<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 March 31, 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 N .
--- ----
Shares of Common Stock outstanding at April 28, 2000 were 42,314,942.
1
<PAGE> 2
P. H. GLATFELTER COMPANY
INDEX
Part I - Financial Information
Financial Statements:
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2000 and 1999 (Unaudited).... 3
Condensed Consolidated Balance Sheets - March 31, 2000
(Unaudited) and December 31, 1999......................... 4
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 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..... 18
Part II - Other Information........................................ 18
Signature.......................................................... 20
Index of Exhibits.................................................. 21
Exhibit 15 - Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information
Exhibit 27 - Financial Data Schedule
2
<PAGE> 3
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
3/31/2000 3/31/1999
--------- ---------
<S> <C> <C>
Revenues
Net sales $181,260 $165,846
Other income - net
Energy sales - net 2,466 2,238
Interest on investments and
other - net 1,288 370
Gain from property
dispositions, etc. - net 308 920
-------- --------
4,062 3,528
Total revenues 185,322 169,374
Costs and expenses
Cost of products sold 147,753 138,163
Selling, general and
administrative expenses 13,103 13,509
Interest on debt - net 4,380 4,790
Unusual item 3,336 --
-------- --------
168,572 156,462
Income before income taxes 16,750 12,912
Income tax provision
Current taxes 4,490 4,126
Deferred taxes 1,616 646
-------- --------
Total 6,106 4,772
Net income $ 10,644 $ 8,140
======== ========
Basic and diluted earnings per share $ 0.25 $ 0.19
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
3/31/2000
(unaudited) 12/31/1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 72,719 $ 76,035
Accounts receivable - net 87,626 74,638
Inventories:
Raw materials 38,553 41,013
In process and finished 40,480 42,463
Supplies 31,239 31,624
----------- -----------
Total inventories 110,272 115,100
Prepaid expenses and other current assets 3,931 2,354
----------- -----------
Total current assets 274,548 268,127
Plant, equipment and timberlands - net 565,936 582,213
Other assets 155,843 153,440
----------- -----------
Total assets $ 996,327 $ 1,003,780
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,744 $ 1,824
Short-term debt 24,791 26,566
Accounts payable 41,508 40,047
Dividends payable 7,400 7,393
Income taxes payable 13,888 9,601
Accrued compensation and other expenses
and deferred income taxes 37,626 47,200
----------- -----------
Total current liabilities 126,957 132,631
Long-term debt 293,916 301,380
Deferred income taxes 150,489 147,698
Other long-term liabilities 63,476 63,947
----------- -----------
Total liabilities 634,838 645,656
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock 544 544
Capital in excess of par value 42,149 42,296
Retained earnings 499,922 496,680
Accumulated other comprehensive income (1,854) (1,392)
----------- -----------
Total 540,761 538,128
Less cost of common stock in treasury (179,272) (180,004)
----------- -----------
Total shareholders' equity 361,489 358,124
----------- -----------
Total liabilities and
shareholders' equity $ 996,327 $ 1,003,780
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
3/31/2000 3/31/1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,644 $ 8,140
Items included in net income not using
(providing) cash:
Depreciation, depletion and amortization 11,820 12,292
Loss (gain) on disposition of fixed assets 98 (908)
Expense related to 401(k) plans 481 63
Changes in assets and liabilities:
Accounts receivable (14,406) (11,358)
Inventories 4,932 2,683
Other assets and prepaid expenses (5,471) (4,001)
Accounts payable, accrued compensation and
other expenses, deferred income taxes
and other long-term liabilities (7,217) 453
Income taxes payable 4,431 984
Deferred income taxes - noncurrent 2,791 2,322
-------- --------
Net cash provided by operating activities 8,103 10,670
-------- --------
Cash flows from investing activities:
Sale or maturity of investments - net -- 2
Proceeds from disposal of fixed assets 40 949
Additions to plant, equipment and timberlands (3,429) (5,914)
-------- --------
Net cash used in investing activities (3,389) (4,963)
-------- --------
Cash flows from financing activities:
Net payment of debt (638) (637)
Dividends paid (7,393) (7,365)
-------- --------
Net cash used in financing activities (8,031) (8,002)
-------- --------
Effect of exchange rate changes on cash 1 (380)
-------- --------
Net decrease in cash and cash equivalents (3,316) (2,675)
Cash and cash equivalents:
At beginning of year 76,035 50,907
-------- --------
At end of period $ 72,719 $ 48,232
======== ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 7,168 $ 8,595
Income taxes 265 844
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
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
March 31
----------------------------
2000 1999
---- ----
Shares Shares
------ ------
<S> <C> <C>
Basic EPS factors 42,267 42,110
Effect of potentially
dilutive employee
incentive plans:
Restricted stock
awards 62 11
Performance stock
awards 39 142
-------- -------
Diluted EPS factors 42,368 42,263
======== =======
Net income $ 10,644 $ 8,140
Basic and diluted EPS $ 0.25 $ 0.19
</TABLE>
The 2000 basic and diluted EPS of $.25, 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
will begin to reduce the workforce at Ecusta shortly. The workforce
reduction is expected to be completed by late 2000 and will ultimately
result in the reduction of approximately 300 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.
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
6
<PAGE> 7
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. The
Registrant is evaluating the effects that the adoption of SFAS No. 133
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 March 31, 2000). One such
agreement expired on January 6, 2000. Under the remaining agreement,
the Registrant receives a floating rate of the six-month DM London
Interbank Offered Rate ("LIBOR") and pays a fixed rate of 4.45% until
January 6, 2001. The six-month DM LIBOR applicable for the first half
of 2000 is approximately 3.8%.
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 March 31, 2000). Under
one agreement, which was effective April 6, 1999, the Registrant
receives a floating rate of the three-month DM LIBOR plus twenty basis
points and pays a fixed rate of approximately 3.41% for the term of the
agreement. Under the second agreement, which was effective July 6,
1999, the Registrant receives a floating rate, which is also the
three-month DM LIBOR plus twenty basis points, and pays a fixed rate of
3.43% for the term of the agreement.
The Registrant has other various 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 maturities.
5. COMPREHENSIVE INCOME
For the three months ended March 31, 2000 and 1999, comprehensive
income was $10,182,000 and $7,591,000, 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 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
7
<PAGE> 8
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, 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
8
<PAGE> 9
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 mid to 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 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
9
<PAGE> 10
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. SUBSEQUENT EVENTS
On April 18, 2000, certain flax inventory held at a facility owned and
operated by the Registrant, located in Manitoba, Canada, sustained
substantial damage as a result of a fire. The Registrant believes it is
fully insured for such loss, subject to a modest deductible. The
Registrant does not believe that its operations will be materially
adversely affected by this incident.
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.
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
10
<PAGE> 11
Form 10-K for the year ended December 31, 1999. Certain
reclassifications have been made of previously reported amounts to
conform with classifications used in the current year.
11
<PAGE> 12
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, 2000, and the related
condensed consolidated statements of income and cash flows for the three months
ended March 31, 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
April 18, 2000, except for Note 7 as to
which the date is May 1, 2000
12
<PAGE> 13
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
March 31, 2000 and
March 31, 1999
----------------------
Increase (Decrease)
(dollars in thousands)
<S> <C> <C>
Net sales 15,414 9.3 %
Other income - net 534 15.1 %
Cost of products sold 9,590 6.9 %
Selling, general and
administrative expenses (406) (3.0)%
Interest on debt - net (410) (8.6)%
Income tax provision 1,334 28.0 %
Net income 2,504 30.8 %
</TABLE>
Net Sales
Worldwide net sales increased $15,414,000, or 9.3%, for the first quarter of
2000 compared to the first quarter of 1999. This increase was a result of both
improved pricing and sales volume.
The Registrant classifies its sales into two product groups: specialized
printing papers and engineered papers (which includes tobacco papers). Total net
sales of specialized printing papers increased 18.4% in the first quarter of
2000 compared to the first quarter of 1999 as the impact of a 5.6% increase in
net sales volume was compounded by a 12.1% increase in average net selling
prices.
The increased sales volume of specialized printing papers was largely due to
improved demand in the first quarter of 2000 versus the like period of 1999. The
early part of 1999 was characterized by generally weak demand for such papers
and short order backlogs for the Registrant. During the last three quarters of
1999, demand for the Registrant's specialized printing papers improved. Such
increased demand enabled the Registrant to increase its pricing, as reflected by
various price increases for such papers that became effective in February
through early April 2000.
The Registrant is currently experiencing what it believes to be a temporary
weakness in demand for its specialized printing papers. It has taken a small
amount of market-related downtime at one of its facilities but believes market
conditions are still strong and will support existing pricing over the near
term.
Net sales of engineered papers for the three months ended March 31, 2000 were
slightly lower than in the corresponding 1999 period. This decrease was
primarily the result of demand erosion for the 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. The Registrant
expects that net sales of tobacco papers will continue to trend downward, with
volume decreases more than offsetting improvements in pricing over the next
several months.
13
<PAGE> 14
Net sales of the Registrant's engineered papers, excluding tobacco papers,
decreased 2.0% in the first quarter of 2000 versus the first quarter of 1999 as
a result of a decrease in net average selling prices. Net sales volume for the
comparative periods remained flat. The decrease in average net selling prices
was a result of a shift in the mix of products sold and not a result of
decreased pricing for specific products.
Other Income - Net
The Registrant's other income - net increased $534,000, or 15.1%, for the first
quarter of 2000 compared to the corresponding period of 1999. Interest on
investments and other - net increased $918,000 as a result of higher average
cash balances in the first quarter of 2000 versus the first quarter of 1999. 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 was $612,000 lower for the first
three months of 2000 versus the first three months of 1999. 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
The Registrant's cost of products sold increased $9,590,000, or 6.9%, in the
first three months of 2000 versus the first three months of 1999 as a result of
an increased volume of products sold and increased costs of raw materials. The
Registrant sold 5.2% more volume during the first quarter of 2000 than the first
quarter of 1999. This increased volume was a result of improved demand for
certain of the Registrant's products as described above.
Prices for certain of the Registrant's principal raw materials, especially
market pulp and wastepaper, have increased over the past four quarters thereby
increasing its marginal cost of products sold by 1.6% in the first quarter of
2000 versus the same quarter of 1999.
This increase in marginal 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 15.0% in the first quarter of 2000 compared to the first
quarter of 1999.
The Registrant expects that market pulp prices will continue to increase over
the last three 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.
Selling, General and Administrative Expenses
The Registrant's selling, general and administrative expenses decreased
$406,000, or 3.0%, for the first quarter of 2000 versus the comparable period of
1999 as a result of reduced legal and professional expenses.
Interest on Debt - Net
The Registrant's interest on debt - net decreased $410,000, or 8.6%, for the
three months ended March 31, 2000 versus the comparable period of 1999. Due to
changes in certain currency exchange rates, especially the weakening of the
Deutsche Mark
14
<PAGE> 15
relative to the U.S. dollar, the Registrant's average borrowings have decreased,
resulting in lower interest expense.
Income Tax Provision
The Registrant's income tax provision increased by $1,334,000, or 28.0%, for the
first quarter of 2000 versus the first quarter of 1999. The increase was
principally due to the increase in net income in 2000 versus 1999.
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 it had notified its major tobacco paper customers 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 will begin to reduce the workforce at Ecusta shortly. The
workforce reduction is expected to be completed by late 2000 and will ultimately
result in the reduction of approximately 300 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.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents decreased $3,316,000 during the first three months of
2000. Net cash provided by operating activities of $8,103,000 was more than
offset by cash used in investing activities of $3,389,000 and financing
activities of $8,031,000. Significant cash activities during the first three
months of 2000 included the payment of $7,393,000 of dividends and $3,429,000
for 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
March 31, 2000, the Registrant's outstanding borrowings were DM 284,200,000
(approximately $138,500,000) 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 March 31, 2000). One such agreement was expired on January 6,
2000. Under the remaining agreement, the Registrant receives a floating rate of
15
<PAGE> 16
the six-month DM London Interbank Offered Rate ("LIBOR") and pays a fixed rate
of 4.45% until January 6, 2001. The six-month DM LIBOR applicable for the first
half of 2000 is approximately 3.8%.
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 March 31, 2000). Under one agreement, which was
effective April 6, 1999, the Registrant receives a floating rate of the
three-month DM LIBOR plus twenty basis points and pays a fixed rate of
approximately 3.41% for the term of the agreement. Under the second agreement,
which was effective July 6, 1999, the Registrant receives a floating rate, which
is also the three-month DM LIBOR plus twenty basis points, and pays a fixed rate
of 3.43% for the term of the agreement.
The Registrant has other various 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
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
March 31, 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.
16
<PAGE> 17
<TABLE>
<CAPTION>
Year of Maturity
------------------------------------------------------------------
(dollar amounts in thousands) Total
Due at Fair Value at
2000 2001 2002 2003 2004 Thereafter Maturity 3/31/00
---- ---- ---- ---- ---- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Fixed rate -- $ 1,409 $ 1,449 $ 1,449 $ 1,290 $1,132 $ 150,412 $ 157,141 $ 149,443
Average interest rate 6.85% 6.85% 6.85% 6.86% 6.86% 6.87%
Variable rate -- $ -- $ -- $138,519 $ -- $ -- $ -- $ 138,519 $ 138,519
Average interest rate 3.78% 3.82% 3.95% -- -- --
Interest rate swap agreements:
Variable to fixed swaps -- $ 3,312 $27,465 $ 25,637 $48,740 $ -- $ -- $ 105,154 $ 1,771
Average pay rate 4.34% 3.75% 3.42% 3.42% -- --
Average receive rate 4.00% 3.95% 4.00% 4.00% -- --
</TABLE>
Capital Expenditures
The Registrant expended $3,429,000 on capital projects for the first three
months of 2000 compared to $5,914,000 for the first three months of 1999.
Capital spending is expected to approximate $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.
SUBSEQUENT EVENT
On April 18, 2000, certain flax inventory held at a facility owned and operated
by the Registrant, located in Manitoba, Canada, sustained substantial damage as
a result of a fire. The Registrant believes it is fully insured for such loss,
subject to a modest deductible. The Registrant does not believe that its
operations will be materially adversely affected by this incident.
17
<PAGE> 18
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant's Annual Meeting of Shareholders was held on April 26, 2000. All
of the Board of Directors' nominees for election as Directors were elected by
the shareholders. Each was elected to a term expiring in 2003. The votes cast
for election of Directors were as follows:
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
R. E. Chappell 35,961,871 2,712,181
G. H. Glatfelter II 35,830,237 2,843,815
R. L. Smoot 34,795,534 3,878,518
</TABLE>
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 1 called for the declassification of the Registrant's Board
of Directors and was defeated by a majority of the votes cast, with 25,851,520
votes against, 9,707,216 votes for, 2,927,072 broker non-votes and 188,244
abstentions. Shareholder Proposal 2 urged the Registrant's Board of Directors to
arrange for the prompt sale of the Registrant to the highest bidder and was also
rejected by a majority of the votes cast, with 33,208,282 votes against,
2,199,220 votes for, 2,927,071 broker non-votes and 339,479 abstentions.
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
18
<PAGE> 19
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.
ITEM 6. EXHIBITS
(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) REPORTS ON FORM 8-K
None
19
<PAGE> 20
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 12, 2000
R. P. Newcomer
Executive Vice President
and Chief Financial Officer
<PAGE> 21
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
21
<PAGE> 1
EXHIBIT 15
LETTER IN LIEU OF CONSENT REGARDING REVIEW REPORT OF UNAUDITED
INTERIM FINANCIAL INFORMATION
P. H. Glatfelter Company:
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited
condensed consolidated financial statements of P. H. Glatfelter Company
and subsidiaries for the three months ended March 31, 2000 and 1999, as
indicated in our report dated April 18, 2000, except for Note 7 as to
which the date is May 1, 2000; because we did not perform an audit, we
expressed no opinion on that information.
We are aware that our report referred to above, which is included in
your Quarterly Report on Form 10-Q for the quarter ended March 31,
2000, is incorporated by reference in Registration Statements Nos.
33-25884, 33-37198, 33-49660, 33-53338, 33-54409, 33-62331, 333-12089,
333-26587, 333-34797, 333-53977 and 333-66991 on Forms S-8.
We are also aware that the aforementioned report, pursuant to Rule
436(c) under the Securities Act of 1933, is not considered a part of
the Registration Statement prepared or certified by an accountant or a
report prepared or certified by an accountant within the meaning of
Sections 7 and 11 of that Act.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
May 1, 2000
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31 OF P.H.
GLATFELTER CO. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<CASH> 72,719
<SECURITIES> 0
<RECEIVABLES> 88,856
<ALLOWANCES> 1,230
<INVENTORY> 110,272
<CURRENT-ASSETS> 274,548
<PP&E> 1,253,383
<DEPRECIATION> 687,447
<TOTAL-ASSETS> 996,327
<CURRENT-LIABILITIES> 121,778
<BONDS> 293,916
0
0
<COMMON> 544
<OTHER-SE> 360,945
<TOTAL-LIABILITY-AND-EQUITY> 996,327
<SALES> 181,260
<TOTAL-REVENUES> 185,322
<CGS> 147,753
<TOTAL-COSTS> 147,753
<OTHER-EXPENSES> 3,336
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 4,380
<INCOME-PRETAX> 16,750
<INCOME-TAX> 6,106
<INCOME-CONTINUING> 10,644
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,644
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.25
</TABLE>
