANY
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0628360
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
96 South George Street, Suite 500, York, Pennsylvania 17401
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(Address of principal executive offices) (Zip Code)
(717) 225-4711
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
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Shares of Common Stock outstanding at April 30, 2001 were 42,462,113.
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P. H. GLATFELTER COMPANY
INDEX
Part I - Financial Information
Financial Statements:
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2001 and 2000 (Unaudited)...... 3
Condensed Consolidated Balance Sheets - March 31, 2001
(Unaudited) and December 31, 2000........................... 4
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2001 and 2000 (Unaudited)............ 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 6
Independent Accountants' Report............................................. 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 13
Quantitative and Qualitative Disclosures About Market Risk.................. 18
Part II - Other Information................................................. 18
Signature................................................................... 20
Index of Exhibits........................................................... 21
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(UNAUDITED)
Three Months Ended
3/31/01 3/31/00
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Revenues:
Net sales $ 185,646 $ 187,658
Other income - net:
Energy sales - net 2,312 2,466
Interest on investments
and other - net 1,378 1,288
Gain from property
dispositions, etc. - net 500 308
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4,190 4,062
Total revenues 189,836 191,720
Cost and expenses:
Cost of products sold 145,921 154,151
Selling, general and
administrative expenses 15,500 13,103
Interest on debt 4,442 4,380
Unusual item -- 3,336
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165,863 174,970
Income before income taxes 23,973 16,750
Income tax provision:
Current 6,274 4,490
Deferred 2,335 1,616
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Total 8,609 6,106
Net income $ 15,364 $ 10,644
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Basic and diluted earnings per share $ 0.36 $ 0.25
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See accompanying notes to condensed consolidated financial statements.
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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
3/31/01
(unaudited) 12/31/00
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ASSETS
Current assets:
Cash and cash equivalents $ 89,142 $ 110,552
Accounts receivable - net 85,027 72,231
Inventories
Raw materials 25,662 27,789
In-process and finished 44,364 43,819
Supplies 29,890 29,686
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Total inventories 99,916 101,294
Prepaid expenses and other current assets 3,046 2,547
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Total current assets 277,131 286,624
Plant, equipment and timberlands - net 544,475 552,768
Other assets 180,753 173,799
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Total assets $ 1,002,359 $ 1,013,191
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,345 $ 1,419
Short-term debt 2,499 5,158
Accounts payable 37,108 45,869
Dividends payable 7,428 7,430
Income taxes payable 12,032 7,328
Accrued compensation and other expenses
and deferred income taxes 43,804 51,980
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Total current liabilities 104,216 119,184
Long-term debt 291,787 300,245
Deferred income taxes 157,788 155,360
Other long-term liabilities 66,113 65,699
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Total liabilities 619,904 640,488
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Commitments and contingencies
Shareholders' equity:
Common stock 544 544
Capital in excess of par value 41,525 41,669
Retained earnings 519,289 511,019
Accumulated other comprehensive income (2,048) (2,843)
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Total 559,310 550,389
Less cost of common stock in treasury (176,855) (177,686)
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Total shareholders' equity 382,455 372,703
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Total liabilities and
shareholders' equity $ 1,002,359 $ 1,013,191
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See accompanying notes to condensed consolidated financial statements.
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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
Three Months Ended
3/31/01 3/31/00
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Cash flows from operating activities:
Net income $ 15,364 $ 10,644
Items included in net income not using cash:
Depreciation, depletion and amortization 11,840 11,820
Loss on disposition of fixed assets -- 98
Expense related to 401(k) plans 747 481
Change in assets and liabilities:
Accounts receivable (14,409) (14,406)
Inventories 151 4,932
Other assets and prepaid expenses (7,695) (5,471)
Accounts payable, accrued compensation and
other expenses, deferred income taxes
and other long-term liabilities (14,327) (7,217)
Income taxes payable 4,197 4,431
Deferred income taxes - noncurrent 2,488 2,791
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Net cash provided by (used in) operating activities (1,644) 8,103
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Cash flows from investing activities:
Proceeds from disposal of fixed assets 16 40
Additions to plant, equipment and timberlands (9,468) (3,429)
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Net cash used in investing activities (9,452) (3,389)
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Cash flows from financing activities:
Net payment of debt (2,797) (638)
Dividends paid (7,418) (7,393)
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Net cash used in financing activities (10,215) (8,031)
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Effect of exchange rate changes on cash (99) 1
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Net decrease in cash and cash equivalents (21,410) (3,316)
Cash and cash equivalents:
At beginning of year 110,552 76,035
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At end of period $ 89,142 $ 72,719
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Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 6,941 $ 7,168
Income taxes 383 265
See accompanying notes to condensed consolidated financial statements.
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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. EARNINGS PER SHARE ("EPS")
Basic EPS excludes the dilutive impact of common stock equivalents and
is computed by dividing net income by the weighted-average number of
shares of common stock outstanding for the period. Diluted EPS includes
the effect of potential dilution from the issuance of common stock,
pursuant to common stock equivalents, using the treasury stock method.
A reconciliation of the Registrant's basic and diluted EPS follows with
the dollar and share amounts in thousands:
Three Months Ended
March 31
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2001 2000
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Shares Shares
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Basic EPS factors 42,418 42,267
Effect of potentially dilutive
employee incentive plans:
Restricted stock awards 130 62
Performance stock awards 29 39
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Diluted EPS factors 42,577 42,368
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Net income $ 15,364 $ 10,644
Basic and diluted EPS $ 0.36 $ 0.25
Basic and diluted EPS of $.25 for the three months ended March 31,
2000, as presented on the Condensed Consolidated Statement of Income,
reflects the negative impact of an after-tax restructuring charge
(unusual item) of $.05 per share (see Note 2).
2. UNUSUAL ITEM
The Registrant announced in September 1999 that, effective January 1,
2000, prices would be increased for certain of its tobacco paper
products. This initiative was required for the Registrant to remain a
viable, high-quality supplier to its tobacco paper customers. As the
Registrant expected, certain of these customers sought other suppliers
after this announcement. As a result, the Registrant announced in
December 1999 that it would begin reducing its tobacco paper
manufacturing capacity at its Ecusta mill during 2000.
During the first quarter of 2000, the Registrant finalized its plan of
restructuring and shortly thereafter began to reduce the workforce at
Ecusta. The workforce reduction has been completed and has resulted in
the reduction of approximately 220 salaried and hourly jobs associated
with the Registrant's tobacco paper production capacity. The Registrant
accrued and charged to expense $3,336,000 ($2,120,000 after tax) in the
first quarter of 2000 primarily as a result of the voluntary portion,
specifically 42 salaried employees, of this restructuring. The amount
of actual termination benefits paid and charged against the liability
as of March 31, 2001 was $795,000.
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3. RECENT ACCOUNTING PRONOUNCEMENTS AND RECLASSIFICATIONS
On January 1, 2001, the Registrant adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended and
interpreted, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the
derivative is designated in a fair-value hedge, changes in the fair
value of the derivative and the hedged item are recognized in earnings.
If the derivative is designated in a cash-flow hedge, changes in the
fair value of the derivative are recorded in other comprehensive income
("OCI") and are recognized in the income statement when the hedged item
affects earnings. SFAS No. 133 defines new requirements for designation
and documentation of hedging relationships as well as ongoing
effectiveness assessments and measurements to use hedge accounting. The
ineffective portion of a hedging derivative's change in fair value is
immediately recognized in earnings. For a derivative that does not
qualify as a hedge, changes in fair value are recognized in earnings.
The adoption of SFAS No. 133 on January 1, 2001 resulted in an $845,000
increase in OCI as a cumulative transition adjustment for derivatives
designated in cash flow-type hedges prior to adopting SFAS No. 133. Due
to its limited use of derivative instruments, the effect on earnings of
adopting SFAS No. 133 was immaterial.
During the fourth quarter of 2000, the Registrant adopted the
provisions of the Emerging Issues Task Force ("EITF") Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs." In accordance
with the provisions of EITF 00-10, certain shipping and handling costs
that the Registrant had previously recorded as a deduction in
determining net sales have been reclassified to cost of products sold.
As a result of adopting EITF 00-10, the Registrant has reclassified
such shipping and handling costs on its Condensed Consolidated
Statement of Income for the three months ended March 31, 2000 to
reflect comparable reporting.
4. INTEREST RATE SWAP AGREEMENTS
In January 1999, the Registrant entered into two interest rate swap
agreements, each having a total notional principal amount of DM
50,000,000 (approximately $22,500,000 as of March 31, 2001). Under
these agreements, which were effective April 6, 1999 and July 6, 1999
and which expire December 22, 2002, the Registrant receives a floating
rate of the three-month DM London Interbank Offered Rate ("LIBOR") plus
twenty basis points and pays a fixed rate of 3.41% and 3.43%,
respectively, for the term of the agreements.
The Registrant's interest rate swap agreements convert a portion of the
Registrant's borrowings from a floating-rate to a fixed-rate basis.
Although the Registrant can terminate its swap agreements at any time,
the Registrant intends to hold its swap agreements until maturity.
5. COMPREHENSIVE INCOME
Comprehensive income was $16,159,000 and $10,182,000 for the first
three months of 2001 and 2000, respectively. Comprehensive income
includes the effects of changes in (1) certain currency exchange rates
relative to the
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U.S. dollar and (2) the fair value of derivative instruments held by
the Registrant (see Note 3).
6. COMMITMENTS AND CONTINGENCIES
The Registrant is subject to loss contingencies resulting from
regulation by various federal, state, local and foreign governmental
authorities with respect to the environmental impact of air and water
emissions and noise from its mills, as well as the disposal of solid
waste generated by its operations. To comply with environmental laws
and regulations, the Registrant has incurred substantial capital and
operating expenditures in past years. The Registrant anticipates that
environmental regulation of its operations will continue to become more
burdensome and that capital and operating expenditures will continue,
and perhaps increase, in the future. In addition, the Registrant may
incur obligations to remove or mitigate any adverse effects on the
environment resulting from its operations, including the restoration of
natural resources, and liability for personal injury and damage to
property, including natural resources. Because environmental
regulations are not consistent worldwide, the Registrant's ability to
compete in the world marketplace may be adversely affected by capital
and operating expenditures required for environmental compliance.
Subject to permit approval, the Registrant has undertaken an initiative
under the Voluntary Advanced Technical Incentive Program of the United
States Environmental Protection Agency ("EPA") to comply with the new
"Cluster Rule" regulations. This initiative, the Registrant's "New
Century Project," will require capital expenditures currently estimated
at approximately $30,000,000 to be incurred before April 2004.
On September 7, 2000, the Pennsylvania Department of Environmental
Protection ("DEP") issued to the Registrant a renewed wastewater
discharge permit for the Spring Grove mill with an effective date of
October 1, 2000. The renewed permit calls for reductions in the mill's
discharge of color that the Registrant believes cannot be achieved at
this time without a curtailment of operations. On September 7, 2000,
DEP also issued to the Registrant an administrative order calling for
achievement of the limitations in the permit on a schedule extending
until 2007. Both the permit and the order contemplate adoption of an
alternative limitation on color which would be less stringent. The
Registrant expects to be able to meet the alternative limitation
without a curtailment of operations under the schedule set forth in the
order. Under the schedule set forth in the permit, however, the
Registrant may not be able to meet the alternative limitation without a
curtailment of operations. The Registrant has appealed the permit and
the order to the Pennsylvania Environmental Hearing Board. After an
evidentiary hearing, the Board granted a stay of the permit limitation
during the pendency of the appeal. The Board did not grant a stay of
the alternative limitation because it is not yet in effect, and will
not come into effect until a change in the Pennsylvania Water Quality
Standard for color is approved; in this case, "approval" includes an
approval by EPA. The Pennsylvania Public Interest Research Group and
several other parties (collectively "Penn PIRG") have appealed the
alternative limitation and have also intervened in the Registrant's
appeal of the permit. The Registrant is engaged in settlement
discussions with Penn PIRG and DEP, but also continues to litigate all
appeals vigorously.
In June 1999, Penn PIRG brought a citizen suit under the Federal Clean
Water Act and Pennsylvania Clean Streams Law seeking a reduction in the
Spring Grove mill's discharge of color, civil penalties and costs of
litigation. On February 7, 2001, the United States District Court
granted partial summary judgment on liability to plaintiffs as to
certain claims and granted summary judgment to the Registrant on
others. The court has not scheduled
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further proceedings with respect to any remedy until after it resolves
the Registrant's pending motion for reconsideration.
In 1999, EPA and DEP issued to the Registrant separate Notices of
Violation ("NOVs") alleging violations of the federal and state air
pollution control laws, primarily for purportedly failing to obtain
appropriate preconstruction air quality permits in conjunction with
certain modifications to the Registrant's Spring Grove mill. EPA
announced that the Registrant was one of seven pulp and paper mill
operators to have received contemporaneously an NOV alleging this kind
of violation. EPA and DEP alleged that the Registrant's modifications
produced (1) significant net emissions increases in certain air
pollutants which should have been covered by appropriate permits
imposing new emissions limitations, and (2) certain other violations.
For all but one of the modifications cited by EPA, the Registrant
applied for and obtained from DEP the preconstruction permits which the
Registrant concluded were required by applicable law. EPA reviewed
those applications before the permits were issued. DEP's NOV pertained
only to the modification for which the Registrant did not receive a
preconstruction permit. The Registrant conducted an evaluation at the
time of this modification, and determined that the preconstruction
permit cited by EPA and DEP was not required. The Registrant has been
informed that EPA and DEP will seek substantial emissions reductions,
as well as civil penalties, to which the Registrant believes it has
meritorious defenses. Nevertheless, the Registrant is unable to predict
the ultimate outcome of these matters or the costs involved.
The Registrant faces a set of related threatened claims arising out of
the presence of polychlorinated biphenyls ("PCBs") in sediments in the
Fox River below Lake Winnebago and in Green Bay, downstream of the
Registrant's Neenah mill. As described below, various sovereigns have
formally notified seven parties ("PRPs"), of which the Registrant is
one, that they are potentially responsible for investigation, cleanup
and natural resource damages arising from this contamination under the
federal Comprehensive Environmental Response, Compensation and
Liability Act and other laws.
The Wisconsin Department of Natural Resources ("DNR") notified the
Registrant and other PRPs informally in 1990 that it wished to pursue
cleanup of certain sediments in the Fox River under state law. DNR
subsequently asserted claims under federal law as well for cleanup and
for natural resource damages. Since 1998, DNR has been performing a
remedial investigation and feasibility study ("RI/FS") of the Fox River
and Green Bay under contract to the EPA. In February 1999, DNR issued a
draft RI/FS report estimating the costs of potential remedies for the
Fox River at between $0 and $721,000,000, but did not select a
preferred remedy. The Registrant does not believe that the no action
remedy will be selected. The largest components of the costs of certain
of the remedial alternatives are attributable to large-scale sediment
removal by dredging. There is no assurance that the cost estimates in
the draft RI/FS will not differ significantly from actual costs. Under
ordinary procedures, the final RI/FS report will be issued along with a
proposed remedial action plan ("PRAP"). EPA will consider comments on
the PRAP and then will select a remedy for the site. EPA and DNR had
stated publicly that the RI/FS would be issued in 2000. The expected
date of issuance was subsequently delayed to the spring of 2001 and has
now been further delayed.
Based on current information and advice from its environmental
consultants, the Registrant continues to believe that an aggressive
effort, as included in certain remedial alternatives in the draft
RI/FS, to remove PCB-contaminated sediment, much of which is buried
under cleaner material or is otherwise unlikely to move and which is
abating naturally, would be environmentally detrimental and, therefore,
inappropriate.
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In January 1997, DNR, the Wisconsin Department of Justice ("WDOJ"), and
the seven PRPs entered into an agreement to conduct a cooperative
natural resource damages assessment ("NRDA"). While that NRDA has not
been completed, based upon work conducted to date, DNR and WDOJ have
proposed to enter into a settlement with another PRP of its share of
the natural resource damages liability. The proposed settlement does
not state explicitly the total amount of natural resource damages, but
it calls for such other PRP to spend $7,000,000 on resource restoration
projects.
The United States Fish and Wildlife Service ("FWS"), the National
Oceanic and Atmospheric Administration ("NOAA"), four Indian tribes and
the Michigan Attorney General claim to be trustees for natural
resources injured by the PCBs in the Fox River and Green Bay. In June
1994, FWS notified the Registrant and other PRPs that it considered
them potentially responsible for natural resource damages. The federal,
tribal and Michigan agencies claiming to be trustees have proceeded
with the preparation of an NRDA separate from the work performed by
DNR. While the final report of assessment will be delayed until after
selection of a remedy for the site, on October 25, 2000, the federal
trustees released a restoration and compensation determination plan
("RCDP") that estimates natural resource damages for the site at
between $176,000,000 and $333,000,000.
The Registrant is seeking settlement with the Wisconsin agencies and
with EPA for all of its liabilities for response actions and natural
resource damages associated with the site. The Registrant believes that
the federal, tribal and Michigan natural resource damages claims are
without merit, and that the federal NRDA is technically and
procedurally flawed. The Registrant further maintains that its share of
any liability as among the seven identified PRPs is much less than
one-seventh and that additional responsible parties exist other than
the seven identified by the governments.
The Registrant currently is unable to predict the ultimate costs to the
Registrant related to this matter, because the Registrant cannot
predict which remedy will be selected for the site or the ultimate
amount of natural resource damages nor can the Registrant predict its
share of these costs or damages.
The Registrant continues to believe it is likely that this matter will
result in litigation; however, the Registrant believes it will be able
to persuade a court that removal of a substantial amount of
PCB-contaminated sediments is not an appropriate remedy. There can be
no assurance, however, that the Registrant will be successful in
arguing that removal of PCB-contaminated sediments is inappropriate or
that it would prevail in any resulting litigation.
The amount and timing of future expenditures for environmental
compliance, cleanup, remediation and personal injury, natural resource
damage and property damage liability, including but not limited to
those related to the lower Fox River and the Bay of Green Bay, cannot
be ascertained with any certainty due to, among other things, the
unknown extent and nature of any contamination, the extent and timing
of any technological advances for pollution control, the remedial
actions which may be required and the number and financial resources of
any other responsible parties. The Registrant continues to evaluate its
exposure and the level of its reserves, including, but not limited to,
its share of the costs and damages (if any) associated with the lower
Fox River and the Bay of Green Bay. The Registrant believes that it is
insured against certain losses related to the lower Fox River,
depending on the nature and amount thereof. Coverage, which is
currently being investigated under reservation of rights by various
insurance companies, is dependent upon the identity of the plaintiff,
the procedural posture of the claims asserted and how such claims are
characterized. The
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Registrant does not know when the insurers' investigation as to
coverage will be completed.
The Registrant's current assessment, after consultation with legal
counsel, is that ultimately it should be able to resolve these
environmental matters without a long-term, material adverse impact on
the Registrant. In the meantime, however, these matters could, at any
particular time or for any particular period, have a material adverse
effect on the Registrant's consolidated financial condition, liquidity
or results of operations or result in a default under the Registrant's
loan covenants. Moreover, there can be no assurance that the
Registrant's reserves will be adequate to provide for future
obligations related to these matters, that the Registrant's share of
costs and/or damages for these matters will not exceed its available
resources or that such obligations will not have a long-term, material
adverse effect on the Registrant's consolidated financial condition,
liquidity or results of operations.
7. SUBSEQUENT EVENT
On May 1, 2001, the Registrant granted to each non-employee member of
its Board of Directors options to purchase 1,500 shares of common stock
for a total of 12,000 options granted. Such options become exercisable
on May 1, 2002 at an exercise price of $14.44, which represents the
average quoted market price of the Registrant's common stock on the
date of grant, and expire on April 30, 2011.
8. DISCLOSURE STATEMENT
In the opinion of the Registrant, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which
comprise only normal recurring accruals) necessary for a fair
presentation of the financial information contained therein. These
unaudited condensed consolidated financial statements should be read in
conjunction with the more complete disclosures contained in the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2000.
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INDEPENDENT ACCOUNTANTS' REPORT
P. H. Glatfelter Company:
We have reviewed the accompanying condensed consolidated balance sheet of P. H.
Glatfelter Company and subsidiaries as of March 31, 2001 and the related
condensed consolidated statements of income and cash flows for the three months
ended March 31, 2001 and 2000. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of P.
H. Glatfelter Company and subsidiaries as of December 31, 2000, and the related
consolidated statements of income and comprehensive income, shareholders' equity
and cash flows for the year then ended (not presented herein); and in our report
dated February 2, 2001, 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, 2000 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
As discussed in Note 3 to the condensed consolidated financial statements, the
Company changed its method of accounting for derivative financial instruments as
of January 1, 2001.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
April 17, 2001, except for Note 7 as to
which the date is May 1, 2001
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis contains forward-looking statements. See
"Cautionary Statement" set forth in Item 5.
RESULTS OF OPERATIONS
A summary of the period-to-period changes in the principal items included in the
Condensed Consolidated Statements of Income is shown below.
Three Months Ended
March 31, 2001 and 2000
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Increase (Decrease)
(dollars in thousands)
Net sales $(2,012) (1.1)%
Other income - net 128 3.2%
Cost of products sold (8,230) (5.3)%
Selling, general and
administrative expenses 2,397 18.3%
Interest on debt 62 1.4%
Income tax provision 2,503 41.0%
Net income 4,720 44.3%
Net Sales
Net sales decreased $2,012,000, or 1.1%, for the first quarter of 2001 compared
to the first quarter of 2000 due to a slight decline in sales volume. Average
net selling prices remained flat as slightly improved pricing offset a weaker
mix of products sold. Demand for most of the Registrant's product lines during
the first quarter of 2001 was steady.
The Registrant classifies its sales into two product groups: specialized
printing papers and engineered papers (which includes tobacco papers). Net sales
of specialized printing papers increased 1.5% in the first quarter of 2001
compared to the first quarter of 2000 due to a 2.7% increase in average net
selling prices, resulting from favorable pricing, partially offset by a 1.1%
decrease in sales volume.
The decreased sales volume of specialized printing papers was largely due to
reduced demand in the first quarter of 2001 versus the like period of 2000. The
Registrant believes that overall market conditions for its products are
relatively stable with only minor price decreases expected in the near term.
Net sales of engineered papers for the three months ended March 31, 2001 were
3.9% lower than for the corresponding 2000 period. The decrease was primarily
the result of continued demand erosion for the Registrant's tobacco papers.
Although the Registrant recognized slightly increased prices for tobacco papers,
a weaker product mix more than offset the increase in prices thereby
contributing to the lower net sales. As explained in "UNUSUAL ITEM" below, the
Registrant has maintained increased pricing for certain of its tobacco papers,
which has resulted in reduced sales volume. Although demand remains stronger
than expected and price increases to date have held, the Registrant expects
that, in the long run, net sales of tobacco papers will continue to trend
downward, with volume decreases more than offsetting any improvements in
pricing. Future price changes will be impacted by changes in market pulp prices.
Net sales of engineered papers, excluding tobacco papers, increased 4.8% in the
first quarter of 2001 versus the like period of 2000 primarily as a result of a
5.5% increase in net sales volume. The increase in net sales volume was slightly
offset by a 0.6% decrease in net average selling prices. The Registrant believes
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it is difficult to characterize such engineered papers in terms of demand trends
and pricing due to the fragmentation and small size of markets within this
group.
Other Income - Net
Other income - net increased $128,000, or 3.2%, for the first quarter of 2001
compared to the corresponding period of 2000. Energy sales - net decreased
$154,000 for the three months ended March 31, 2001 versus the comparable period
in 2000. Interest on investments and other - net increased $90,000 in the first
quarter of 2001 versus the same period in 2000 as a result of higher average
cash balances. Gain from property dispositions, etc. - net increased $192,000
for the three months ended March 31, 2001 versus the like period in 2000.
Cost of Products Sold and Gross Margin
Cost of products sold decreased $8,230,000, or 5.3%, for the first quarter of
2001 versus the first quarter of 2000 as a result of the Registrant's cash
savings project (as described below), strong productivity from its manufacturing
facilities and increased pension income, which were partially offset by
increased costs of energy and market pulp. Market pulp prices have dropped
steadily from January 2001 through April 2001. The Registrant expects that
market pulp prices will continue to decrease slightly through the second quarter
of 2001 and then remain constant through the third quarter of 2001.
The Registrant continued to realize the benefits of its cash savings project,
known as "DRIVE," in the first quarter of 2001. Such savings began in the second
quarter of 2000 and have been offset slightly, in the short term, by the
Registrant's costs of implementing the project (see "Selling, General and
Administrative Expenses" below). The Registrant remains on pace to achieve its
DRIVE target which has been increased from $50,000,000 to $53,000,000 in
sustainable, annual cash savings. As of March 31, 2001, the Company had
implemented portions of the DRIVE project that will realize approximately
$30,000,000 per year in sustainable cash savings.
Income resulting from the overfunded status of the Registrant's defined benefit
pension plans and other postretirement benefit plans decreased cost of products
sold by $7,036,000 and $5,281,000 for the first quarter of 2001 and the same
quarter of 2000, respectively. This improved level of income was primarily the
result of long-term investment performance of the plans' assets.
Marginal cost of products sold per ton decreased 4.3% for the first quarter of
2001 versus the same period of 2000, resulting in an increase in gross margin
per ton of 19.9%.
As a result of the aforementioned items, gross margin as a percentage of net
sales increased to 21.4% for the first quarter of 2001 from 17.9% for the like
quarter of 2000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of 2001 were
$2,397,000, or 18.3%, higher than for the first quarter of 2000. This increase
was primarily a result of increased legal and professional expenses, which
included outside consulting services associated with the Registrant's IMPACT
(see "IMPACT PROJECT" below) and DRIVE projects. Additionally, incentive
compensation costs increased in the first quarter of 2001 versus the same period
of 2000 attributable to higher earnings in the 2001 period. Pension income
reduced selling, general and administrative expenses by $1,612,000 and
$1,074,000 for the first quarter of 2001 and the same quarter of 2000,
respectively.
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Interest on Debt - Net
Interest on debt - net increased $62,000, or 1.4%, for the three months ended
March 31, 2001 versus the comparable period of 2000.
Income Tax Provision
The income tax provision increased $2,503,000, or 41.0%, for the first quarter
of 2001 versus the first quarter of 2000. The increase was primarily due to
higher income before income taxes in 2001 versus 2000 and was offset slightly by
a lower effective income tax rate.
UNUSUAL ITEM
The Registrant's tobacco papers business has suffered from extremely low pricing
in recent years as a result of overcapacity in the tobacco papers industry and
declining domestic consumption of tobacco products. To combat such depressed
pricing, the Registrant announced in September 1999 that, effective January 1,
2000, prices would be increased for certain of its tobacco paper products. This
initiative was required for the Registrant to remain a viable, high-quality
supplier to its tobacco paper customers. As the Registrant expected, certain of
these customers sought other suppliers after this announcement. As a result, the
Registrant announced in December 1999 that it would begin reducing its tobacco
paper manufacturing capacity at its Ecusta mill during 2000.
During the first quarter of 2000, the Registrant finalized its plan of
restructuring and shortly thereafter began to reduce the workforce at Ecusta.
The workforce reduction has been completed and has resulted in the reduction of
approximately 220 salaried and hourly jobs associated with the Registrant's
tobacco paper production capacity. This reduction in jobs is lower than
originally estimated due to stronger customer demand than anticipated. The
Registrant accrued and charged to expense $3,336,000 ($2,120,000 after tax, or
$.05 per share) in the first quarter of 2000 primarily as a result of the
voluntary portion, specifically 42 salaried employees, of this restructuring.
The amount of actual termination benefits paid and charged against the liability
as of March 31, 2001 was $795,000.
IMPACT PROJECT
In July 2000, the Registrant initiated its IMPACT project, which is focused on
identifying and implementing changes to the Registrant's organization and its
business processes. The initial phase, the preliminary design work, has been
completed. The second phase of the IMPACT project, which includes the
installation of an enterprise resource planning system, is underway and is
expected to extend over the next few years. Total spending on the IMPACT project
is expected to be approximately $49,000,000, of which approximately $45,000,000
is capital related. During 2000, the Registrant spent approximately $5,200,000
on the IMPACT project.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents decreased $21,410,000 during the first three months of
2001, principally due to cash used in investing activities and financing
activities of $9,452,000 and $10,215,000, respectively. Cash used in investing
activities was substantially for additions to plant, equipment and timberlands,
and cash used in financing activities was for dividend payments and net payment
of debt. Cash used in operations further decreased cash and cash equivalents by
$1,644,000.
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To finance the acquisition of S&H Papier-Holding GmbH, on December 22, 1997, the
Registrant entered into a $200,000,000 multi-currency revolving credit facility
("Revolving Credit Facility") with a syndicate of major lending institutions.
The Revolving Credit Facility enables the Registrant to borrow up to the
equivalent of $200,000,000 in certain currencies in the form of revolving credit
loans with a final maturity date of December 22, 2002, and with interest periods
determined, at the Registrant's option, on a daily or one- to six-month basis.
Interest on the revolving credit loans is at variable rates based, at the
Registrant's option, on the Eurocurrency Rate or the Base Rate (lender's prime
rate), plus applicable margins. Margins are based on the higher of the
Registrant's debt ratings as published by Standard & Poor's and Moody's. As of
March 31, 2001, the Registrant's outstanding borrowings were DM 307,800,000
(approximately $138,700,000) under the Revolving Credit Facility.
In January 1999, the Registrant entered into two interest rate swap agreements,
each having a total notional principal amount of DM 50,000,000 (approximately
$22,500,000 as of March 31, 2001). Under these agreements, which were effective
April 6, 1999 and July 6, 1999 and which expire December 22, 2002, the
Registrant receives a floating rate of the three-month DM LIBOR plus twenty
basis points and pays a fixed rate of 3.41% and 3.43%, respectively, for the
term of the agreements.
On July 22, 1997, the Registrant issued $150,000,000 principal amount of 6-7/8%
Notes due July 15, 2007. Interest on the Notes is payable semiannually on
January 15 and July 15. The Notes are redeemable, in whole or in part, at the
option of the Registrant at any time at a calculated redemption price plus
accrued and unpaid interest to the date of redemption, and constitute unsecured
and unsubordinated indebtedness of the Registrant. The net proceeds from the
sale of the Notes were used primarily to repay certain short-term unsecured debt
and related interest.
The Registrant expects to meet all its near- and long-term cash needs from a
combination of internally generated funds, cash, cash equivalents and its
existing Revolving Credit Facility or other bank lines of credit and, if
prudent, other long-term debt.
Interest Rate Risk
The Registrant uses its Revolving Credit Facility and proceeds from the issuance
of its 6-7/8% Notes to finance a significant portion of its operations. The
Revolving Credit Facility provides for variable rates of interest and exposes
the Registrant to interest rate risk resulting from changes in the DM LIBOR. The
Registrant uses interest rate swap agreements to hedge, partially, interest rate
exposure associated with the Revolving Credit Facility. All of the Registrant's
derivative financial instrument transactions are entered into for non-trading
purposes.
To the extent that the Registrant's financial instruments expose the Registrant
to interest rate risk and market risk, they are presented in the table below.
The table presents principal cash flows and related interest rates by year of
maturity for the Registrant's Revolving Credit Facility and 6-7/8% Notes as of
March 31, 2001. For interest rate swap agreements, the table presents notional
amounts and the related reference interest rates by year of maturity. Fair
values included herein have been determined based upon (1) rates currently
available to the Registrant for debt with similar terms and remaining
maturities, and (2) estimates obtained from dealers to settle interest rate swap
agreements.
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Year of Maturity Fair
(dollar amounts in thousands) Value at
Debt: 2001 2002 2003 2004 2005 Thereafter Total 3/31/01
---- ---- ---- ---- ---- ---------- --------- ---------
Fixed rate -- $ 1,345 $ 1,007 $ 872 $ 728 $ 437 $ 150,000 $ 154,389 $ 157,333
Average interest rate 6.86% 6.86% 6.87% 6.87% 6.87% 6.87%
Variable rate -- $ -- $138,743 $ -- $ -- $ -- $ -- $ 138,743 $ 138,743
Average interest rate 4.64% 4.64% -- -- -- --
Interest rate swap agreements:
Variable to fixed swaps -- $ -- $ 45,076 $ -- $ -- $ -- $ -- $ 45,076 $ 782
Average pay rate 3.42% 3.42% -- -- -- --
Average receive rate 5.20% 5.20% -- -- -- --
As required by Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," the Registrant
was required to record the interest rate swaps from the table above on the
balance sheet at fair value beginning January 1, 2001. SFAS No. 133, as amended
and interpreted, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Because these swaps are designated in a
cash-flow hedge, changes in the fair value of the derivative are recorded in
other comprehensive income ("OCI") and are recognized in the income statement
when the hedged item affects earnings. The adoption of SFAS No. 133 on January
1, 2001 resulted in an $845,000 increase in OCI as a cumulative transition
adjustment for derivatives designated in cash flow-type hedges prior to adopting
SFAS No. 133. Due to its limited use of derivative instruments, the effect on
earnings of adopting SFAS No. 133 was immaterial.
Capital Expenditures
The Registrant expended $9,468,000, including $3,357,000 for the IMPACT project,
on capital projects for the first three months of 2001 compared to $3,429,000
for the first three months of 2000. Capital spending is expected to be
approximately $70,000,000, of which approximately $25,000,000 relates to the
Registrant's IMPACT project, during 2001.
Business Strategies
For more than a year, the Registrant has been developing strategies to position
its business for the future. Execution of these strategies is intended to result
in a reorganization of the Registrant's business to capitalize on its strengths
in customer relationships, technology and people and its leadership positions in
certain markets. Internally, the Registrant is working to improve the efficiency
of its operations. Externally, the Registrant is looking to strengthen its
business through strategic alliances and joint ventures, as well as potential
acquisition opportunities or dispositions of under-performing or non-strategic
assets.
ENVIRONMENTAL MATTERS
The Registrant is subject to loss contingencies resulting from regulation by
various federal, state, local and foreign governmental authorities with respect
to the environmental impact of air and water emissions and noise from its mills,
as well as the disposal of solid waste generated by its operations. To comply
with environmental laws and regulations, the Registrant has incurred substantial
capital and operating expenditures in past years. During 2000, 1999 and 1998,
the Registrant incurred approximately $16,700,000, $15,800,000 and $17,700,000,
respectively, in operating costs related to complying with environmental laws
and regulations. The Registrant anticipates that environmental regulation of its
operations will continue to become more burdensome and that capital and
operating expenditures will continue, and perhaps increase, in the future. In
addition, the Registrant may incur obligations to remove or mitigate any adverse
effects on the environment resulting from its operations, including the
restoration of natural resources, and liability for personal injury and damage
to property, including natural resources. In particular, the Registrant remains
open to negotiations
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with EPA and DEP regarding the NOVs under the federal and state air pollution
control laws. The Registrant continues to negotiate with the State of Wisconsin
and the United States regarding natural resources damages and response costs
related to the discharge of PCBs and other hazardous substances in the lower Fox
River, on which the Registrant's Neenah mill is located. The Registrant also is
in settlement discussions with DEP and Penn PIRG regarding the wastewater
discharge permit for its Spring Grove mill. The costs associated with such
matters are presently unknown but could be substantial and perhaps exceed the
Registrant's available resources. The Registrant's current assessment, after
consultation with legal counsel, is that ultimately it should be able to resolve
these environmental matters without a long-term, material adverse impact on the
Registrant. In the meantime, however, these matters could, at any particular
time or for any particular period, have a material adverse effect on the
Registrant's consolidated financial condition, liquidity or results of
operations. Moreover, there can be no assurance that the Registrant's reserves
will be adequate to provide for future obligations related to these matters or
that such obligations will not have a long-term, material adverse effect on the
Registrant's consolidated financial condition, liquidity or results of
operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
See the discussion under the headings "Liquidity" and "Interest Rate Risk" in
Item 2 as well as Note 4 to the Registrant's unaudited condensed consolidated
financial statements.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant's Annual Meeting of Shareholders was held on April 25, 2001. All
of the Board of Directors' nominees for election as Directors were elected by
the shareholders. Each was elected to a term expiring in 2004. The votes cast
for election of Directors were as follows:
For Withheld
---------- ---------
Robert P. Newcomer 36,776,436 4,060,336
John M. Sanzo 36,773,748 4,060,336
Item 5. Other Information
Cautionary Statement
Any statements set forth herein or otherwise made in writing or orally by the
Registrant with regard to its goals for revenues, cost reductions and return on
capital, expectations as to industry conditions and the Registrant's financial
results and cash flow, demand for or pricing of its products, development of new
products, environmental matters and other aspects of its business may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Registrant makes such statements
based on assumptions that it believes to be reasonable, there can be no
assurance that actual results will not differ materially from the Registrant's
expectations. Accordingly, the Registrant identifies the following important
factors, among others, which could cause its results to differ from any results
which might be projected, forecasted or estimated by the Registrant in any such
forward-looking statements: (i) variations in demand for or pricing of its
products; (ii) the Registrant's ability to identify, finance and consummate
future alliances or acquisitions; (iii) the Registrant's ability to develop new,
high value-added engineered products; (iv) the Registrant's ability to identify
and implement its planned cost reductions pursuant to its DRIVE project and
changes to its business processes contemplated by its IMPACT project; (v)
changes in the cost or
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availability of raw materials used by the Registrant, in particular market pulp,
pulp substitutes and wastepaper; (vi) changes in energy-related costs; (vii)
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; (viii) the gain or loss of significant customers;
(ix) cost and other effects of environmental compliance, cleanup, damages,
remediation or restoration, or personal injury or property damage related
thereto, such as costs associated with the NOVs issued by EPA and DEP, the costs
of natural resource restoration or damages related to the presence of PCBs in
the lower Fox River on which the Registrant's Neenah mill is located and the
effect of complying with the wastewater discharge limitations of the Spring
Grove mill permit which the Registrant is currently appealing; (x) significant
changes in cigarette consumption, both domestically and internationally; (xi)
enactment of adverse state, federal or foreign legislation or changes in
government policy or regulation; (xii) adverse results in litigation; (xiii)
fluctuations in currency exchange rates; and (xiv) disruptions in production
and/or increased costs due to labor disputes.
Item 6. Exhibits
(a) Exhibits
Number Description of Documents
------ ------------------------
3(ii) By-Laws, as amended April 25, 2001
15 Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information
(b) REPORTS ON FORM 8-K
Item 5 Current Report on Form 8-K dated February 7, 2001
filed February 15, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
P. H. GLATFELTER COMPANY
Date: May 15, 2001
C. Matthew Smith
Chief Financial Officer
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INDEX OF EXHIBITS
Number Description of Documents
- ------ ------------------------
3(ii) By-Laws, as amended April 25, 2001
15 Letter in Lieu of Consent Regarding
Review Report of Unaudited Interim
Financial Information
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