[P. H. Glatfelter Company Letterhead]
July 5, 2006
VIA EDGAR
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Mail Stop 4561
Washington, D.C. 20549
Attention: Stephen Krikorian
Accounting Branch Chief
RE: P. H. GLATFELTER COMPANY (THE "COMPANY")
FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2005
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
FILE NO. 001-03560
Ladies and Gentlemen:
This letter responds to the Staff's comment letter dated June 20, 2006
regarding the Company's Current Reports on Form 8-K filed on February 16, 2006
and May 11, 2006. For your convenience, the Staff's comment has been reproduced,
followed by the Company's response.
Form 8-Ks filed on February 16, 2006 and May 11, 2006
- -----------------------------------------------------
1. We note your response to prior comment number 5 with respect to your use of
the non-GAAP adjusted earnings financial measure. We do not believe that
you have adequately addressed the usefulness of your non-GAAP measure
presented. Note, Question 8 of the Frequently Asked Questions Regarding the
Use of Non-GAAP Financial Measures states, "companies must meet the burden
of demonstrating the usefulness of any measure that excludes recurring
items." Therefore, you must either demonstrate the usefulness of your
non-GAAP measure or eliminate such measure from your disclosure based on
this guidance. In this respect, please address the following:
- Your response indicates that the items excluded in your non-GAAP
measure "are distinguishable from the Company's core papermaking
business." Explain why you believe that your core papermaking business
does not include the expenses and gains/losses that are excluded from
your non-GAAP results, when such items generally result from your
operating activities. For example, indicate why your core business
reflects the benefits of revenue generated from acquired businesses
but does not reflect the merger integration costs. It appears that
there would be other costs of such acquisitions that are not being
eliminated from each measure. Address why you believe that excluding
certain charges is a proper reflection of your core business. Address
why the measure includes the revenues but not all
United States Securities and Exchange Commission
Stephen Krikorian
July 5, 2006
page 2
the cost associated with generating that revenue. Describe the
economic substance behind management's decision to use each non-GAAP
measure presented that excludes these non-cash charges.
- Your response indicates that the items excluded from your non-GAAP
measure "will only have an impact over a finite period of time."
Explain how you have made this conclusion when you have recognized
gains on the disposition of timberlands and restructuring charges in
each of the fiscal years ended December 31, 2003 through December 31,
2005. Further, we note that you have recognized insurance recoveries
in the fiscal years ended December 31, 2004 and 2005. Therefore, you
appear to have a past pattern of incurring such charges and
recognizing such gains. Demonstrate why you believe that you will not
incur such charges or recognize such gains in the future. We refer you
to Question 9 of the Frequently Asked Questions Regarding the Use of
Non-GAAP Financial Measures.
- Your response indicates that your papermaking businesses' performance
can be "obscured" without excluding the "special items" from your GAAP
results. Further clarify why you believe that your non-GAAP results
provide a clearer indication of your past and future results than your
results reported in accordance with GAAP.
RESPONSE: Our non-GAAP financial measure that we refer to as "adjusted
earnings" is meant to present the financial performance of the Company's
core papermaking operation, which consists of the production and sale of
specialty papers and long fiber and overlay papers, each of which is
produced at distinct and separate manufacturing facilities. In evaluating
the performance of our papermaking operations in relation to prior periods,
management and our Board of Directors focus, and we believe investors
focus, on business unit financial performance measures related to our
production and sale of our products. The performance of our papermaking
operations is evaluated based upon numerous items such as tons sold,
average selling prices, gross margins and overhead, among others. We
exclude gains on sales of timberlands, restructuring charges, merger
integration costs and insurance recoveries in our calculation of adjusted
earnings because we believe (i) each of these items is unique and not part
of our core papermaking business and, therefore, not indicative of the
underlying financial performance of such business and (ii) will only
impact our financial results for a limited period of time, which is
determinable. Below, for each of the excluded items, is an explanation of
the basis for such statements:
Timberland Sales. Gains from our timberland sales do not represent
revenue derived from our production and sale of paper products.
Rather, such gains are the result of the disposition of long held
assets to monetize the value of such assets and to utilize the
proceeds to maintain the financial strength and flexibility of our
balance sheet. Management believes it is appropriate to exclude from
United States Securities and Exchange Commission
Stephen Krikorian
July 5, 2006
page 3
earnings the gains from such sales because they do not reflect how the
Company is performing in its paper making operations. We have recently
publicly disclosed our strategy to complete the disposition of
additional timberlands within three to five years. Prior to this
strategy, we sold certain tracts of our timberland in 2003, 2004 and
2005 in a limited number of discreet transactions. Since any material
timberland sales are anticipated be completed no later than the end of
2010, we have concluded that timberland sales will impact our
financial results for only a finite period of time.
Restructuring Activities. Earnings are adjusted to exclude the costs
associated with our discrete restructuring activities because they
represent charges related to strategic actions taken to reposition the
business, reduce production costs and/or rationalize assets. We have
undertaken four specific restructuring initiatives at three of our
facilities since the fourth quarter of 2002. We believe it is
appropriate to exclude such charges from our results because these are
unique charges isolated and identifiable with strategic initiatives,
and not representative of ongoing costs associated with the production
and sale of our paper products. Each initiative was implemented in
response to a specific set of circumstances, market conditions and/or
other environmental factors affecting the facility's operations. The
most significant of the restructuring initiatives were the 2004 North
American Restructuring Program (the "NARP") and the restructurings at
our operations in Neenah, Wisconsin. The NARP was an initiative
focused on reducing the cost structure at our Spring Grove facility
and improving financial results of our Specialty Papers business unit,
which consisted of a significant workforce reduction and other
actions. The Neenah restructuring was completed in two separate
initiatives; an initial restructuring in the second half of 2003 and,
in connection with our recent acquisition of the facility in Ohio, a
shutdown of the facility in the first half of 2006.
Going forward, we are not planning on undertaking any further
significant restructuring initiatives. However, we are analyzing
operations at our recently acquired Ohio and United Kingdom facilities
to determine if restructuring initiatives at either of those
facilities would be prudent. Restructuring activities, if any, at our
new facilities are expected to be completed at or before the end of
2007. We believe that any restructuring activities will only have an
impact on our financial results over a short period of time because
they will be completed at the latest by the end of 2007.
Merger Integration Costs. The two acquisitions we completed in early
2006 were the first acquisitions we completed since 1998. We have not
been, and do not anticipate being in the near term, a highly
acquisitive organization. Each acquisition represents unique isolated
transactions. Integration costs that have been excluded to arrive at
adjusted earnings consist primarily of one time external consulting
costs incurred for projects such as the of redesign our organizational
United States Securities and Exchange Commission
Stephen Krikorian
July 5, 2006
page 4
structure and the design and implementation of post merger
transitional planning activities. Such items are one-time costs and
have been excluded due to their unique and non-recurring nature.
Management does not include these charges in evaluating the
performance of our business because they do not represent ongoing
costs associated with the production and sale of paper products. We
have concluded that merger integration costs will only have an impact
over a finite period of time because we do not anticipate completing
any significant acquisitions in the near term. All material merger
integration costs related to our recent acquisitions will be incurred
and expensed by the end of 2006.
Insurance Recoveries. Gains from insurance recoveries are merely the
reclamation of prior environmental expenses for which we were insured
and are not derived from our production and sale of paper products. We
recognized insurance recoveries during 2004 and 2005. However, as we
publicly disclosed, we do not anticipate receiving any additional
significant insurance recoveries in the foreseeable future as we are
not pursuing any additional claims at this time. As a result,
insurance recoveries will have no material impact on our financial
results for the foreseeable future.
With the exception of insurance recoveries, as discussed below, for
each of the items excluded from adjusted earnings, we believe our treatment
of such item has been consistent and all costs and gains associated with
such item for the applicable period have been excluded from such non-GAAP
measure. Specifically, the adjustment for merger integration costs
represents all costs incurred that are not otherwise included as part of
purchase price accounting adjustments. However, adjusted earnings in the
periods for which insurance recoveries were recorded was not adjusted to
eliminate any related legal expenses incurred in such periods in pursuit of
such claims, primarily due to the immateriality of such amounts. Based on
the Staff's comment, going forward, we will exclude from adjusted earnings
all amounts associated with such excluded items recorded in the applicable
period.
As discussed above, we believe that the excluded items are unique and
not part of our core papermaking business and should not be considered in
evaluating the performance of such operations. As a result, we believe
gains represented by such items should not be included in a measure of our
core operations and we believe that the costs associated with the excluded
items are not costs directly associated with the generation of revenue from
our core operations. Gains from timberland sales and insurance recoveries
are distinct from revenues generated from paper product sales and, unlike
items such as cost of raw materials and overhead costs, restructuring costs
and merger integration costs are unique items that do not represent direct
costs incurred in the manufacture and sale of our products.
Management uses adjusted earnings because it is a measure of the
performance of the Company's fundamental business, the manufacture and sale
of paper products.
United States Securities and Exchange Commission
Stephen Krikorian
July 5, 2006
page 5
Adjusted earnings provides a measure of how core operations are performing,
which we believe is useful to investors because it allows comparison of
such papermaking operations from period to period without the taint of
unique items that, while required to be included in results reported in
accordance with GAAP, are not directly associated with papermaking.
Please direct any questions or comments to either me at (717) 225-2794
or Morris Cheston, Jr. (at (215) 864-8609) of Ballard Spahr Andrews &
Ingersoll, LLP.
Sincerely,
/s/ John P. Jacunski
---------------------------
John P. Jacunski
Senior Vice President and
Chief Financial Officer
cc: George H. Glatfelter II
Glenn Davies
Morris Cheston, Jr., Esq.