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, 1998
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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__________________________
Commission File No. 1-3560
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P. H. GLATFELTER COMPANY
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-0628360
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
228 South Main Street, Spring Grove, Pennsylvania 17362
------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(717) 225-4711
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
------ ------
Shares of Common Stock outstanding at May 12, 1998 were 41,951,237.
1
P. H. GLATFELTER COMPANY
INDEX
Part I - Financial Information
------------------------------
Financial Statements:
Condensed Consolidated Statements of Income and Retained
Earnings - Three Months Ended March 31, 1998 and 1997
(Unaudited)............................................ 3
Condensed Consolidated Balance Sheets - March 31, 1998
(Unaudited) and December 31, 1997...................... 4
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 1998 and 1997 (Unaudited)....... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................ 6-10
Independent Accountants' Report......................... 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 12-16
Part II - Other Information................................ 17-18
---------------------------
Signature.................................................. 19
---------
Index of Exhibits.......................................... 20
-----------------
Exhibit 15 - Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information.................................. 21
Exhibit 27 - Financial Data Schedule...................... 22
2
PART I - FINANCIAL INFORMATION
------------------------------
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(in thousands, except per share amounts)
(UNAUDITED)
Three Months Ended
3/31/98 3/31/97
--------- ---------
Net sales $ 193,216 $ 142,185
Other income - net
Energy sales - net 2,169 2,215
Interest on investments and
other - net 1,528 1,044
Gain (loss) from property
dispositions, etc., - (104) (275)
--------- ---------
Total 196,809 145,169
Costs and expenses
Cost of products sold 152,287 112,005
Selling, general and
administrative expense 13,146 8,897
Interest on debt - net 6,423 3,550
--------- ---------
Total 171,856 124,452
Income before income taxes 24,953 20,717
Income tax provision
Current taxes 7,189 4,697
Deferred taxes 2,437 3,197
--------- ---------
Total 9,626 7,894
Net income 15,327 12,823
Retained earnings at beginning
of period 478,073 462,337
--------- ---------
Total 493,400 475,160
Common stock dividends decla 7,342 7,400
--------- ---------
Retained earnings at end
of period $ 486,058 $ 467,760
======== ========
Basic and diluted
earnings per share $ 0.36 $ 0.30
======== ========
See accompanying notes to condensed consolidated financial statements.
3
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
------
3/31/98 12/31/97
(unaudited)
----------- -----------
Current assets:
Cash and cash equivalents $ 16,399 $ 66,919
Marketable securities 3,547 155,174
Accounts receivable - net 90,523 50,187
Inventories:
Raw materials 40,998 35,980
In process and finished products 45,584 31,724
Supplies 36,814 33,528
--------- -----------
Total inventory 123,396 101,232
Prepaid expenses and other current assets 4,811 2,967
--------- -----------
Total current assets 238,676 376,479
Plant, equipment and timberlands - net 621,167 475,189
Other assets 127,527 85,915
--------- -----------
Total assets $ 987,370 $ 937,583
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,581 $ 150,000
Short-term debt 32,947 48,665
Accounts payable 39,701 37,276
Dividends payable 7,357 7,390
Federal, state and local taxes 14,946 5,106
Accrued compensation, other expenses
and deferred income taxes 42,020 41,506
--------- -----------
Total current liabilities 138,552 289,943
Long-term debt 305,930 150,000
Deferred income taxes 122,053 101,995
Other long-term liabilities 74,110 56,287
Commitments and contingencies
Shareholders' equity:
Common stock 544 544
Capital in excess of par value 42,749 42,623
Cumulative translation adjustment 180 (1,058)
Retained earnings 486,058 478,073
--------- -----------
Total 529,531 520,182
Less cost of common stock in treasury (182,806) (180,824)
--------- -----------
Total shareholders' equity 346,725 339,358
Total liabilities and
shareholders' equity $ 987,370 $ 937,583
========= ==========
See accompanying notes to condensed consolidated financial statements.
4
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
Three Months Ended
3/31/98 3/31/97
---------- ------------
Cash Flows from Operating Activities:
Net income $ 15,327 $ 12,823
Items included in net income not using
(providing) cash:
Depreciation and depletion 11,872 9,161
Gain on disposition of fixed assets 1 37
Expense related to employee stock purchase and
401(k) plans 467 420
Change in assets and liabilities:
Accounts receivable (13,878) (8,355)
Inventories 8,261 388
Prepaid expenses and other assets (4,711) (4,617)
Accounts payable, accrued compensation,
other expenses, deferred income taxes
and other long-term liabilities (11,923) (11,961)
Federal, state and local taxes 2,133 3,041
Deferred income taxes - non-current 2,753 3,349
--------- ------------
Net cash provided by operating activities 10,302 4,286
--------- ------------
Cash Flows from Investing Activities:
Sale/maturity of marketable securities and
long-term investments - net 154,876 (1,723)
Proceeds from disposal of fixed assets 13 18
Additions to plant, equipment and timberlands (9,818) (8,196)
Increase (decrease) in liabilities related to
fixed asset acquisitions 131 (2,441)
Acquisition of S&H - net of cash acquired (147,491) -
--------- ------------
Net cash used in investing activities (2,289) (12,342)
--------- ------------
Cash Flows from Financing Activities:
Issuance of subsidiary's preferred stock to others - 150,100
Net borrowing of short-term debt 14,249 -
Net payment of other long-term debt (14,609) -
Repayment of 5-7/8% Notes (150,000) -
Acquisition-related borrowings 101,500 -
Decrease in preferred stock of subsidiary - (888)
Deposit into trust to defease certain covenants
of current portion of long-term debt - (150,351)
Dividends paid (7,376) (7,444)
Purchases of common stock (2,614) (5,188)
Proceeds from issuance of common stock under
employee stock purchase plans and key
employee long-term incentive plan 285 434
--------- ------------
Net cash used in financing activities (58,565) (13,337)
--------- ------------
Effect of exchange rate changes on cash 32 3
Net increase (decrease) in cash and cash equivalents (50,520) (21,390)
Cash and Cash Equivalents:
At beginning of period 66,919 31,802
--------- ------------
At end of period $ 16,399 $ 10,412
======== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest $ 9,523 $ 6,658
Income taxes 5,138 1,750
See accompanying notes to condensed consolidated financial statements.
5
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Effective January 2, 1998, the Registrant acquired all of the outstanding
common stock of S&H Papier-Holding GmbH ("S&H"), the specialty paper
division of Schoeller and Hoesch Group from RQPO Beteiligungs GmbH & Co.
Papier KG ("RQPO") and EVOBESTRA Vermogensverwaltungsgesellschaft mbH, for
DM 270 million (approximately $150 million), subject to certain
adjustments, in cash. The principal partners in RQPO were Deutsche
Beteiligungs AG and S&H management. The Registrant accounted for the S&H
acquisition under the purchase method of accounting and S&H is consolidated
with the Registrant beginning in January 1998.
S&H was founded in 1881 in Gernsbach, Germany, where its corporate offices
and major paper production facilities are located. S&H produces a range of
paper products, including tea bag and other long fiber products such as
stencil, filter and casing paper, as well as tobacco papers, metalizing
papers and printing papers. S&H has an abaca pulpmill in the Philippines
and other facilities in France and the United States. S&H also has a 50%
ownership interest in a paper mill in Odet, France. Minority interest of
$9,766,000 associated with this subsidiary is classified as "Other long-
term liabilities" on the Registrant's Condensed Consolidated Balance Sheet.
The purchase price of S&H, including certain transaction costs, was
allocated to the assets acquired and liabilities assumed based upon their
fair values at the date of acquisition. The excess of the purchase price
over the fair value of net assets acquired was recorded principally as
goodwill and will be amortized on a straight-line basis over 20 years.
The following summarized unaudited combined pro forma information of the
Registrant for the quarter ended March 31, 1997 has been presented as if
the S&H acquisition had occurred on January 1, 1997. This unaudited pro
forma information is based on the historical results of operations adjusted
for acquisition costs and is not necessarily indicative of what the results
would have been had the Registrant operated S&H since January 1, 1997. Pro
forma combined net sales, net income and both basic and diluted earnings
per share of the Registrant for the quarter ended March 31, 1997 would have
been $188,114,000, $14,374,000 and $0.34, respectively.
2. A reconciliation between the income tax provision computed by applying the
statutory federal income tax rate of 35% to income before income taxes, and
the actual income tax provision follows (in thousands):
Three Months Ended
3/31/98 3/31/97
-------- --------
Federal income tax provision at
statutory rate $ 8,734 $ 7,251
State income taxes after deducting
federal income tax benefit 620 640
Non-US tax rate differences 289 3
Other (17) -
-------- --------
Actual income tax provision $ 9,626 $ 7,894
======== ========
The deferred income tax provisions for the three-month periods ended March
31, 1998 and 1997 result from the following temporary differences (in
thousands):
Three Months Ended
3/31/98 3/31/97
-------- -------
Depreciation $ 1,960 $1,990
Pensions 1,363 1,079
Alternative minimum tax - 876
Other (886) (748)
--------- ------
Deferred income tax provision $ 2,437 $3,197
========= ======
6
The provision for deferred income taxes is, in part, estimated based on an
allocation of the appropriate amount relative to the number of months
reported herein and in conformance with existing tax regulations. The
deferred income tax provisions reflect the impact of any audits by federal
and state authorities.
3. The number of shares of common stock outstanding decreased by 108,140 in
the first three months of 1998. This decrease was due to the repurchase of
150,000 shares of common stock for the treasury, which more than offset the
delivery of 40,860 treasury shares pursuant to the various employee stock
purchase and 401(k) plans of the Registrant and the delivery of 1,000
treasury shares pursuant to the exercise of stock options under the
Registrant's 1992 Key Employee Long-Term Incentive Plan. At March 31, 1998,
12,320,512 shares of common stock were held in treasury.
4. The Registrant's Board of Directors has authorized the repurchase in the
open market or in privately negotiated transactions of up to 12,000,000
shares of the Registrant's common stock in the aggregate for the purpose of
enhancing shareholder value. Repurchased shares are added to the treasury
and are available for future sale. Under this authorization, as of March
31, 1998, the Registrant had repurchased an aggregate of 11,893,503 shares
for a total consideration of $201,587,000.
5. In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
("SFAS No. 128"). SFAS No. 128 requires a dual presentation of basic and
diluted earnings per share on the face of the Registrant's consolidated
statement of income and a reconciliation of the computation of basic
earnings per share to diluted earnings per share. Basic earnings per share
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 earnings per share includes the
effect of potential dilution from the exercise of outstanding common stock
equivalents into common stock using the treasury stock method. Concurrent
with the adoption, all prior years' earnings per share information has been
restated, resulting in no material differences. A reconciliation of the
Registrant's basic and diluted earnings per share follows:
Three Months Ended
-----------------------------------------------------------
March 31, 1998 March 31, 1997
--------------------------- -----------------------------
Net Income Shares Net Income Shares
(Numerator) (Denominator) (Numerator) (Denominator)
----------- ------------- ----------- -------------
Basic earnings per
share factors $ 15,327,000 42,149,528 $ 12,823,000 42,396,736
Effect of potentially
dilutive employee
incentive plans:
Restricted stock
awards 26,700 39,960
Performance stock
awards 126,166 95,879
Employee stock
options 30,939 22,886
------------ ----------- ------------- -----------
Diluted earnings per
share factors $ 15,327,000 42,333,333 $ 12,823,000 42,555,461
Basic and diluted
earnings per share $ 0.36 $ 0.30
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). This statement, which establishes standards for
reporting and disclosure of comprehensive income, is effective for interim
and annual periods beginning after December 15, 1997. Reclassification of
financial information for earlier periods presented for comparative
purposes is required under SFAS No. 130. As this statement only requires
additional disclosures in the Registrant's consolidated financial
statements, its adoption does not have any impact on the Registrant's
consolidated financial position or results of operations. The Registrant
adopted SFAS No. 130 effective January 1, 1998. As a result, due to
changes in certain foreign currencies relative to the U.S. Dollar,
comprehensive income would have been $16,565,000 and $12,983,000 for the
first quarter of 1998 and 1997, respectively.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). This statement,
which establishes standards for the reporting of
7
information about operating segments and requires the reporting of selected
information about operating segments in interim financial statements, was
adopted by the Registrant on January 1, 1998. Disclosure of segment and
other related information is not required in interim periods of the first
year of the Registrant's adoption. The Registrant will provide appropriate
SFAS 131 disclosures for the year ended December 31, 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS No. 132"). This
statement, which revises certain disclosure requirements for the
Registrant's pension assets and obligations, is effective for fiscal
periods beginning after December 15, 1997. Restatement of prior years'
information is required, where available. As this statement only requires a
change in methods of disclosure and not any changes in accounting methods,
it will not have any impact on the Registrant's consolidated financial
position or results of operations. Interim reporting periods are not
affected by this statement. The Registrant adopted SFAS No. 132 effective
January 1, 1998.
6. To finance the acquisition of S&H Papier-Holding GmbH ("S&H"), on December
22, 1997, the Registrant entered into a $200 million 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 million 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.
On December 30, 1997, the Registrant borrowed DM 87,500,000 (approximately
$48,665,000) under the Revolving Credit Facility at a three-day rate of
5.075%. These proceeds were used to capitalize two German subsidiaries in
order to facilitate the S&H acquisition and are included in "Cash and cash
equivalents" on the December 31, 1997 Condensed Consolidated Balance Sheet.
The borrowings are classified as "Short-term debt" on the Condensed
Consolidated Balance Sheet as of December 31, 1997.
On January 2, 1998, the Registrant borrowed an additional DM 182,500,000
(approximately $101,500,000) necessary to complete the acquisition and
classified the aggregate borrowings under the Revolving Credit Facility as
long-term. To offset some of the variable rate characteristics of the
total borrowing under the Revolving Credit Facility, effective in January
1998, the Registrant entered into two interest rate swap agreements, each
having total notional principal amounts of DM 52,600,000 (approximately
$29,300,000). Under the agreements, the Registrant pays fixed rates of
4.18% and 4.45% for periods of two and three years, respectively, and
receives a floating rate of the six-month DM London Interbank Offered
Rate ("LIBOR"). The six-month DM LIBOR applicable for the first half of
1998 is approximately 3.8%.
On March 2, 1998, $150,000,000 principal amount of the Registrant's 5-7/8%
Notes matured. All of the securities which had been placed in a trust
relating to the defeasance of certain covenants of such Notes were
liquidated and the proceeds thereof were used to pay the principal of, and
interest on, the Notes in full.
7. On April 22, the Registrant's Board of Directors approved a non-qualified
stock option program under which each non-employee director is granted
options to purchase 1,500 shares of common stock of the Registrant on each
May 1 on which the individual serves as a director of the Registrant. Such
options are exercisable no earlier than one year from the date of grant and
generally expire on the earlier of five years subsequent to retirement from
the Registrant's Board of Directors or ten years after the date of grant.
The exercise price is calculated as the average of the high and low selling
price of the Registrant's common stock on the open market on the date of
grant, which, on May 1, 1998 was $18.3125. On May 1, 1998, options to
purchase 13,500 shares of common stock were granted under this program.
8. 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 its disposal of solid waste generated by its
operations. In order to comply with environmental laws and regulations,
the Registrant has incurred substantial capital and operating expenditures
over the past several years. The Registrant anticipates that environmental
regulation of the Registrant's operations will continue to become more
8
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 other paper companies located in the
United States are generally subject to the same environmental regulations,
the Registrant does not believe that its competitive position in the United
States paper industry will be materially adversely affected by its capital
expenditures for, or operating costs of, pollution abatement facilities for
its present mills or the limitations which environmental compliance may
place on its operations.
The Pennsylvania Department of Environmental Protection ("DEP") has
proposed to reissue the Registrant's wastewater discharge permit for the
Spring Grove mill on terms unacceptable to the Registrant. In addition,
the Wisconsin Department of Natural Resources ("DNR") has reissued in draft
the Registrant's wastewater discharge permit for the Neenah mill on terms
which are acceptable to the Registrant but as to which certain local
residents have objected. The Registrant cannot determine the impact that
the new permits will have on the Registrant if they contain objectionable
terms because it is too soon to determine what material terms will be in
the permits' final forms.
The Registrant, along with six other companies which operate or formerly
operated facilities along the Fox River in Wisconsin, has been in
discussions with the Wisconsin DNR and the United States Fish and Wildlife
Service ("USFWS") regarding the alleged discharge of polychlorinated
biphenyls ("PCBs") and other hazardous substances to the Fox River below
Lake Winnebago ("the lower Fox River") and the Bay of Green Bay.
On January 30, 1997, the Registrant and six other companies entered into an
agreement with the State of Wisconsin (the "Wisconsin Agreement") which was
intended to establish a framework for the final resolution of claims for
natural resources damages and other relief which the State asserts against
the companies. Under the agreement, the companies will provide in the
aggregate $10 million in work and funds to facilitate natural resources
damages assessment activities, including, among other things, modeling and
risk assessment, as well as field scale demonstration of sediment dredging
and the enhancement of certain environmental amenities. The State has
indicated that the $10 million in work and funds is expected to be spent
over a four year period although the bulk of the amount may be spent in
1998. The final allocated portion of the $10 million which the Registrant
is required to pay is unknown at present. The State has agreed to act as
"lead authorized official" under federal law for purposes of any assessment
of damages to natural resources within Wisconsin, except those within the
administrative jurisdiction of a federal agency. The USFWS, together with
the National Oceanic and Atmospheric Administration and two Indian tribes,
however, is conducting its own assessment despite the State's status. In
general, the parties to the Wisconsin Agreement have agreed to toll all
limitations periods and to forbear from litigation during the term of the
agreement. The parties intend to conclude a final resolution of all of the
State's claims during the course of, or after completion of, the work
called for by the agreement.
By letter dated January 31, 1997, and received by the Registrant on
February 3, 1997, the USFWS provided 60 days' notice of the intention of
the United States Departments of the Interior and Commerce to commence an
action for natural resources damages against the Registrant and the six
other companies referred to above similarly relating to the discharge of
hazardous substances into the lower Fox River. The Registrant does not
know the amount which the federal trustees will claim as natural resources
damages, but the Registrant believes that it will be substantial.
Beginning as of March 1, 1997, the Registrant and six other companies
entered into a series of agreements with the United States which provided
that all limitation periods were tolled and the parties would forbear from
litigation; the last tolling and forbearance period expired on December 2,
1997.
On July 11, 1997, the Wisconsin DNR, the United States Department of the
Interior, the Menominee Indian Tribe of Wisconsin, the Oneida Tribe of
Indians of Wisconsin, the National Oceanic and Atmospheric Administration
and the United States Environmental Protection Agency ("EPA") entered into
a Memorandum of Agreement (the "MOA") which provides for coordination and
cooperation among those parties in addressing the release or threat of
release of hazardous substances into the lower Fox River, Green Bay and
Lake Michigan environment. The MOA sets forth a mutual goal of remediating
and/or responding to hazardous substance releases and threats of releases,
and restoring injured and potentially injured natural resources. The MOA
further states that, based on current
9
information, removal of the PCB contaminated sediments in the lower Fox
River is expected to be the principal, but not exclusive, action undertaken
to achieve restoration and rehabilitation of injured natural resources. The
MOA anticipates funding from the Registrant and the six other companies,
all of which are identified as potentially responsible parties.
The EPA has announced its intention to include the Fox River/Green Bay site
on the National Priorities List maintained pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act. EPA rejected the
potentially responsible parties' offer to perform a remedial investigation
and feasibility study ("RI/FS") for the site and the Wisconsin DNR will
perform the RI/FS. The Registrant believes that this development increases
the likelihood that this matter will end up in litigation. The Registrant
cannot now predict the cost of the remedy which will be selected for the
site, in part because the Registrant cannot predict the remedy for the site
and the Registrant cannot predict its share of that cost.
The Registrant, with advice from its environmental consultants, continues
to believe that an aggressive effort, as currently proposed by the
governmental authorities, to remove PCB contaminated sediments, many of
which are buried under cleaner material or are otherwise unlikely to move,
would be environmentally detrimental and therefore inappropriate.
Furthermore, the Registrant's share of the cost of such removal, depending
on the amount of sediments to be removed, could exceed its available
resources. The Registrant believes it will be able to persuade the parties
to the MOA or a court against removal of a substantial amount of PCB
contaminated sediments. There can be no assurance, however, that the
Registrant will be successful in arguing that removal of PCB contaminated
sediments is inappropriate, that it would prevail in any resulting
litigation or that its share of the cost of any such removal would not have
a material adverse effect on the Registrant's consolidated financial
condition, liquidity and results of operation.
The amount and timing of future expenditures for environmental compliance,
clean up, remediation and personal injury 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 agreement reached with the State regarding the
lower Fox River and the Bay of Green Bay, its future negotiations with the
State concerning those areas and the unknown amount which could be claimed
by the federal trustees as natural resource damages related to the lower
Fox River. 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 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 future expenditures for these matters are not likely to have a
material adverse impact on the Registrant's consolidated financial
condition or liquidity, but could have a material adverse effect on the
Registrant's consolidated results from operations in a given year; however,
there can be no assurances that the Registrant's reserves will be adequate
or that a material adverse effect on the Registrant's consolidated
financial condition or liquidity will not occur at some future time.
9. 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, 1997. Certain reclassifications
have been made of previously reported amounts in order to conform with
classifications used in the current year.
10
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, 1998, and the related
condensed consolidated statements of income and retained earnings, and cash
flows for the three-month periods ended March 31, 1998 and 1997. 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 generally accepted auditing standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of P. H. Glatfelter Company and
subsidiaries as of December 31, 1997, and the related consolidated statements of
income, shareholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated February 6, 1998, 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, 1997 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
April 22, 1998
11
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
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.
Effective January 2, 1998, the Registrant acquired all of the outstanding common
stock of S&H Papier-Holding GmbH ("S&H"), the specialty paper division of
Schoeller and Hoesch Group from RQPO Beteiligungs GmbH & Co. Papier KG ("RQPO")
and EVOBESTRA Vermogensverwaltungsgesellschaft mbH, for approximately DM 270
million ($150 million), subject to certain adjustments, in cash. The principal
partners in RQPO were Deutsche Beteiligungs AG and S&H management. The
Registrant has accounted for the S&H acquisition under the purchase method of
accounting and S&H is consolidated with the Registrant beginning in January
1998. As a result, certain changes from year to year are a result of the
acquisition and not necessarily a change in comparable results of operations.
Where appropriate, those variances have been highlighted. The entities which
were owned by the Registrant during 1997 and whose results of operations can be
compared from year to year are referred to as "Pre-S&H Operations."
RESULTS OF OPERATIONS
- ---------------------
A summary of the period-to-period changes in the principal items included in the
Condensed Consolidated Statements of Income and Retained Earnings is shown
below.
Comparison of Three Months Ended
March 31, 1998 and March 31, 1997
----------------------------------
Increase(Decrease)
(dollars in thousands)
Net sales $51,031 35.9 %
Other income - net 609 20.4 %
Cost of products sold 40,282 36.0 %
Selling, general and
administrative expenses 4,249 47.8 %
Interest on debt 2,873 80.9 %
Income tax provision 1,732 21.9 %
Net income 2,504 19.5 %
Net Sales
- ---------
Overall net sales increased $51,031,000, or 35.9%, in the first quarter of 1998
compared to the first quarter of 1997. The primary reason for this increase is
S&H net sales of $42,914,000 during the first quarter of 1998.
The Registrant classifies its product sales into two product groups: 1)
printing papers; and 2) tobacco and other specialty papers. Printing papers net
sales increased $9,791,000, or 11.3%, in the first quarter of 1998 versus the
corresponding period in 1997. Pre-S&H Operations' printing papers sales
increased by 9.0% in the first quarter of 1998 as compared to the first three
months of 1997. This was due to both an increase in average net selling price
of 4.8% and an increase in net sales volume of 4.1%. The balance of the
increase in printing papers net sales represented printing papers sales by S&H
in the first quarter of 1998.
Pre-S&H Operations' printing papers net sales volume increased during the first
quarter of 1998 versus the first quarter of 1997. Improved productivity of Pre-
S&H Operations' printing papers operations coupled with adequate demand was
responsible for the increased volume. The Registrant did shut-down several
smaller paper machines for 8 days during the first quarter due to insufficient
demand; however this lost production and sales were not material. The immediate
outlook for the demand for, and pricing of, printing papers remains uncertain
due to, among other things, above normal inventories for paper producers,
uncertainty surrounding the pulp market, the threat of imported paper from Asia
and the Asian financial crisis. The Registrant does believe that pricing for
printing papers should improve in the future as a result of modest worldwide
capacity increases coupled with an expected increase in demand for those
products.
Net sales of tobacco and other specialty papers were $41,241,000, or 74.6%
higher in the first three months of 1998 as compared to the first three months
of 1997, primarily due to net sales of tobacco and other specialty papers by S&H
in the first quarter of 1998. Pre-S&H Operations'
12
net sales of tobacco papers increased by 3.1%, as a decrease in sales volume of
1.7% was more than offset by an increase in average net selling price of 4.9%.
One of the Ecusta mill's tobacco paper machines was indefinitely shut-down
during the first quarter of 1998 due to the Registrant's efforts to reduce
finished goods inventory levels and insufficient customer demand. The machine
was down for 50 days during the first quarter. During May 1998, this machine was
re-started, primarily as a result of demand for the Registrant's financial
printing papers. It is uncertain as to whether customer demand will sustain
operation of this machine for the remainder of the second quarter. The daily
capacity of this machine represents approximately 10% of the mill's daily
tobacco paper capacity.
The Registrant anticipates that prices for tobacco papers may come under
pressure in the near and intermediate term as a result of the strong dollar
versus the currencies of European competitors and worldwide excess capacity.
The Registrant is currently evaluating what steps it needs to take in order to
mitigate the potential negative impact of lower prices. The increase in Pre-S&H
Operations' average net selling prices of 4.9% compared to the prior year's
first quarter, was principally due to a higher-priced mix of products sold.
Net sales of other specialty papers for Pre-S&H Operations decreased by 6.2% in
the first quarter of 1998 compared to the first quarter of 1997, due primarily
to a lower-priced mix of products sold, with a slight decrease in sales volume.
The Registrant expects this unfavorable sales mix to turn around with, among
other things, increased sales volume of the Spring Grove mill's gravure coater
products.
Other Income - Net
- ------------------
The Registrant's other income - net, including interest income, increased
$609,000, or 20.4% for the first three months of 1998 compared to the
corresponding period of 1997. Interest income was $484,000 higher in the first
quarter of this year versus the first quarter of 1997. In 1997, the Registrant
established a trust to defease certain covenants of its $150,000,000 principal
amount of 5-7/8% Notes. The trust was in place for a longer period of time in
the first quarter of 1998 versus the first quarter of 1997, resulting in
$526,000 more interest income during the first quarter of 1998.
Cost of Products Sold
- ---------------------
The Registrant's cost of products sold increased $40,282,000, or 36.0% during
the first three months of 1998 compared to the same period of 1997. The
percentage increase in cost of products sold was approximately the same as the
percentage increase in net sales. Therefore, the Registrant's gross margin as a
percentage of sales remained flat versus the prior year's first quarter. The
increase in cost of products sold was due primarily to S&H's cost of products
sold during the first quarter of 1998 and an increase in sales volume in the
Registrant's Pre-S&H Operations. A significant component of the Registrant's
cost of products sold is its cost for market pulp. The cost of market pulp, on
average, during the first quarter of 1998 was close to that experienced during
the first quarter of 1997.
The Registrant expects that pulp costs will increase modestly over the balance
of the year. Historically, increases in pulp costs have provided an environment
conducive to increased printing papers prices.
Selling, General and Administrative Expenses
- --------------------------------------------
The Registrant's selling, general and administrative expenses for the first
quarter of 1998 were $4,249,000, or 47.8% higher than for the comparable period
of 1997. This increase was principally due to the selling, general and
administrative expenses of S&H during the first quarter of 1998. In addition,
the Registrant has increased spending on its internal information technology
resources.
Interest on Debt
- ----------------
The Registrant's interest on debt for the first three months of 1998 was
$2,873,000, or 80.9% higher than for the comparable period of 1997, primarily
due to the debt incurred under a $200 million multi-currency revolving credit
facility ("Revolving Credit Facility") with a syndicate of major lending
institutions to finance the acquisition of S&H. As of March 31, 1998, the
Registrant had borrowed DM 270,000,000 (approximately $150,000,000) under this
facility. Through the first three months of 1998, the Registrant had recognized
approximately DM 2,700,000 (approximately $1,500,000) of interest expense under
the Revolving Credit Facility.
13
In order to offset some of the variable rate characteristics of the total
borrowings under the Revolving Credit Facility, the Registrant entered into two
interest rate swap agreements, each having total notional principal amounts of
DM 52,600,000 (approximately $29,300,000). Under the agreements, the Registrant
pays fixed rates of 4.18% and 4.45% for periods of two and three years,
respectively, and receives a floating rate of the six-month DM London Interbank
Offered Rate ("LIBOR"). The six-month DM LIBOR applicable for the first half of
1998 is approximately 3.8%. The amount of interest expense incurred under these
two swap agreements during the first quarter of 1998 was approximately DM
133,000 (approximately $73,000).
During the first quarter of 1997, $150,000,000 principal amount of the
Registrant's 5-7/8% Notes were outstanding. On July 22, 1997, the Registrant
issued $150,000,000 principal amount of its 6-7/8% Notes. While certain of the
covenants of the 5-7/8% Notes were defeased by deposit of securities into a
trust that was established in 1997, the 5-7/8% Notes remained outstanding until
March 2, 1998. During the first quarter of 1998, the Registrant recognized two
months of interest expense on the 5-7/8% Notes, as well as a full three months
of interest expense on the 6-7/8% Notes. During the comparable quarter of 1997,
only the 5-7/8% Notes were outstanding, resulting in lower interest in that
prior period.
The Registrant's notional principal amount $50,000,000 swap agreement, which was
in place during the first quarter of 1997, also terminated on March 2, 1998.
The termination of this agreement reduced the amount of interest expense in the
first quarter of 1998 as compared to 1997.
Income Tax Provision
- --------------------
The Registrant's income tax provision increased by $1,732,000, or 21.9%,
primarily due to increased earnings as a result of the acquisition of S&H.
FINANCIAL CONDITION
- -------------------
Liquidity
- ---------
The Registrant's cash and cash equivalents decreased by $50,520,000 during the
first three months of 1998. Net cash provided by operating activities of
$10,302,000 was more than offset by cash used in investing activities of
$2,289,000 and cash used in financing activities of $58,565,000. Significant
cash activities during the first quarter of 1998 included the liquidation of
$154,407,000 of securities held in trust to repay the principal amount of the
Registrant's 5-7/8% Notes and related interest on March 2, 1998 and the
borrowing of approximately $101,500,000 to finance part of the purchase price
for the Registrant's acquisition of S&H. Other significant cash payments
included dividends of $7,376,000, expenditure of $9,818,000 on plant, equipment
and timberlands and the repurchase of 150,000 shares of common stock for the
treasury at an aggregate purchase price of $2,614,000, the purpose of which was
to enhance shareholder value.
To finance the S&H acquisition, the Registrant entered into a $200 million
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 million 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, 1998 the Registrant
owed DM 270,000,000 (approximately $146,200,000) under this agreement. The
Registrant is in compliance with all covenants of the Revolving Credit
Agreement.
To offset some of the variable rate characteristics of the total borrowing under
the Revolving Credit Facility, effective in January 1998, the Registrant entered
into two interest rate swap agreements, each having total notional principal
amounts of DM 52,600,000 (approximately $29,300,000). Under the agreements, the
Registrant pays fixed rates of 4.18% and 4.45% for periods of two and three
years, respectively, and receives a floating rate based on the six-month DM
London Interbank Offered Rate ("LIBOR"). The six-month DM LIBOR applicable for
the first half of 1998 is approximately 3.8%. Until the applicable six-month DM
LIBOR rate is greater than the respective fixed rate, the Registrant will be a
net payer under each of these agreements.
On July 22, 1997, the Registrant issued $150,000,000 principal amount of its 6-
7/8% Notes. These Notes will mature on July 15, 2007. The 6-7/8% Notes are
redeemable, in whole or in
14
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. The 6-7/8%
Notes are unsecured and unsubordinated indebtedness of the Company. Interest on
the Notes is payable semiannually on January 15 and July 15 of each year.
Capital Resources
- -----------------
The precipitated calcium carbonate ("PCC") plant at the Registrant's Spring
Grove mill started operations on March 20, 1998. Start-up has gone well and
quality production began with the plant's first batch of PCC. This project is
expected to result in cost savings to the Registrant, as less expensive and
higher quality PCC is being substituted for other higher cost fillers.
In March 1998, the Registrant's Board of Directors approved a $6 million capital
project to modify a paper machine at S&H's Gernsbach, Germany facility. The
modification is expected to provide additional capacity to produce tea bag paper
and other long fiber papers, as well as ultra porous plug wrap papers, which are
used in the tobacco industry.
During January 1998, the installation of a gravure coater ("G-Coater"), at the
Registrant's Spring Grove mill, was completed within budget. Although demand
for G-Coater products has been below expectations, the Registrant continues to
view the G-Coater as an important strategic project for the expansion of its
more profitable specialty paper line of business. Early production runs have
resulted in new technically engineered papers not previously produced by the
Registrant.
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 its disposal of solid waste generated by its operations. In order to
comply with environmental laws and regulations, the Registrant has incurred
substantial capital and operating expenditures over the past several years.
During 1997, 1996 and 1995, the Registrant incurred approximately $14,800,000,
$15,200,000 and $14,600,000, respectively, in operating costs related to
complying with environmental laws and regulations. The Registrant anticipates
that environmental regulation of the Registrant's 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 continues to negotiate with the State
of Wisconsin regarding natural resources restoration and damages related to the
discharge of polychlorinated biphenyls (PCBs) and other hazardous substances in
the lower Fox River, on which the Registrant's Neenah mill is located. The cost
of such restoration and damages is presently unknown but could be substantial
and perhaps exceed the Registrant's available resources as discussed in Note 8
to the Registrant's condensed consolidated financial statements. Management's
current assessment, after consultation with legal counsel, is that such
expenditures are not likely to have a material adverse effect on the
Registrant's consolidated financial condition or liquidity, but could have a
material adverse effect on the Registrant's consolidated results from operations
in a given year; however, there can be no assurance that the Registrant's
reserves will be adequate or that a material adverse effect on the Registrant's
consolidated financial condition or liquidity will not occur at some future
time.
YEAR 2000
- ---------
The Registrant continues to make progress in achieving Year 2000 compliance. It
has accelerated the schedule for compliance of its internally developed business
systems from mid-year 1999 to the end of the first quarter of 1999. Nearly all
of the Company's business systems have been developed internally. Internal
information technology personnel are revising those systems. The Company has
not hired any external consultants or incurred any additional costs for this
portion of the Year 2000 project other than normal wage, benefit and related
costs for its normal complement of information systems personnel. The
Company's use of its own information systems personnel to make the business
systems Year 2000 compliant has and will continue to delay some other strategic
information systems development and implementation which would have otherwise
benefited the Company in various ways and to varying extents. The Company does
not believe that it will be at a competitive disadvantage as a result of these
delays.
15
The inventory phase of computer process control equipment is nearing completion.
Preliminary indications from that phase are encouraging. The Registrant
currently believes that some cost will be incurred to make certain process
control equipment Year 2000 compliant. It is difficult at this stage of the
process to quantify that cost, but preliminary indications are that it should
not be material. The Registrant continues to make inquiries of its vendors,
professional advisors and other constituents whose Year 2000 compliance is
important to its ongoing business. Based upon limited preliminary information
received by the Registrant, no significant issues have been discovered. In the
event that any of the Registrant's significant suppliers or customers do not
successfully achieve Year 2000 compliance on a timely basis, the Registrant's
business or operations could be adversely affected.
OTHER COMPREHENSIVE INCOME
- --------------------------
Due to certain changes in the functional currencies of foreign subsidiaries
relative to the reporting currency of the Registrant, the U.S. Dollar, the
Registrant's other comprehensive income was $1,238,000 and $160,000 for the
first quarter of 1998 and 1997, respectively. The primary reason for the
increase in other comprehensive income is the increase in foreign-based assets
as a result of the S&H acquisition as impacted by changes in foreign currency
exchange rates.
BARGAINING UNIT LABOR AGREEMENT
- -------------------------------
The Spring Grove Mill bargaining unit employees continue to work under the terms
of a contract that expired on January 16, 1998. The Registrant has made several
proposals to the bargaining unit employees, all of which were highly competitive
with recent settlements negotiated by others in the industry. The bargaining
unit employees rejected the latest offer on April 24, 1998. A federal mediator
has been involved in the negotiations since February 1998. Although no new
talks are scheduled at this time, the Registrant remains confident that an
agreement will be reached.
16
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 22, 1998. All
of management's nominees for Directors were elected by the shareholders. Each
was elected to a term expiring in 2001. The votes cast for election of
Directors were as follows, with cumulative voting applied:
For Withheld
---------- --------
R. S. Hillas 38,338,760 504,229
S. R. Roedel 38,217,390 625,599
T. M. Sanzo 38,454,603 388,386
The holders of common stock rejected two Shareholder Proposals as presented, in
accordance with the recommendations of the Registrant's Board of Directors.
Shareholder Proposal Number 1 called for the declassification of the
Registrant's Board of Directors. Shareholder Proposal Number 1 was defeated by
a majority of the votes cast, with 25,224,847 votes against, 9,430,699 votes
for, 3,961,366 broker non-votes and 226,077 abstentions. Shareholder Proposal
Number 2 urged the Registrant's Board of Directors to arrange for the prompt
sale of the Registrant to the highest bidder. Shareholder Proposal Number 2 was
also rejected by a majority of the votes cast, with 31,835,962 votes against,
2,751,377 votes for, 3,961,366 broker non-votes and 294,376 abstentions.
No other matters were voted upon at the meeting.
17
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 expectations as to industry conditions and its
financial results, demand for or pricing of its products 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 which 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 hereby 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) changes in the cost or availability of raw
materials used by the Registrant, in particular market pulp, pulp substitutes
and wastepaper; (iii) 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; (iv) the gain or loss of
significant customers; (v) cost and other effects of environmental compliance,
cleanup, damages, remediation or restoration, or personal injury or property
damage related thereto, such as the cost 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; (vi) significant changes in cigarette
consumption, both domestically and internationally; (vii) enactment of adverse
state, federal or foreign legislation or changes in government policy or
regulation; (viii) adverse results in litigation; (ix) fluctuations in currency
exchange rates; and (x) disruptions in production and/or increased costs due to
labor disputes.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
--------
Number Description of Documents
------ ------------------------
15 Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information
27 Financial Data Schedule
(b) The Registrant filed the following reports on Forms 8-K and 8-K/A since
December 31, 1997:
Date of Report Item Reported
-------------- -------------
January 2, 1998 5
(filed January 15, 1998)
January 2, 1998 7
(filed March 23, 1998)
18
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 14, 1998
R. P. Newcomer
Senior Vice President
and Chief Financial Officer
19
INDEX OF EXHIBITS
-----------------
Number Description of Documents
------ ------------------------
15 Letter in Lieu of Consent Regarding
Review Report of Unaudited Interim
Financial Information
27 Financial Data Schedule
20