<PAGE> 1
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 June 30, 2000
( ) 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
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.)
96 South George Street, Suite 500, York, Pennsylvania 17401
(Address of principal executive offices) (Zip Code)
(717) 225-4711
(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 July 31, 2000 were 42,358,413.
<PAGE> 2
P. H. GLATFELTER COMPANY
INDEX
<TABLE>
<S> <C>
Part I - Financial Information
Financial Statements:
Condensed Consolidated Statements of Income -
Three Months and Six Months Ended June 30,
2000 and 1999 (Unaudited)..................................... 3
Condensed Consolidated Balance Sheets - June 30, 2000
(Unaudited) and December 31, 1999............................. 4
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2000 and 1999 (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................ 19
Part II - Other Information............................................... 19
Signature................................................................. 21
Index of Exhibits......................................................... 22
</TABLE>
Exhibit 3(ii)- By-Laws, as amended June 21, 2000
Exhibit 15 - Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information
Exhibit 27 - Financial Data Schedule
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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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
6/30/2000 6/30/1999 6/30/2000 6/30/1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Net sales $177,497 $167,234 $358,757 $333,080
Other income - net
Energy sales - net 1,362 2,706 3,828 4,944
Interest on investments and
other - net 701 428 1,989 798
Gain from property
dispositions, etc. - net 459 1,163 767 2,083
-------- -------- -------- --------
2,522 4,297 6,584 7,825
Total revenues 180,019 171,531 365,341 340,905
Costs and expenses
Cost of products sold 137,653 132,778 285,406 270,941
Selling, general and
administrative expenses 16,610 14,293 29,713 27,802
Interest on debt - net 3,997 4,601 8,377 9,391
Unusual item -- -- 3,336 --
-------- -------- -------- --------
158,260 151,672 326,832 308,134
Income before income taxes 21,759 19,859 38,509 32,771
Income tax provision
Current taxes 4,835 3,408 9,325 7,534
Deferred taxes 2,886 3,908 4,502 4,554
-------- -------- -------- --------
Total 7,721 7,316 13,827 12,088
Net income $ 14,038 $ 12,543 $ 24,682 $ 20,683
======== ======== ======== ========
Basic and diluted earnings per share $ 0.33 $ 0.30 $ 0.58 $ 0.49
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
6/30/2000 12/31/1999
(unaudited)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 87,144 $ 76,035
Accounts receivable - net 80,378 74,638
Inventories:
Raw materials 31,542 41,013
In process and finished 45,775 42,463
Supplies 33,040 31,624
----------- -----------
Total inventories 110,357 115,100
Prepaid expenses and other current assets 3,641 2,354
----------- -----------
Total current assets 281,520 268,127
Plant, equipment and timberlands - net 560,113 582,213
Other assets 165,077 153,440
----------- -----------
Total assets $ 1,006,710 $ 1,003,780
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,738 $ 1,824
Short-term debt 15,494 26,566
Accounts payable 42,208 40,047
Dividends payable 7,410 7,393
Income taxes payable 11,108 9,601
Accrued compensation and other expenses
and deferred income taxes 43,564 47,200
----------- -----------
Total current liabilities 121,522 132,631
Long-term debt 300,171 301,380
Deferred income taxes 153,356 147,698
Other long-term liabilities 63,708 63,947
----------- -----------
Total liabilities 638,757 645,656
Commitments and contingencies
Shareholders' equity:
Common stock 544 544
Capital in excess of par value 41,986 42,296
Retained earnings 506,546 496,680
Accumulated other comprehensive income (2,463) (1,392)
----------- -----------
Total 546,613 538,128
Less cost of common stock in treasury (178,660) (180,004)
----------- -----------
Total shareholders' equity 367,953 358,124
----------- -----------
Total liabilities and
shareholders' equity $ 1,006,710 $ 1,003,780
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
6/30/2000 6/30/1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 24,682 $ 20,683
Items included in net income not using
(providing) cash:
Depreciation, depletion and amortization 23,755 24,488
Loss (gain) on disposition of fixed assets 452 (1,005)
Expense related to 401(k) plans and other 1,034 1,140
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable (11,501) (13,206)
Inventories 8,820 (557)
Other assets and prepaid expenses (14,909) (8,312)
Accounts payable, accrued compensation and
other expenses, deferred income taxes
and other long-term liabilities (664) 6,830
Income taxes payable 1,658 163
Deferred income taxes - noncurrent 6,029 4,554
-------- --------
Net cash provided by operating activities 39,356 34,778
-------- --------
Cash flows from investing activities:
Sale or maturity of investments - net -- 6
Proceeds from disposal of fixed assets 107 1,059
Additions to plant, equipment and timberlands (9,390) (11,659)
Acquisition of Cascadec -- (7,399)
-------- --------
Net cash used in investing activities (9,283) (17,993)
-------- --------
Cash flows from financing activities:
Net borrowing (payment) of debt (4,203) 1,429
Dividends paid (14,796) (14,740)
-------- --------
Net cash used in financing activities (18,999) (13,311)
-------- --------
Effect of exchange rate changes on cash 35 (234)
-------- --------
Net increase in cash and cash equivalents 11,109 3,240
Cash and cash equivalents:
At beginning of year 76,035 50,907
-------- --------
At end of period $ 87,144 $ 54,147
======== ========
Supplemental disclosure of cash flow information: Cash paid for:
Interest $ 8,621 $ 11,907
Income taxes 8,431 5,425
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ----------------------
2000 1999 2000 1999
------- ------- ------- -------
Shares Shares Shares Shares
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic EPS 42,318 42,158 42,293 42,134
Effect of potentially
dilutive employee
incentive plans:
Restricted stock
awards 145 4 101 7
Performance stock
awards 43 127 43 135
Employee stock
options -- 96 -- 48
------- ------- ------- -------
Diluted EPS 42,506 42,385 42,437 42,324
======= ======= ======= =======
Net income $14,038 $12,543 $24,682 $20,683
Basic and diluted EPS $ 0.33 $ 0.30 $ 0.58 $ 0.49
</TABLE>
Basic and diluted EPS of $.58 for the six months ended June 30, 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 has begun to reduce the workforce
at Ecusta. The workforce reduction is expected to be completed by late
2000 and will ultimately result in the reduction of approximately 250
salaried and hourly jobs associated with the Registrant's tobacco paper
production capacity. The Registrant accrued and charged to expense
$3,336,000 on a pre-tax basis ($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.
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3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133 requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. SFAS No. 137, issued in July
1999, deferred the effective date of SFAS No. 133 until the beginning of
the Registrant's first quarter of 2001. SFAS No. 138, issued in June 2000,
addresses a limited number of issues causing implementation difficulties
for numerous entities that apply SFAS No. 133 and amends the accounting
and reporting standards of that Statement for certain derivative
instruments and certain hedging activities. The Registrant is evaluating
the effects that the adoption of SFAS Nos. 133 and 138 may have on its
consolidated financial position and results of operations.
4. INTEREST RATE SWAP AGREEMENTS
In January 1998, the Registrant entered into two interest rate swap
agreements, each having a total notional principal amount of DM 52,600,000
(approximately $25,700,000 as of June 30, 2000). One such agreement
expired January 6, 2000. Under the remaining agreement, which expires
January 3, 2001, the Registrant receives a floating rate of the six-month
DM London Interbank Offered Rate ("LIBOR") and pays a fixed rate of 4.45%
for the term of the agreement.
In January 1999, the Registrant entered into two additional interest rate
swap agreements, each having a total notional principal amount of DM
50,000,000 (approximately $24,400,000 as of June 30, 2000). 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.
The Registrant has other interest rate swap agreements outstanding which
do not have a material impact on the Registrant's consolidated financial
statements. All of 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 any of its swap
agreements at any time, the Registrant intends to hold all of its swap
agreements until their respective maturities.
5. COMPREHENSIVE INCOME
Comprehensive income was $13,429,000 and $14,435,000 for the second
quarter of 2000 and 1999, respectively, and $23,611,000 and $22,026,000
for the first six months of 2000 and 1999, respectively. Comprehensive
income includes the effects of changes in certain currency exchange rates
relative to the U.S. dollar.
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
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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.
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. DEP has
concurrently publicly proposed terms for resolution of an anticipated
appeal from the issuance of that permit which terms, subject to the
satisfaction of certain conditions, are acceptable to the Registrant.
However, such terms may be unacceptable to EPA or certain third parties.
The Registrant cannot determine the impact that the new permit will have
on the Registrant if it contains objectionable terms because the material
terms of the final form of the permit are unknown.
The Pennsylvania Public Interest Research Group ("Penn PIRG") and several
other plaintiffs have 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.
The Registrant believes Penn PIRG's lawsuit to be without merit, but the
Registrant cannot predict the impact on the Registrant of any relief the
court might award because the case is not yet at a stage where the nature
and extent of any relief can be predicted.
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 only pertained 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,
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the Registrant is unable to predict the ultimate outcome of these matters
or the costs involved.
The Registrant, along with six other companies which operate or formerly
operated facilities along the Fox River in Wisconsin, has been identified
as a potentially responsible party ("PRP") under the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") and
other laws for (a) investigation and cleanup and (b) natural resources
damages arising from 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. A dispute
presently exists as to which sovereign controls which claims concerning
this matter. Accordingly, the Registrant has been in discussions with EPA,
the Wisconsin Department of Natural Resources ("DNR"), the United States
Fish and Wildlife Service ("FWS"), the National Oceanic and Atmospheric
Administration ("NOAA"), the Menominee Indian Tribe of Wisconsin, the
Oneida Tribe of Indians of Wisconsin, and the state and federal
Departments of Justice.
On July 11, 1997, these agencies and tribes 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 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.
On February 26, 1999, DNR released a draft remedial investigation and
feasibility study ("RI/FS") for the lower Fox River for public comment. In
the draft RI/FS, DNR reviewed and summarized a number of possible remedial
alternatives for the site estimated to cost in the range of $0 to
$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 and disposal. There is no
assurance that the cost estimates in the draft RI/FS will not differ
significantly from actual costs. The Registrant and the other six
companies have submitted extensive technical comments to the draft RI/FS.
In addition, the Registrant has submitted its individual comments to the
draft RI/FS. DNR and EPA have announced that the RI/FS will be revised.
The revision may add, delete or amend the remedial alternatives, and a
final RI/FS and a proposed remedial action plan will be issued. The
agencies have publicly stated that these documents may be issued in late
2000.
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.
Natural resources damages may be assessed in addition to cleanup costs. In
November 1999, FWS announced a preliminary estimate of damages as the
result of injury to recreational fishing. The range of damages announced
is from $106 million to $150 million. The Registrant believes that this
range is significantly overstated. FWS and the federal and tribal trustees
have not yet announced estimates of certain other components of their
natural resources damages claim. The Registrant believes DNR to be the
lead agency
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for assessment of damages, and has been cooperatively assessing damages
with DNR independent of the federal agencies.
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 resources 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 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. DIRECTORS' COMPENSATION
On May 1, 2000, 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 13,500 options granted. Such options become exercisable on May 1,
2001 at an exercise price of $10.78125, which represents the average
quoted market price of the Registrant's common stock on the date of grant,
and expire on April 30, 2010.
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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, 1999.
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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 June 30, 2000, the related condensed
consolidated statements of income for the three months and six months ended June
30, 2000 and 1999, and the related condensed consolidated statements of cash
flows for the six months ended June 30, 2000 and 1999. 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, 1999, 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 11,
2000, 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, 1999 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
July 19, 2000
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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.
<TABLE>
<CAPTION>
Comparison of
------------------------------------------------------
Three Months Ended Six Months Ended
June 30, 2000 and 1999 June 30, 2000 and 1999
------------------------ ----------------------
Increase (Decrease)
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales 10,263 6.1 % 25,677 7.7 %
Other income - net (1,775) (41.3)% (1,241) (15.9)%
Cost of products sold 4,875 3.7 % 14,465 5.3 %
Selling, general and
administrative expenses 2,317 16.2 % 1,911 6.9 %
Interest on debt - net (604) (13.1)% (1,014) (10.8)%
Income tax provision 405 5.5 % 1,739 14.4 %
Net income 1,495 11.9 % 3,999 19.3 %
</TABLE>
Net Sales
Net sales increased $10,263,000, or 6.1%, for the second quarter of 2000
compared to the second quarter of 1999 as a result of improved pricing,
partially offset by slightly lower sales volume. Although demand for most of the
Registrant's product lines during the second quarter of 2000 was steady, market
conditions were slightly weaker than anticipated. Net sales increased
$25,677,000, or 7.7%, for the first six months of 2000 versus the corresponding
period in 1999 as a result of both improved pricing and higher overall sales
volume.
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 19.1% in the second quarter of 2000
compared to the second quarter of 1999 primarily due to a 16.3% increase in
average net selling prices, resulting from favorable pricing and an improved mix
of products sold, combined with a 2.4% increase in net sales volume. Net sales
of specialized printing papers increased 18.9% for the first six months of 2000
compared to the like period in 1999 as a result of a 14.4% increase in average
net selling prices, also due to favorable pricing and an improved mix of
products sold, and a 3.9% increase in net sales volume.
The increased sales volume of specialized printing papers was largely due to
improved overall demand in the second quarter and first six months of 2000
versus the like periods of 1999. Despite this improved demand, somewhat weak and
inconsistent demand for certain of such papers caused some market-related
downtime due to lack of orders during the first and second quarters of 2000.
During the first half of 1999, the Registrant did not experience significant
market-related downtime related to its specialized printing papers operations.
The Registrant believes that overall market conditions are still strong and will
support existing pricing over the near term, as indicated by stronger backlogs
at the end of June 2000.
Net sales of engineered papers for the three months and six months ended June
30, 2000 were 5.6% and 3.2%, respectively, lower than for the corresponding 1999
periods. The decreases were primarily the result of demand erosion for the
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Registrant's tobacco papers, partially offset by an increase in pricing for such
papers. As explained in "Unusual Item" below, the Registrant has 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 determined
based on contractual provisions to reflect changes in market pulp prices.
Net sales of engineered papers, excluding tobacco papers, increased 10.9% and
4.3% in the second quarter and first six months of 2000, respectively, versus
the like periods of 1999 primarily as a result of an increase in net sales
volume. Net average selling prices for such papers were 2.3% higher for the
second quarter of 2000, principally due to selective price increases, and
remained relatively flat for the first half of 2000 compared to similar periods
in 1999. The increases in net sales volume were a result of unit growth in a
diverse group of products that are typically less cyclical by reason of their
special applications. Overall, demand for such engineered papers has remained
steady, and the Registrant expects pricing to be stable for the remainder of the
year with some limited improvement in certain products.
Other Income - Net
Other income - net decreased $1,775,000, or 41.3%, for the second quarter of
2000 compared to the corresponding period of 1999 and decreased $1,241,000, or
15.9%, for the first six months of 2000 compared to the first six months of
1999. Energy sales - net decreased $1,344,000 and $1,116,000 for the three
months and six months ended June 30, 2000, respectively, versus the comparable
periods in 1999. The decreases were due to equipment problems experienced at the
Registrant's Spring Grove, Pennsylvania manufacturing facility during the second
quarter of 2000 that led to approximately one and one-half months of lost energy
sales, as well as additional maintenance expense. Interest on investments and
other - net increased $273,000 and $1,191,000 in the second quarter of 2000 and
the first half of 2000, respectively, versus the same periods in 1999 as a
result of higher average cash balances and higher average interest rates. In
addition, the Registrant recognized minority interest expense of $343,000 in the
first quarter of 1999. No such minority interest expense was recognized in the
first quarter of 2000.
Gain from property dispositions, etc. - net decreased $704,000 and $1,316,000
for the three months and six months ended June 30, 2000, respectively, versus
the like periods in 1999. In the second quarter of 1999, the Registrant sold
various fully-depreciated items, in addition to the rights to standing timber on
select tracts of land, but no single sale was material to the Registrant's
results of operations. No significant sales of such property occurred in the
second quarter of 2000. During the first quarter of 1999, the Registrant
realized a gain of $976,000 resulting from the sale of a tract of timberland,
while no significant sales of property occurred in the first quarter of 2000.
Cost of Products Sold and Gross Margin
Cost of products sold increased $4,875,000, or 3.7%, for the second quarter of
2000 versus the second quarter of 1999 primarily as a result of increased costs
of raw materials, partially offset by slightly lower overall sales volume. Cost
of products sold increased $14,465,000, or 5.3%, for the first six months of
2000 versus the first six months of 1999 due to a 1.4% higher overall sales
volume and increased raw materials costs. In the second quarter and first six
months of 2000, such cost increases were offset somewhat by increased pension
income.
Overall, prices for certain of the Registrant's principal raw materials,
especially market pulp and wastepaper, have increased over the past five
quarters thereby increasing its net marginal cost of products sold by 3.9% for
the first six months of 2000 versus the same period of 1999. This increase in
net marginal
14
<PAGE> 15
cost of products sold was more than offset by an increase in average net selling
price per ton, resulting in an increase in gross margin per ton of 16.4% for the
first half of 2000 compared to the first half of 1999.
The Registrant expects that market pulp prices will continue to increase over
the last two quarters of 2000. Since pricing for many of the Registrant's
products typically follows that of market pulp, the Registrant also expects
corresponding improved pricing for such products.
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 $7,905,000 and $5,550,000 for the second quarter of 2000 and the same
quarter of 1999, respectively, and by $14,067,000 and $9,454,000 for the first
half of 2000 and the like period of 1999, respectively. This improved level of
income was primarily the result of investment performance of the plans' assets.
In addition, strong productivity from the Registrant's manufacturing facilities
helped increase gross margin in the second quarter of 2000. Further, the
Registrant began to realize the benefits of its cash savings project, known as
"DRIVE," in the second quarter of 2000. Such savings in the short term have been
offset by the Registrant's costs of implementing the project. The Registrant
remains on pace to achieve its DRIVE target of $50,000,000 in sustainable,
annual cash savings. The Registrant is currently realizing savings on projects
that when fully implemented by the fourth quarter of 2001 will result in
$40,000,000 of expected annual savings. The remaining $10,000,000 is expected to
be realized, on an annualized basis, by mid 2002.
As a result of the aforementioned items, gross margin as a percentage of net
sales increased to 22.4% for the second quarter of 2000 from 20.6% for the like
quarter of 1999 and increased to 20.4% for the first half of 2000 from 18.7% for
the corresponding period of 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the second quarter of 2000 were
$2,317,000, or 16.2%, higher than for the second quarter of 1999 and for the
first half of 2000 were $1,911,000, or 6.9%, higher than for the like period of
1999 as a result of increased legal and professional expenses, stemming mainly
from outside consulting services associated with the Registrant's DRIVE and
other strategic projects. Pension income reduced selling, general and
administrative expenses by $210,000 and $297,000 for the second quarter of 2000
and the same quarter of 1999, respectively, and by $403,000 and $517,000 for the
first half of 2000 and the like period of 1999, respectively.
Interest on Debt - Net
Interest on debt - net decreased $604,000, or 13.1%, and $1,014,000, or 10.8%,
for the three months and six months ended June 30, 2000, respectively, versus
the comparable periods of 1999. Due to changes in certain currency exchange
rates, especially the weakening of the Deutsche Mark relative to the U.S.
dollar, the Registrant's average reported borrowings have decreased, resulting
in lower interest expense for the periods indicated.
Income Tax Provision
The income tax provision increased $405,000, or 5.5%, for the second quarter of
2000 versus the second quarter of 1999 and increased $1,739,000, or 14.4%, for
the first half of 2000 compared to the first half of 1999. The increases were
due to higher income before income taxes in 2000 versus 1999, partially offset
by lower effective income tax rates in the 2000 periods.
15
<PAGE> 16
UNUSUAL ITEM
The Registrant's tobacco papers business has suffered from extremely low pricing
in recent years as a result of industry overcapacity and declining domestic
consumption. 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 has begun to reduce the
workforce at Ecusta. The workforce reduction is expected to be completed by late
2000 and will ultimately result in the reduction of approximately 250 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 on a pre-tax basis ($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.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents increased $11,109,000 during the first six months of
2000. Net cash provided by operating activities of $39,356,000 more than offset
cash used in investing activities of $9,283,000 and financing activities of
$18,999,000. Significant cash activities during the first six months of 2000
included the payment of $14,796,000 of dividends and $9,390,000 for additions to
plant, equipment and timberlands.
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
June 30, 2000, the Registrant's outstanding borrowings were DM 296,900,000
(approximately $144,900,000) under the Revolving Credit Facility.
In January 1998, the Registrant entered into two interest rate swap agreements,
each having a total notional principal amount of DM 52,600,000 (approximately
$25,700,000 as of June 30, 2000). One such agreement expired January 6, 2000.
Under the remaining agreement, which expires January 3, 2001, the Registrant
receives a floating rate of the six-month DM London Interbank Offered Rate
("LIBOR") and pays a fixed rate of 4.45% for the term of the agreement.
In January 1999, the Registrant entered into two additional interest rate swap
agreements, each having a total notional principal amount of DM 50,000,000
(approximately $24,400,000 as of June 30, 2000). 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.
16
<PAGE> 17
The Registrant has other interest rate swap agreements outstanding which do not
have a material impact on the Registrant's consolidated financial statements.
All of 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 any of its swap agreements at any time, the Registrant
intends to hold all of its swap agreements until their respective maturities.
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 off-balance sheet 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
June 30, 2000. 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.
<TABLE>
<CAPTION>
Year of Maturity
---------------------------------------------------------------------
(dollar amounts in thousands)
Total
Due at Fair Value
2000 2001 2002 2003 2004 Thereafter Maturity at 6/30/00
---- ---- ---- ---- ---- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Fixed rate -- $ 1,738 $ 1,451 $ 1,292 $ 1,133 $ 946 $150,414 $156,974 $150,005
Average interest rate 6.85% 6.86% 6.86% 6.87% 6.87% 6.87%
Variable rate -- $ -- $ -- $144,935 $ -- $ -- $ -- $144,935 $144,935
Average interest rate 4.44% 4.54% 4.54% -- -- --
Interest rate swap agreements:
Variable to fixed swaps -- $27,508 $25,677 $ 48,816 $ -- $ -- $ -- $102,001 $ 2,280
Average pay rate 3.75% 3.42% 3.42% -- -- --
Average receive rate 4.30% 4.50% 4.50% -- -- --
</TABLE>
17
<PAGE> 18
Capital Expenditures
The Registrant expended $9,390,000 on capital projects for the first six months
of 2000 compared to $11,659,000 for the first six months of 1999. Capital
spending is expected to range from $35,000,000 to $40,000,000 during 2000.
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 1999, 1998 and 1997,
the Registrant incurred approximately $15,800,000, $17,700,000 and $14,800,000,
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
continues to negotiate with EPA and DEP regarding the NOVs under the federal and
state air pollution control laws and 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 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. See Note 6 to the Registrant's condensed consolidated financial
statements.
ENVIRONMENTAL ACHIEVEMENT
On May 19, 2000, the Registrant announced that its Neenah, Wisconsin paper mill
achieved ISO 14001 certification for its environmental management system and its
commitment to environmental excellence. ISO 14001 requires that an organization
have an environmental policy that includes commitments to prevention of
pollution, compliance with environmental laws and regulations and continual
improvements in its environmental management system. As a part of maintaining
its certification, the mill's environmental management system will be audited by
an independent third party on an ongoing, periodic basis. The Registrant's
Pisgah Forest, North Carolina paper mill is currently working on achieving ISO
14001 certification. The Registrant plans to have all of its operating
facilities certified by 2002.
18
<PAGE> 19
YEAR 2000
The Registrant's efforts to achieve Year 2000 compliance for its information
technology systems and non-information technology systems have been successful
to date. The Registrant will continue to monitor its systems, as well as its
interaction with vendors, suppliers and customers, for potential Year 2000
noncompliance through the remainder of 2000.
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 condensed consolidated financial
statements.
PART II - OTHER INFORMATION
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 operating
results, demand for or pricing of its products, environmental matters, Year 2000
compliance 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, including
variations resulting from the Registrant's previously announced tobacco paper
price increases; (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; (v) changes in the cost
or availability of raw materials used by the Registrant, in particular market
pulp, pulp substitutes and wastepaper; (vi) 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; (vii)
the gain or loss of significant customers; (viii) 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 and 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; (ix) significant changes in
cigarette consumption, both domestically and internationally; (x) enactment of
adverse state, federal or foreign legislation or changes in government policy or
regulation; (xi) adverse results in litigation; (xii) fluctuations in currency
exchange rates; (xiii) failure of third parties which are material to the
Registrant to be Year 2000 compliant thereby interrupting their and the
Registrant's business operations; and (xiv) disruptions in production and/or
increased costs due to labor disputes.
19
<PAGE> 20
ITEM 6. EXHIBITS
(a) EXHIBITS
<TABLE>
<CAPTION>
Number Description of Documents
------ ------------------------
<S> <C> <C>
3(ii) By-Laws, as amended June 21, 2000
15 Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
None
20
<PAGE> 21
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: August 14, 2000
---------------------------------
C. Matthew Smith
Chief Financial Officer
21
<PAGE> 22
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Number Description of Documents
------ ------------------------
<S> <C> <C>
3(ii) By-Laws, as amended June 21, 2000
15 Letter in Lieu of Consent Regarding
Review Report of Unaudited Interim
Financial Information
27 Financial Data Schedule
</TABLE>
22
