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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

       [X]|X|    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                                       or

       [ ]| |  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD

                              from ______ to ______

                  For the quarterly period ended MARCH 31,JUNE 30, 2003

                          Commission file number 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 Identification No.)
     incorporation or organization)

    96 SOUTH GEORGE STREET, SUITE 500
        YORK, PENNSYLVANIA 17401                        (717) 225-4711
(Address of principal executive offices)        (Registrant's telephone number,
                                                      including area code)
N/A (Former name or former address, if changed since last report) 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 at least the past 90 days. Yes X|X| No .| |. Indicate by check mark whether the filer is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X|X| No .| |. As of April 30,July 31, 2003, P.H. Glatfelter Company had 43,707,86143,748,522 shares of common stock outstanding. ================================================================================ P.H. GLATFELTER COMPANY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31,JUNE 30, 2003 TABLE OF CONTENTS
Page ---- PART I - FINANCIAL INFORMATION ITEM 1 Financial Statements Condensed Consolidated Statements of Income for the three months and six months ended March 31,June 30, 2003 and 2002 (unaudited) 3 Condensed Consolidated Balance Sheets as of March 31,June 30, 2003 and December 31, 2002 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the threesix months ended March 31,June 30, 2003 and 2002 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Independent Accountants' Report 1618 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 1719 ITEM 3 Quantitative and Qualitative Disclosures About Market Risks 2631 ITEM 4 Controls and Procedures 2732 PART II - OTHER INFORMATION ITEM 4 Submission of Matters to a Vote of Security Holders 33 ITEM 6 Exhibits and Reports on Form 8-K 2833 SIGNATURES 29 CERTIFICATIONS 3034 EXHIBIT INDEX 3235
-2- GLATFELTER PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS P.H. GLATFELTER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
THREE MONTHS ENDED MARCH 31SIX MONTHS ENDED JUNE 30 JUNE 30 In thousands, except per share amounts 2003 2002 - --------------------------------------2003 2002 --------- --------- --------- --------- Net sales $ 143,614129,620 $ 131,998136,693 $ 271,906 $ 267,981 Energy sales - net 2,277 2,1662,775 2,533 5,052 4,699 --------- --------- --------- --------- Total revenues 145,891 134,164132,395 139,226 276,958 272,680 Cost of products sold 115,262 99,657114,126 110,430 228,382 209,529 --------- --------- --------- --------- Gross profit 30,629 34,50718,269 28,796 48,576 63,151 Operating expenses Selling, general and administrative expenses 15,211 14,492 Gain14,737 14,273 29,771 28,627 Loss (gain) on sale of plant, equipment and timberlands (30,547) (568)(854) (476) (31,401) (1,044) --------- --------- --------- --------- Total operating expenses (15,336) 13,92413,883 13,797 (1,630) 27,583 --------- --------- --------- --------- Operating income 45,965 20,5834,386 14,999 50,206 35,568 Other nonoperating income (expense) Interest expense on debt (3,409) (3,744)(3,655) (3,954) (7,054) (7,688) Interest income on investments and other - net 187 242500 820 687 1,062 Other (income) expenseincome (expense) - net (890) 22(153) (25) (1,043) (3) --------- --------- --------- --------- Total other income (expense) (4,112) (3,480)(3,308) (3,159) (7,410) (6,629) --------- --------- --------- --------- Income from continuing operations before income taxes 41,853 17,1031,078 11,840 42,796 28,939 Income tax provision Current 3,743 4,021(1,047) 2,305 2,649 6,325 Deferred 11,333 1,9581,443 1,957 12,776 3,915 --------- --------- --------- --------- Total income tax provision 15,076 5,979396 4,262 15,425 10,240 --------- --------- --------- --------- Income from continuing operations 682 7,578 27,371 18,699 Discontinued operations Income (loss) from discontinued operations before income taxes (648) (3) (513) 1 Income tax benefits 235 1 188 -- --------- --------- --------- --------- Income (loss) from discontinued operations (413) (2) (325) 1 --------- --------- --------- --------- Net income $ 26,777269 $ 11,1247,576 $ 27,046 $ 18,700 ========= ========= ========= ========= BASIC AND DILUTED EARNINGS (LOSS) PER SHARE Basic and dilutedFrom continuing operations $ 0.610.02 $ 0.260.17 $ 0.63 $ 0.43 From discontinued operations (0.01) -- (0.01) -- --------- --------- --------- --------- Net income $ 0.01 $ 0.17 $ 0.62 $ 0.43 ========= ========= ========= ========= CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.175 $ 0.175 $ 0.35 $ 0.35
The accompanying notes are an integral part of the condensed consolidated financial statements. -3- GLATFELTER P.H. GLATFELTER COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
MARCH 31JUNE 30 December 31 In thousands 2003 2002 - ------------ ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 46,25027,423 $ 32,24832,219 Accounts receivable - net 68,309 60,37755,989 59,171 Inventories 73,408 70,45672,374 69,890 Prepaid expenses and other current assets 10,449 9,47311,062 9,401 Assets held for sale 4,499 4,241 ----------- -------------------- Total current assets 198,416 172,554171,347 174,922 PLANT, EQUIPMENT AND TIMBERLANDS - NET 529,525 518,913540,855 517,053 OTHER ASSETS 308,494 261,735310,867 261,227 ----------- -------------------- Total assets $ 1,036,4351,023,069 $ 953,202 =========== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 828798 $ 795 Short-term debt 4,007 1,0802,441 1,028 Accounts payable 28,364 27,78234,972 27,042 Dividends payable 7,6487,654 7,638 Income taxes payable 8,652 1,9184,810 1,550 Accrued compensation, other expenses and deferred income taxes 53,759 54,90954,224 54,883 Liabilities of discontinued operations 1,627 1,608 ----------- -------------------- Total current liabilities 103,258 94,122106,526 94,544 LONG-TERM DEBT 255,486244,016 218,709 DEFERRED INCOME TAXES 196,679 184,180198,871 183,758 OTHER LONG-TERM LIABILITIES 86,37885,420 82,358 ----------- -------------------- Total liabilities 641,801634,833 579,369 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock 544 544 Capital in excess of par value 40,64840,567 40,798 Retained earnings 514,407507,022 495,278 Accumulated other comprehensive loss (2,730)(2,112) (3,708) ----------- ----------- 552,869--------- 546,021 532,912 Less cost of common stock in treasury (158,235)(157,785) (159,079) ----------- -------------------- Total shareholders' equity 394,634388,236 373,833 ----------- -------------------- Total liabilities and shareholders' equity $ 1,036,4351,023,069 $ 953,202 =========== ====================
The accompanying notes are an integral part of the condensed consolidated financial statements. -4- GLATFELTER P.H. GLATFELTER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
THREESIX MONTHS ENDED MARCH 31JUNE 30 In thousands 2003 2002 - ------------ -------- ----------------- OPERATING ACTIVITIES Net income $ 26,77727,046 $ 11,124 Items included in18,700 Income (loss) from discontinued operations (325) 1 -------- --------- Income from continuing operations 27,371 18,699 Adjustments to reconcile to net income not using (providing) cash provided by continuing operations: Depreciation, depletion and amortization 12,585 11,08225,153 22,207 Pension income (5,115) (7,817)(8,998) (16,052) Deferred income tax provision 11,333 1,958 Net gain12,776 3,915 Loss (gain) on sales of plant, equipment and timberlands (30,547) (568)(31,401) (1,044) Expense related to 401(k) plans and other 220 425397 659 Change in operating assets and liabilities Accounts receivable (6,749) (6,065)5,522 (5,618) Inventories (1,932) (2,802)(230) (2,268) Other assets and prepaid expenses (1,491) (5,339)(3,406) (5,951) Accounts payable, accrued compensation and other expenses, deferred income taxes and other long term liabilities (3,136) (10,194)2,247 5,886 Income taxes payable 7,064 13,9222,522 9,245 -------- --------- Net cash provided by continuing operations 31,953 29,678 Net cash provided (used) by discontinued operations (244) 103 -------- --------- Net cash provided by operating activities 9,009 5,72631,709 29,781 INVESTING ACTIVITIES Purchase of plant, equipment and timberlands (25,223) (7,984)(45,548) (25,721) Proceeds from disposal of fixed assets 274 5801,080 181 -------- ----------------- Net cash used by investing activities (24,949) (7,404)of continuing operations (44,468) (25,540) Net cash used by investing activities of discontinued operations (60) (15) -------- --------- Net cash used by investing activities (44,528) (25,555) FINANCING ACTIVITIES Repayment of debt under previous revolving credit agreement -- (133,027) Net (repayments of) proceeds from revolving credit facilities 2,681 535facility (12,507) 66,529 Proceeds from borrowing from SunTrust Financial 34,000 -- Payment of dividends (7,648) (7,481)(15,302) (15,051) Proceeds from stock options exercised 299 6,151448 10,463 -------- ----------------- Net cash provided (used) by financing activities 29,332 (795)6,639 (71,086) Effect of exchange rate changes on cash 610 2571,384 594 -------- ----------------- Net change in cash and cash equivalents 14,002 (2,216)(4,796) (66,266) Cash and cash equivalents at the beginning of period 32,248 88,04432,219 87,950 -------- ----------------- Cash and cash equivalents at the end of period $ 46,25027,423 $ 85,82821,684 ======== ================= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid (received) for Interest expense $ 6,2098,356 $ 6,7048,076 Income taxes (2,808) 265(833) 5,367
The accompanying notes are an integral part of the condensed consolidated financial statements. -5- GLATFELTER P.H.P. H. GLATFELTER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. ORGANIZATION P. H. Glatfelter Company and subsidiaries (d/b/a Glatfelter) is a manufacturer of specialized printingspecialty papers and engineered products. Headquartered in York, Pennsylvania, our manufacturing facilities are located in Spring Grove, Pennsylvania; Neenah, Wisconsin; Gernsbach, Germany; Scaer, France and the Philippines. Our products are marketed throughout the United States and in many foreign countries, either through wholesale paper merchants, brokers and agents or directly to customers. 2. BASIS OF PRESENTATION These unaudited condensed consolidated interim financial statements ("Financial Statements") have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission and include the accounts of Glatfelter and its wholly-owned subsidiaries. These unaudited condensed consolidated financial statementsFinancial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Glatfelter's 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission. These condensed unaudited interim financial statementsFinancial Statements do not include all of the information and footnotes required for complete financial statements. In management's opinion, these financial statementsFinancial Statements reflect all adjustments, which are of a normal, recurring nature, necessary for a fair presentation of the results for the interim periods presented. Results for these interim periods are not necessarily indicative of results to be expected for the full year. Certain prior period amounts have been reclassified, where necessary, to conform to the current period presentation. 3. DISCONTINUED OPERATIONS During the second quarter of 2003, we entered into an agreement to sell a subsidiary located in Wisches, France. For financial reporting purposes this subsidiary is classified as held for sale and reported as discontinued operations for all periods presented. The underlying assets are recorded at the lower of carrying amount or fair value less cost to sell. Accordingly, loss from discontinued operations includes a charge of $0.5 million, after tax, to write-down the carrying value of the assets held for sale. Revenue included in determining results from discontinued operations totaled $1.3 million and $2.6 million for the three months and six months ended June 30, 2003, respectively, and $0.7 million and $1.5 million for the three months and six months ended June 30, 2002, respectively. This operation was previously reported in the Engineered Products business unit. The sale of the subsidiary was completed in July 2003. 4. STOCK-BASED COMPENSATION Stock-based compensation is accounted for in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, as permitted by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Compensation expense for both restricted stock and performance stock awards is recognized ratably over the performance period based on changes in quoted market prices of Glatfelter stock and the likelihood of achieving the performance goals. This variable plan accounting recognition is due to the uncertainty of achieving performance goals and determining the resulting number of shares to ultimately be issued. No compensation expense is recorded for stock options granted to employees. -6- PRO FORMA INFORMATION No compensation expense has been recognized for non-qualified stock options granted. The weighted-average grant date fair value of options granted during 2003 and 2002 2001was $2.54 and 2000 was $2.48, $3.84 and $2.60, respectively. No options were granted in the first quarter of 2003. The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing using the following assumptions:
2002 2001 2000 ---- ---- ---- Risk-free interest rate 4.13% 5.57% 5.61% Expected dividend yield 5.15 4.58 7.61 Expected volatility 27.80 29.70 42.00 Expected life 6.5 YRS 10 yrs 10 yrs --------- --------- ---------
-6- GLATFELTER Had compensation costexpense for non-qualified stock options been determined consistent with the fair value method of SFAS No. 123, our net income and earnings per share would have been reduced to the following pro forma amounts:
THREE MONTHS ENDED MARCH 31SIX MONTHS ENDED JUNE 30 JUNE 30 In thousands, except per share amounts 2003 2002 - --------------------------------------2003 2002 ----- ------- -------- -------- Net income As reported $ 26,777269 $ 11,1247,576 $ 27,046 $ 18,700 Stock-based compensation expense, after tax (212)(207) (296) (419) (593) ----- ------- -------- -------- Pro forma $ 26,56562 $ 10,8287,280 $ 26,627 $ 18,107 ===== ======= ======== ======== Earnings per share:share Reported - basic and diluted $0.01 $ 0.610.17 $ 0.260.62 $ 0.43 Pro forma - basic and diluted 0.00 0.17 0.61 0.260.42 ----- ------- -------- --------
4.5. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standard ("SFAS")SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in June 2001 and applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. We adopted SFAS No. 143 on January 1, 2003, and it did not impact our consolidated financial position or results of operations. SFAS No. 145, "Recission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections," was issued April 2002 and is effective for fiscal years beginning after May 15, 2002. This statement, among other things, rescinds the requirement to classify a gain or loss upon the extinguishment of debt as an extraordinary item on the income statement. It also requires lessees to account for certain modifications to lease agreements in a manner consistent with sale-leaseback transaction accounting. We adopted SFAS No. 145 on January 1, 2003, and it did not impact our consolidated financial position or results of operations. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," was issued in June 2002 and requires recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002,2002. We adopted SFAS No. 146 on January 1, 2003, and it did not impact our consolidated financial position or results of which there were none in the first quarter of 2003.operations. SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure, an Amendment to SFAS No. 123," was issued in December 2002. This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We have elected to continue accounting for stock-based compensation in accordance with APB Opinion No. 25.25 and we have included the appropriate disclosure requirements herein. In November of 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others" ("FIN No. 45"). FIN No. 45 requires entities to establish liabilities for certain types of guarantees, and expands financial statement disclosures for others. The accounting requirements of FIN No. 45 are effective for guarantees issued or modified after December 31, 2002, and the disclosure requirements are effective for financial statements for interim or annual periods ending after December 15, 2002. The adoption on January 1, 2003, of FIN No. 45 did not have any significant accounting implications for us as all of our commitments and guarantees are on behalf of our subsidiaries. Effective January 1, 2003, we adopted the requirements of FIN No. 45.-7- SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," was issued in April 2003, amends and clarifies accounting for derivative instruments including derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. This standard is effective for contracts entered into or modified after June 30, 2003. Management has not yet determinedcontinues to analyze the impact, if any, SFAS No. 149 will have on our consolidated financial position or results of operations. -7- GLATFELTER 5.In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for measuring and classifying certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning third quarter of 2003. Based on the financial instruments we currently use, the adoption of SFAS No. 150 will not effect our financial statements. 6. GAIN ON SALE OF TIMBERLANDS On March 21, 2003, the Company completed its previously announced agreement to sell approximately 25,500 acres of its timberlands in Maryland, with a carrying amount of $6.0 million, to a subsidiary of The Conservation Fund (the "Buyer""Timberland Buyer"). As consideration for the timberlands, the Companywe received a 10-year note from the Timberland Buyer in the principal amount of $37.9 million (the "Note")., which is included in "Other Assets" in the consolidated balance sheet. The Note bears interest at 3.22% per annum with interest-only payments due in quarterly installments. After five years the interest rate on the Note will be adjusted to the then existing bank prime rate. The Note is secured by a letter of credit issued by a financial institution. The Company pledged the Note as collateral under a $34.0 million promissory note payable to SunTrust Financial (the "Note Payable"). The Note Payable bears a fixed rate of interest at 3.82% for five years at which time the Company can elect to renew the obligation. The pre-tax gain recognized from this transaction was $31.2 million. 6.-8- 7. EARNINGS PER SHARE The following table sets forth the details of basic and diluted earnings per share:share (EPS):
THREE MONTHS ENDED MARCH 31SIX MONTHS ENDED JUNE 30 JUNE 30 In thousands, except per share amounts 2003 2002 - -------------------------------------- ------- -------2003 2002 -------- -------- -------- -------- Income from continuing operations $ 682 $ 7,578 $ 27,371 $18,699 Income (loss) from discontinued operations (413) (2) (325) 1 -------- -------- -------- ------- Net income $26,777 $11,124 =======$ 269 $ 7,576 $ 27,046 $18,700 ======== ======== ======== ======= Weighted average common shares 43,717 43,406 43,699 43,180 outstanding used in computing basic earnings per share 43,681 42,952EPS Common shares issuable upon exercise of dilutive stock options, restricted stock awards and performance awards 21 660 -------32 643 30 614 -------- -------- -------- ------- Weighted average common shares outstanding and common share equivalents used in computing diluted earnings per share 43,702 43,612 =======EPS 43,749 44,049 43,729 43,794 ======== ======== ======== ======= Basic and diluted earnings per shareEPS Income from continuing operations $ 0.610.02 $ 0.260.17 $ 0.63 $ 0.43 Income (loss) from discontinued operations (0.01) -- (0.01) -- -------- -------- -------- ------- -------Net income $ 0.01 $ 0.17 $ 0.62 $ 0.43 ======== ======== ======== =======
7.8. INVENTORIES Inventories, net of reserves were as follows:
MARCH 31JUNE 30 December 31 In thousands 2003 2002 - ------------ ------- ------------------ Raw materials $12,924 $12,909$14,150 $12,545 In-process and finished 37,900 35,62133,682 35,419 Supplies 22,58424,542 21,926 ------- ------- Total $73,408 $70,456$72,374 $69,890 ======= =======
-8- GLATFELTER 8.9. RESTRUCTURING RESERVE The following schedule summarizes activity in our restructuring reserve during the first quartersix months of 2003:
THREESIX MONTHS ENDED In thousands MARCH 31, 2003 - ------------ --------------ENDED JUNE 30 ------------- Beginning balance $2,572$ 2,572 Adjustments 350 Payments made (521) ------(2,162) ------- Ending balance $2,051 ======$ 760 =======
9.During the second quarter of 2003, we accrued and paid an additional $350,000 for severance payments related to the workforce reduction initiative undertaken at the end of 2002. -9- 10. LONG-TERM DEBT Long-term debt is summarized as follows:
MARCH 31JUNE 30 December 31 In thousands 2003 2002 - ------------ --------- -------------------- Revolving credit facility, due June 2006 $ 70,42059,269 $ 67,681 6-7/6 7/8% Notes, due July 2007 150,000 150,000 Note payable - SunTrust, due March 2008 34,000 -- Other notes, various 1,8941,545 1,823 --------- --------- Total long-term debt 256,314244,814 219,504 Less current portion (828)(798) (795) --------- --------- Long-term debt, excluding current portion $ 255,486244,016 $ 218,709 ========= =========
On June 24, 2002, we entered into an unsecured $102.5 million multi-currency revolving credit facility (the "Facility") with a syndicate of three major banks. An additional $22.5 million was added to the Facility on September 24, 2002 with a fourth major bank. The Facility, which replaced an old facility, enables Glatfelter or its subsidiaries to borrow up to the equivalent of $125.0 million in certain currencies. Borrowings can be made for any time period from one day to six months and incur interest based on the domestic prime rate or a Eurocurrency rate, at our option, plus a margin ranging from .525% to 1.05%. The margin and a facility fee on the commitment balance are based on the higher of our debt ratings as published by Standard & Poor's and Moody's. The Facility requires us to meet certain leverage and interest coverage ratios, with both of which we are in compliance. On July 22, 1997, we issued $150.0 million 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 our option at any time at a calculated redemption price plus accrued and unpaid interest to the date of redemption, and constitute unsecured and unsubordinated indebtedness. The net proceeds from the sale of the Notes were used primarily to repay certain short-term unsecured debt and related interest. On March 21, 2003, we sold approximately 25,500 acres of timberlands and received as consideration a $37.9 million 10-year interest bearing note receivable from the buyer (SeeTimberland Buyer (see Note 5)6). We pledged the Note as collateral under a $34.0 million promissory note payable to SunTrust Financial (the "Note Payable"). The Note Payable bears interest at a fixed rate of interest at 3.82% for five years at which time the Company can elect to renew the obligation. P. H. Glatfelter Company guarantees debt obligations of all its subsidiaries. All such obligations are recorded in these consolidated financial statements. At March 31,June 30, 2003 and December 31, 2002, we had $3.0 million of letters of credit issued to us by a financial institution. The letters of credit are for the benefit of certain state workers compensation insurance agencies in conjunction with our self-insurance program. No amounts were outstanding under the letters of credit. We bear the credit risk on this amount to the extent that we do not comply with the provisions of certain agreements. The letters of credit do not reduce the amount available under our lines of credit. -9- GLATFELTER-10- 10.11. FINANCIAL DERIVATIVES In conjunction with our 2002 refinancing, we entered into a cross-currency swap transaction effective June 24, 2002. Under this transaction, we swapped $70.0 million for approximately E73.0(euro)73.0 million and will pay interest on the Euro portion of the swap at a floating Eurocurrency Rate, plus applicable margins and will receive interest on the dollar portion of the swap at a floating U.S. Dollar LIBOR, plus applicable margins. The contract matures on June 24, 2006. The cross-currency swap is designed to provide protection from the impact that changes in currency rates have on certain U.S. Dollar-denominated debt obligations recorded at our subsidiary in Gernsbach, Germany. The cross currency swap is recorded at fair value of $(9.6)$(13.4) million in the Consolidated Balance Sheets under the caption "Accrued compensation, other expenses and changesdeferred income taxes". Changes in fair value are recognized in earnings as "Other income (expense)" in the Consolidated Statements of Income. The mark-to-market adjustment was completely offset by a gain on the related remeasurement of the U.S. Dollar denominated debt obligations. The credit risks associated with our financial derivatives are controlled through the evaluation and monitoring of the creditworthiness of the counterparties. Although we may be exposed to losses in the event of nonperformance by counterparties, we do not expect such losses, if any, to be significant. 11.12. COMPREHENSIVE INCOME The following table sets forth comprehensive income and its components:
THREE MONTHS ENDED MARCH 31SIX MONTHS ENDED JUNE 30 JUNE 30 In thousands 2003 2002 - ------------ -------- --------2003 2002 ---- ------ ------- ------- Net income $ 26,777 $ 11,124$269 $7,576 $27,046 $18,700 Foreign currency translation adjustment 978 (317) -------- --------618 1,385 1,596 1,068 ---- ------ ------- ------- Comprehensive income $ 27,755 $ 10,807 ======== ========$887 $8,961 $28,642 $19,768 ==== ====== ======= =======
12.13. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS ECUSTA DIVISION In connection with the sale of the Ecusta Division sale in August 2001 to four related entities consisting of Purico (IOM) Limited, an Isle of Man limited liability company ("Purico"), RF&Son Inc. ("RF"), RFS US Inc. ("RFS US") and RFS Ecusta Inc. ("RFS Ecusta"), all three of which are Delaware corporations, (collectively, the buyers"Buyers"). The Buyers assumed certain liabilities related to the operation of the Ecusta Division. In July 2002, we received notice from the buyers'Buyers' legal counsel asserting claims for indemnification for certain alleged damages incurred by the Buyers, without estimates of value, pursuant to the sale agreement.Acquisition Agreement between the Buyers and us. We have requested, but not received, further information from the Buyers and, therefore, are currently investigatingunable to evaluate these claims and have not yet determined the validity or value of these claims. As such, we cannot ascertain at this time what effect, if any, these claims may have on our consolidated financial position and/or results of operations. DuringIn August 2002, the buyers of the Ecusta DivisionBuyers shut down the paper manufacturing operation of the paper mill in Pisgah Forest, North Carolina, which was the most significant operation of the Ecusta Division. On October 23, 2002, two of the four related buyers of theRFS Ecusta Divisionand RFS US filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. During the third quarter of 2002, in accordance with the provisions of the Acquisition Agreement, we notified the Buyers of third party claims ("Third Party Claims") made against us for which we are seeking indemnification from the Buyers. The Third Party Claims primarily relate to certain post-retirement benefits, workers compensation claims and vendor payables. In addition, beginning in April 2003, we have had discussions with governmental authorities regarding certain potential environmental-related liabilities ("Environmental Items") associated with the Ecusta mill and its properties. -11- As of June 30, 2003, we had recorded liabilities totaling $6.0 million relating to the Third Party Claims and the Environmental Items. This amount includes $3.4 million that was accrued during the second quarter of 2003. Pursuant to the terms of the Acquisition Agreement, the Buyers assumed substantially all of these liabilities and they have agreed to indemnify and hold us harmless against them. Accordingly, we also recorded a corresponding receivable of $5.9 million for amounts due from Purico and RF, the buyers that have not filed for bankruptcy, including $3.3 million that was recorded during the second quarter of 2003. We do not expect to receive any proceeds from the bankruptcy proceedings. AsThe net charge included in our results of March 31,operations for the three months and six months ended June 30, 2003 we hadwas $0.1 million. At this time, no reserves have been recorded liabilities totaling $2.6 million related to post-retirement benefits, workers compensation and vendor payables. These liabilities were assumed by the buyers and they have agreed to indemnify and hold us harmless. We also recorded a corresponding receivable of $2.6 million for amountsreceivables due from the buyers.Purico and RF. In addition to the workers compensation benefits included in the accrualamounts discussed above, we received notice from State of North Carolina indicating we may be liable for $1.6 million in additional workers compensation benefits. While we disagree with this position, if we are held liable, we are entitled to indemnification by the buyers under terms of the sales agreement. The accompanying financial statements do not include an accrual for such amounts. -10- GLATFELTER In addition to these amounts, as of March 31,June 30, 2003, our trade accounts receivable include $2.2included $1.5 million for products sold by our S&H subsidiary pursuant to a supply agreement with a party related to one of the buyers who has not filed for bankruptcy.German company affiliated with Purico. Such accounts receivable balances totaled $1.6$0.8 million at April 30,August 7, 2003, reflecting additional sales partially offset by $1.5 million of cash collectionscollections. Effective August 8, 2003, the assets of $1.8 million. Since April 2003, we have had discussions with governmental authoritiesRFS Ecusta and private parties regarding the futureRFS US, which substantially consist of the Ecusta mill. While the future usepaper mill and ownershiprelated real property, were sold to an unrelated third party, whose business plan is to continue certain mill-related operations and to convert portions of the mill remain unclear, it is possible the current owner of the mill will cease the operation of certain environmental-related systems and abandon the property. Should this occur, the governmental authorities have stated they will turn to us for the interim operation of the environmental- related systems and possibly for certain on-site work. At this time, we cannot predict whether this will occur. It is our understanding that thesite into a business park. The governmental authorities are continuing to investigate the environmental conditions at the mill, but that they believe that a three-month period of assured funding for the operation of environmental-related systems is necessary pending the results of their investigation.mill. We are uncertain as to what additional Ecusta-related claims, including environmental matters, if any, may be asserted against us. The likelihood and extent of potential claims against us for other liabilities that were assumed, or with respect to which we are indemnifiedwould be mitigated by the buyers, or related to our former operationsuccessful execution of the paper mill. At this time, no reserves have been recorded relatedbusiness plan discussed above. Should any claims be made against us, we would seek indemnification for such damages to the receivables due fromextent possible in accordance with the buyers.terms of the Acquisition Agreement. We cannot ascertain at this time what effect, if any, these matters will have on our consolidated financial position and/or results of operations. -11- GLATFELTER ENVIRONMENTAL MATTERS We are subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of our mills. To comply with environmental laws and regulations, we have incurred substantial capital and operating expenditures in past years. We anticipate that environmental regulation of our operations will continue to become more burdensome and that capital and operating expenditures necessary to comply with environmental regulations will continue, and perhaps increase, in the future. In addition, we may incur obligations to remove or mitigate any adverse effects on the environment resulting from our operations, including the restoration of natural resources and liability for personal injury and for damages to property and natural resources. Because environmental regulations are not consistent worldwide, our ability to compete in the world marketplace may be adversely affected by capital and operating expenditures required for environmental compliance. SPRING GROVE, PENNSYLVANIA We are subject to the "Cluster Rule," a 1998 federal regulation in which the United States Environmental Protection Agency ("EPA") aims to regulate air and water emissions from certain pulp and paper mills, including kraft pulp mills, such as our Spring Grove facility. Issued under both the Clean Air Act and the Clean Water Act, the Cluster Rule establishes baseline emissions limits for toxic and conventional pollutant releases to both water and air. Subject to permit approvals, we have undertaken an initiative at our Spring Grove facility under the Voluntary Advanced Technical Incentive Program set forth by the EPA in the Cluster Rule. This initiative, the "New Century Project," will require capital expenditures currently estimated to be approximately $37.0 million to be incurred before April 2004. The New Century Project includes improvements in brownstock washing, installation of an oxygen delignification bleaching process, 100 percent chlorine dioxide substitution and a hardwood ozone bleaching system. Through March 31,June 30, 2003, we have invested approximately $20.4$28.0 million in this project. We presently do not anticipate difficulties in implementing the New Century Project; however,Project. While we have not yet receivedobtained all the required governmental approvals, norwe have wenot yet installed all the necessary equipment. We are voluntarily cooperatingcooperated with an investigation by the Pennsylvania DEPDepartment of Environmental Protection (the "PA DEP") which commenced in February 2002, of our Spring Grove facility related to certain discharges which are alleged to be unpermitted, to the Codorus Creek. There is no indication that these discharges had an impact on human health or the environment. We are currently engaged in negotiationsOn June 13, 2003, we entered into a Consent Order and Agreement with the PennsylvaniaPA DEP regarding these matters.such discharges. Under the terms of this agreement, we agreed to pay a civil penalty of $1.5 million over three years, beginning June 15, 2003, and to implement various remedial -12- measures related to the facility's operations and to the facility's historical piping network. We accrued $1.5 million in the 2002 fourth quarter results of operations for this obligation and the remedial measures are expected to be capital expenditures. In 1999, EPA and the Pennsylvania DEP issued us separate Notices of Violation ("NOVs") alleging violations of air pollution control laws, primarily for purportedly failing to obtain appropriate pre-construction air quality permits in conjunction with certain modifications to our Spring Grove facility. For all but one of the modifications cited by EPA, we applied for and obtained from the Pennsylvania DEP the pre-construction permits that we concluded were required by applicable law. EPA reviewed those applications before the permits were issued. The Pennsylvania DEP's NOV pertained only to the modification for which we did not receive a pre-construction permit. We conducted an evaluation at the time of this modification and determined that the pre-construction permit cited by EPA and the Pennsylvania DEP was not required. We have been informed that EPA and the Pennsylvania DEP will seek substantial emissions reductions, as well as civil penalties, to which we believe we have meritorious defenses. Nevertheless, we are unable to predict the ultimate outcome of these matters or the costs, if any, involved. NEENAH, WISCONSIN We have previously reported with respect to potential environmental claims arising out of the presence of polychlorinated biphenyls ("PCBs") in sediments in the lower Fox River and in the Bay of Green Bay, downstream of our Neenah, Wisconsin facility. We acquired the Neenah facility in 1979 as part of the acquisition of the Bergstrom Paper Company. In part, this facility uses wastepaper as a source of fiber. At no time did the Neenah facility utilize PCBs in the pulp and paper making process, but discharges from the facility containing PCBs from wastepaper may have occurred from 1954 to the late 1970s. Any PCBs that the Neenah facility discharged into the Fox River resulted from the presence of NCR(R)-brand carbonless copy paper in the wastepaper that was received from others and recycled. As described below, various state and federal governmental agencies have formally notified seven potentially responsible parties ("PRPs"), including Glatfelter, that they are potentially responsible for response costs and "natural resource damages" ("NRDs") arising from PCB contamination in the lower Fox River and -12- GLATFELTER in the Bay of Green Bay, under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and other statutes. The six other identified PRPs are NCR Corporation, Appleton Papers Inc., Georgia Pacific (formerly Fort Howard Corp. and Fort James), WTM I Co. (a subsidiary of Chesapeake Corp.), Riverside Paper Corporation, and U.S. Paper Mills Corp. (a subsidiary of Sonoco Products Company). We believe some of these PRPs may have corporate or contractual relationships with unidentified entities that may shift monetary obligations arising from the lower Fox River and Bay of Green Bay. CERCLA establishes a two-part liability structure that makes responsible parties liable for (1) "response costs" associated with the remediation of a release of hazardous substances and (2) NRDs related to that release. Courts have interpreted CERCLA to impose joint and several liability on responsible parties for response costs, subject to equitable allocation in certain instances. Prior to a final settlement by all responsible parties and the final cleanup of the contamination, uncertainty regarding the application of such liability will persist. On January 7, 2003, the Wisconsin Department of Natural Resources (the "Wisconsin DNR") and EPA issued a Record of Decision ("ROD") for the cleanup of reaches of the lower Fox River known as Operable Unit 1 ("OU1") (which consists of Little Lake Butte des Morts, the portion of the river that is closest to our Neenah facility) and Operable Unit 2 ("OU2") (which is the portion of the river between dams at Appleton and Little Rapids). This ROD does not address the entire lower Fox River or the Bay of Green Bay nor does it place any value on claims for NRDs associated with this matter. The environmental agencies have stated that the Record of Decision related to the remainder of the river and the Bay of Green Bay is expected to be issued during mid-2003. Subject to extenuating circumstances and alternative solutions arising during the cleanup, the ROD requires the removal of approximately 784,000 cubic yards of sediment from Little Lake Butte des Morts.OU1 and no active remediation of OU2. The ROD also requires the monitoring of the two operable units. Wisconsin DNR and EPA estimate that the remedy for these two reaches will cost approximately $75 million but could cost within a range from approximately $52 million to $112 million. The $75 million estimate is approximatelyOn July 1, 2003, WTM I entered into an Administrative Order on Consent with EPA and the same amount estimated for these sectionsWisconsin DNR regarding to the implementation of the river inRemedial Design for OU1. We continue to actively negotiate a potential settlement with the Proposed Remedial Action Plan ("PRAP") issued in October, 2001 related to this matter. We are continuing to analyzeEPA and the ROD to determineWisconsin DNR regarding the viabilityimplementation of the remedy set forth thereinfor OU1 and itsto resolve our potential impact on us. The total cost estimateliability for certain response costs. -13- On July 28, 2003, the EPA and the Wisconsin DNR issued a ROD ("the Second ROD") for the cleanup of reaches of the PRAP, including OU1lower Fox River and OU2, was $307.6the Bay of Green Bay known as Operable Units 3 through 5. The Neenah mill's discharge is more than 20 miles upstream of this portion of the river. The Second ROD calls for the removal of 6.5 million (withoutcubic yards of sediment and certain monitoring at an estimated cost of $324.4 million but, according to the Second ROD, could cost within a contingency factor) over a 7-18 year time period.range from approximately $227.0 million to $486.6 million. The most significant component of the estimated costs is attributable to large-scale sediment removal by dredging. Based on cost estimates of large-scale dredging response actions at other sites, we believeWe are currently analyzing the PRAP's cost projections may underestimate actual costsSecond ROD to determine the feasibility of the proposed remedy by approximately $450 million.set forth therein and its impact, if any, on our potential liability. The ROD and Second ROD do not place any value on claims for NRDs associated with this matter. As noted above, NRD claims are theoretically distinct from costs related to the primary remediation of a Superfund site. Calculating the value of NRD claims is difficult, especially in the absence of a completed remedy for the underlying contamination. The State of Wisconsin, the United States Fish and Wildlife Service ("FWS"), the National Oceanic and Atmospheric Administration ("NOAA"), four Indian tribes and the Michigan Attorney General have asserted that they possess NRD claims related to the lower Fox River and the Bay of Green Bay. In June 1994, FWS notified the seven identified PRPs that it considered them potentially responsible for NRDs. The federal, tribal and Michigan agencies claiming to be NRD trustees have proceeded with the preparation of an NRD assessment. While the final assessment will be delayed until after the selection of a remedy, the federal trustees released a plan on October 25, 2000 that values their NRDs for injured natural resources between $176 million and $333 million. We believe that the federal NRD assessment is technically and procedurally flawed. We also believe that the NRD claims alleged by the various alleged trustees are legally and factually without merit. On June 20, 2002, the United States, the State of Wisconsin and the Fort James Operating Company ("Fort James") lodged a consent decree with the U.S. District Court for the Eastern District of Wisconsin. If entered, that consent decree would resolve certain outstanding claims, primarily NRD claims, against Fort James and a related entity. Under the terms of the proposed consent decree, Fort James would pay $6.2 million in cash to the United States and the State of Wisconsin in settlement of various claims related to NRDs and cost -13- GLATFELTER recovery related to dredging of sediments at Deposits 56/57.57 (downstream from OU1 and OU2). Fort James also agrees to convey 1,063 acres of land to the State and to perform delineated NRD "restoration" projects at a cost of up to $3.9 million. We submitted comments on the proposed consent decree to the U.S. Department of Justice. These comments suggest that the United States, the State of Wisconsin and certain alleged natural resource trustees not move to enter this proposed consent decree, due to various procedural and substantive infirmities.Nevertheless,infirmities. Nevertheless, on March 28, 2003, the federal government made such a motion with respect to which the courts have not yet ruled. Because the plaintiffs have yet to provide a factual orand legal justification the plaintiffs provided for the settlement is vague and specific to the Fort James situation, we are not able to extrapolate an estimated settlement amount for Glatfelter from the proposed consent decree. We are actively negotiating a potential settlement with the Wisconsin agencies and with the federal government for all of our potential liabilities for response costs and NRDs associated with the contamination. The Wisconsin DNR and FWS have published studies, the latter in draft form, estimating the amount of PCBs discharged by each identified PRP to the lower Fox River and the Bay of Green Bay. These reports are cited in both RODs and in the final joint restoration plan. These reports estimate our Neenah facility's share of the volumetric discharge to be as high as 27%. We do not believe the volumetric estimates used in these studies are accurate because the studies themselves disclose that they are not accurate and are based on assumptions for which there is no evidence. We believe that our volumetric contribution is significantly lower than the estimates. Further, we do not believe that a volumetric allocation would constitute an equitable distribution of the potential liability for the contamination. Other factors, such as the location of contamination, location of discharge and a party's role in causing discharge must be considered in order for the allocation to be equitable. We have entered into interim cost-sharing agreements with four of the other six PRPs, pursuant to which such PRPs have agreed to share both defense costs and costs for scientific studies relating to PCBs discharged into the lower Fox River. These interim cost-sharing agreements have no bearing on the final allocation of costs related to this matter. Based upon our evaluation of the magnitude, nature and location of the various discharges of PCBs to the river and the relationship of those discharges to identified contamination, we believe our share of any liability among the seven identified PRPs is much less than one-seventh of the whole. -14- We also believe that additional potentially responsible parties exist other than the seven identified PRPs. For instance, certain of the identified PRPs discharged their wastewater through public wastewater treatment facilities, which we believe makes the owners of such facilities potentially responsible in this matter. We also believe that entities providing wastepaper-containing PCBs to each of the recycling mills, including our Neenah facility, are also potentially responsible for this matter. We continue to believe that this matter will likely result in litigation, but cannot predict the timing, nature, extent or magnitude of such litigation. We currently are unable to predict our ultimate cost related to this matter. RESERVES FOR ENVIRONMENTAL LIABILITIES The amount and timing of future expenditures for environmental compliance, cleanup, remediation and personal injury, NRDs 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 abatement, the response actions that may be required, the availability of qualified remediation contractors, equipment and landfill space and the number and financial resources of any other PRPs. We have established reserves relating to unasserted claims for environmental liabilities for those matters for which it is probable that a claim will be made, that an obligation may exist and for which the amount of the obligation is reasonably estimable. As of March 31,June 30, 2003 and December 31, 2002, we had accrued reserves for all contingentasserted and unasserted liabilities related to environmental matters of approximately $29.8 million and $30.3 million.million, respectively. These accruals are primarily included in "other long-term liabilities" on the Consolidated Balance Sheets. During 2003, the reserve balance declined $0.5 million as a result of the first of three installment payments made to the PA DEP. No adjustments were made to the reserve during the first quarter of 2003 or during the first quarterhalf of 2002. NEENAH, WISCONSIN - RANGE OF REASONABLY POSSIBLE OUTCOMES. Based on analysis of currently available information and experience regarding the cleanup of hazardous substances, we believe that it is reasonably possible that our costs associated with the lower Fox River and the Bay of Green Bay may exceed current reserves by amounts that may prove to be insignificant or that could range, in the aggregate, up to approximately $125 million, over a period that is undeterminable but could range beyond 20 years. We believe that the likelihood of an outcome in the upper end of the monetary range is significantly less than -14- GLATFELTER other possible outcomes within the range and that the possibility of an outcome in excess of the upper end of the monetary range is remote. In our estimate of the upper end of the range, we have assumed full-scale dredging as set forth in the ROD for Operable Unit 1 and 2.no active remediation of OU2. We have also assumed full-scale dredging for the remainder of the riverRiver and the Bay of Green Bay, as set forth in the PRAP,Second ROD, at a significantly higher cost than estimated in the PRAP.Second ROD. We have also assumed our share of the ultimate liability to be 18%, which is significantly higher than we believe is appropriate or will occur and a level of NRD claims and claims for reimbursement of expenses from other parties that, although reasonably possible, is unlikely. In estimating both our current reserve for environmental remediation and other environmental liabilities and the possible range of additional costs, we have not assumed that we will bear the entire cost of remediation and damages to the exclusion of other known PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, based generally on their financial condition and probable contribution. Our evaluation of the other PRPs' financial condition included the review of publicly disclosed financial information. The relative probable contribution is based upon our knowledge that at least two PRPs manufactured the paper that included the PCBs and as such, in our opinion, bear a higher level of responsibility. In addition, our assessment is based upon the magnitude, nature and location of the various discharges of PCBs to the river and the relationship of those discharges to identified contamination. We have also considered that over a number of years, certain PRPs were under the ownership of large multinational companies, which appear to retain some liability for this matter. We continue to evaluate our exposure and the level of our reserves, including, but not limited to, our potential share of the costs and NRDs (if any) associated with the lower Fox River and the Bay of Green Bay. -15- We believe that we are insured against certain losses related to the lower Fox River and the Bay of Green Bay, depending on the nature and amount of the losses. InsuranceOn July 30, 2003, we filed a Complaint in the Circuit Court for the County of Milwaukee, Wisconsin, against our insurers, seeking damages for breach of contract and declaratory relief related to such losses. The filing of this complaint followed the issuance of a Wisconsin Supreme Court opinion regarding environmental coverage whichissues that is currently being investigated under reservations 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. We do not know when the insurers' investigations asfavorable to coveragepolicyholders. While we believe that we will be completedsuccessful in this action and recoveries may be significant, we are uncertain as to what the timing or extent of any ultimate recovery will be and whether it will be significant in relation to the potential losses associated with the Fox River. Our financial statements do not include any amounts for which we have accrued.such potential recoveries. SUMMARY Our current assessment is that we should be able to manage these environmental matters without a long-term, material adverse impact on us. These matters could, however, at any particular time or for any particular year or years, have a material adverse effect on our consolidated financial position, liquidity and/or results of operations or could result in a default under our loan covenants. Moreover, there can be no assurance that our reserves will be adequate to provide for future obligations related to these matters, that our share of costs and/or damages for these matters will not exceed our available resources, or that such obligations will not have a long-term, material adverse effect on our consolidated financial position, liquidity or results of operations. With regard to the lower Fox River and the Bay of Green Bay, if we are not successful in managing the matter and are ordered to implement the remedies proposed in both the RODfirst and the PRAP,second RODs, such orders would have a material adverse effect on our consolidated financial position, liquidity and results of operations and would result in a default under our loan covenants. We are also involved in other lawsuits that are ordinary and incidental to our business. The ultimate outcome of these lawsuits cannot be predicted with certainty, however, we do not expect that such lawsuits in the aggregate or individually will have a material adverse effect on our consolidated financial position, liquidity or results of operations. 13.14. SEGMENT INFORMATION We manage our organization along separate business units: Engineered Products, Long-Fiber & Overlay Papers, and Printing and Converting Papers, as well as Tobacco Papers, which is being exited. In the latter part of 2002, we completed the implementation of a new information system to provide, among other things, more complete business unit reporting. However, we are currently unable to provide detail business unit profitability reporting for periods prior to the system implementation. Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the business unit are allocated primarily based on an estimated utilization of support area services. The following table setstables set forth net sales by business unit:
Three Months Ended March 31 Percent of Total ----------------- -----------------THREE MONTHS ENDED JUNE 30 PERCENT OF TOTAL Dollars in millions 2003 2002 ChangeCHANGE 2003 2002 - --------------------------------------------------------------------------------------- ------- ------- ------- ------- BUSINESS UNIT Engineered Products $32.3 $29.7 $2.6 22.5% 22.5%$ 34.8 $ 35.1 $ (0.2) 26.9% 25.7% Long-Fiber & Overlay Papers 35.3 26.6 8.7 24.6 20.129.4 24.7 4.6 22.7 18.1 Printing and Converting Papers 72.0 70.7 1.3 50.1 53.662.9 71.7 (8.8) 48.5 52.4 Tobacco Papers 4.0 5.0 (1.0) 2.82.5 5.2 (2.7) 1.9 3.8 ----------------------------------------------------- ------- ------- ------- ------- Total $143.6 $132.0 $11.6$ 129.6 $ 136.7 $ (7.1) 100.0% 100.0% ===================================================== ======= ======= ======= =======
-16-
SIX MONTHS ENDED JUNE 30 PERCENT OF TOTAL Dollars in millions 2003 2002 CHANGE 2003 2002 ------ ------ ------ ------ ------ BUSINESS UNIT Engineered Products $ 65.8 $ 64.1 $ 1.7 24.2% 23.9% Long-Fiber & Overlay Papers 64.7 51.3 13.4 23.8 19.2 Printing and Converting Papers 134.9 142.4 (7.5) 49.6 53.1 Tobacco Papers 6.5 10.2 (3.7) 2.4 3.8 ------ ------ ------ ------ ------ Total $271.9 $268.0 $ 3.9 100.0% 100.0% ====== ====== ====== ====== ======
The following table sets forth profitability information by business unit and the composition of consolidated income before income taxes:
Three Months Ended March 31,THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2003 -----------------------------------JUNE 30, 2003 Operating Profit Operating Operating Operating Dollars in millions (Loss) Margin Profit Margin - ------------------------------------------------------------------------------------------ --------- --------- --------- BUSINESS UNIT Engineered Products $1.3 4.0%$(0.7) (2.1)% $ 1.0 1.5% Long-Fiber & Overlay Papers 6.2 17.60.8 3.2 7.3 11.3 Printing and Converting Papers 1.8 2.5(1.9) (3.1) (0.7) (0.5) Tobacco Papers (1.3) (32.5) ------ ------(1.5) (60.4) (2.8) (43.2) ----- ----- Total Business Unit $8.0 5.4%(3.3) (2.5) 4.8 1.8 Energy sales, net 2.32.8 5.0 Pension income, net 5.14.1 9.0 Gain on sale of plant, equipment and timberlands, net 30.6 ------0.8 31.4 ----- ----- Total consolidated operating income 46.04.4 50.2 Interest expense, net (3.6)(3.2) (6.4) Other income (expense), net (0.5) ------(0.1) (1.0) ----- ----- Income from continuing operations before income taxes $41.9 ======$ 1.1 $42.8 ===== =====
Management evaluates results of operations before energy sales, gains from asset sales and the effects of non-cash pension income because it believes this is a more meaningful representation of the operating performance of its core papermaking businesses, the profitability of business units and the extent of cash flow generated from core operations. This presentation is closely aligned with the management and operating structure of our company. It is also on this basis that management performance is evaluated internally and by the Company's Board of Directors. -15- GLATFELTER-17- 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,June 30, 2003 and the related condensed consolidated statements of income for the three months and six months ended June 30, 2003 and 2002 and condensed consolidated statements of cash flows for the threesix months ended March 31,June 30, 2003 and 2002. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of P. H. Glatfelter Company and subsidiaries as of December 31, 2002, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2003 (which includes an explanatory paragraph concerning the Company's adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002), 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, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP Philadelphia, Pennsylvania May 12,August 11, 2003 -16- GLATFELTER-18- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF INCOME The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Glatfelter's Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in its 2002 Annual Report on Form 10-K. FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future consolidated financial position or results of operations, made in this Quarterly Report on Form 10-Q are forward looking. We use words such as anticipates, believes, expects, future, intends and similar expressions to identify forward-looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations. The following discussion includes forward-looking statements regarding expectations of, among others, net sales, cost of products sold, pension costs, environmental costs and liquidity, all of which are inherently difficult to predict. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Accordingly, we identify the following important factors, among others, which could cause our results to differ from any results that might be projected, forecasted or estimated in any such forward-looking statements: i. variations in demand for, or pricing of, our products; ii. changes in the cost or availability of raw materials we use, in particular market pulp, pulp substitutes and wastepaper; abaca fiber, and changes in energy-related costs; iii. our ability to develop new, high value-added engineered products;products and long fiber & overlay papers; iv. 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; v. 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 the EPA and the Pennsylvania DEP, the costs of natural resource restoration or damages related to the presence of polychlorinated biphenyls ("PCBs") in the lower Fox River on which our Neenah mill is located; the costs, if any, of environmental matters at our former Ecusta Division mill; and the effect of complying with the wastewater discharge limitations of the Spring Grove mill permits; vi. the gain or loss of significant customers and/or on-going viability of such customers; vii. risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates; viii. geopolitical events, including war and terrorism; ix. enactment of adverse state, federal or foreign legislation or changes in government policy or regulation; x. our ability to identify, finance and consummate future alliances or acquisitions; xi. adverse results in litigation; xii. disruptions in production and/or increased costs due to labor disputes; xiii. the effect on us, if any, associated with the financial condition of the buyers of the Ecusta Division; and, xiv. our ability to realize the value of our timberlands. CRITICAL ACCOUNTING POLICIES The following discussion and analysis of our consolidated financial position and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to sales returns, doubtful accounts, inventories, investments and financial derivative instruments, long-lived assets and contingencies, including environmental matters. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances; the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. -17- GLATFELTER-19- We believe the following represent the most significant and subjective estimates used in the preparation of our consolidated financial statements. i. We maintain reserves for expected sales returns and allowances based principally on our return practices and our historical experience. If actual sales returns differ from the estimated return rates projected, we may need to increase or decrease our reserves for sales returns and allowances, which could affect our reported income. ii. We maintain allowances for doubtful accounts for estimated losses resulting from our customers' failure to make required payments. If actual customer payments differ from our estimates, we may need to increase or decrease our allowances for doubtful accounts, which could affect our reported income. iii. We evaluate the recoverability of our long-lived assets, including property, equipment and intangible assets periodically or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Our evaluations include analyses based on the cash flows generated by the underlying assets, profitability information, including estimated future operating results, trends or other determinants of fair value. If the value of an asset determined by these evaluations is less than its carrying amount, a loss is recognized for the difference between the fair value and the carrying value of the asset. Future adverse changes in market conditions or poor operating results of the related business may indicate an inability to recover the carrying value of the assets, thereby possibly requiring an impairment charge in the future. iv. Accounting for defined-benefit pension plans requires various assumptions, including, but not limited to, discount rates, expected rates of return on plan assets and future compensation growth rates. Accounting for our retiree medical plans also requires various assumptions, which include, but are not limited to, discount rates and annual rates of increase in the per capita costs of health care benefits. We evaluate these assumptions at least once each year and make changes as conditions warrant. Changes to these assumptions will increase or decrease our reported income, which will result in changes to the recorded benefit plan assets and liabilities. v. We maintain accruals for losses associated with environmental obligations when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing legislation and remediation technologies. These accruals are adjusted periodically as assessment and remediation actions continue and/or further legal or technical information develops. Such undiscounted liabilities are exclusive of any insurance or other claims against third parties. Recoveries of environmental remediation costs from other parties, including insurance carriers, are recorded as assets when their receipt is assured beyond a reasonable doubt. vi. We have made estimates and accrued for liabilities assumed by the buyers of the Ecusta Division. In addition, we have recorded receivables due from the buyers to reimburse us for such liabilities as well as for other expenses we were to pay on the buyers' behalf. We continue to evaluate the collectibility of the receivables due from the buyers and, at March 31,June 30, 2003, have determined that no reserves are necessary for such receivables. However reserves may be necessary in future periods. Reference is made to our Annual Report on Form 10-K for the year ended December 31, 2002, Item 8 - Financial Statements and Supplementary Data - Note 2 and the Notes included in this Quarterly Report on Form 10-Q for the quarterly period ended March 31,June 30, 2003, for a discussion of our accounting policies with respect to these and other items. OVERVIEW We are one of the world's leading manufacturers of specializedspecialty papers and engineered products. During 2002 we completed the reorganization of the way we manage our business. We now operate three business units: Engineered Products, Long-Fiber & Overlay Papers and Printing and Converting Papers.Papers as well as Tobacco Papers, which is being exited. We also completed our IMPACT project, which included the installation of a worldwide enterprise resource planning ("ERP") information system. -18- GLATFELTER-20- RESULTS OF OPERATIONS FIRST QUARTERSIX MONTHS OF 2003 VERSUS FIRST QUARTERSIX MONTHS OF 2002 The following table sets forth summarized results of operations.
THREESIX MONTHS ENDED MARCH 31 ----------------JUNE 30 In millions 2003 2002 CHANGE - ----------- ------ ------ ------ Net sales $143.6 $132.0$271.9 $268.0 $ 11.63.9 Energy sales, net 2.3 2.2 0.15.1 4.7 0.4 ------ ------ ------ Total revenue 145.9 134.2 11.7277.0 272.7 4.3 Cost of products sold 115.3 99.7 15.6228.4 209.5 18.9 ------ ------ ------ Gross profit 30.6 34.5 (3.9)48.6 63.2 (14.6) Operating expenses Selling, general and administrative expenses 15.2 14.5 0.7 Gain29.8 28.7 1.1 Loss (gain) on sale of plant, equipment and timberlands (30.6) (0.6) (30.0) ------ ------ ------(31.4) (1.1) (30.3) Total operating expenses (15.4) 13.9 (29.3)(1.6) 27.6 (29.2) ------ ------ ------ Operating income 46.0 20.6 25.450.2 35.6 14.6 Interest expense net (3.2) (3.5) 0.3(7.1) (7.7) 0.6 Interest income 0.7 1.0 (0.3) Other income (expense), net (0.9) 0.0 (0.9)(1.0) -- (1.0) ------ ------ ------ Nonoperating income (expense) (7.4) (6.7) (0.7) ------ ------ ------ Income from continuing operations before 42.8 28.9 13.9 income taxes 41.9 17.1 24.8 Income taxes 15.1 6.0 9.115.4 10.2 5.2 ------ ------ ------ Income from continuing operations 27.4 18.7 8.7 Discontinued operations Loss from discontinued operations before taxes (0.6) -- (0.6) Income tax benefits (0.2) -- (0.2) ------ ------ ------ Net loss from discontinued operations (0.4) -- (0.4) ------ ------ ------ Net income $ 26.827.0 $ 11.118.7 $ 15.78.3 ====== ====== ======
Net income and diluted earnings per share for the first quartersix months of 2003 of $26.8were $27.0 million and $0.61,$0.62, respectively, compared to $11.1$18.7 million and $0.26,$0.43, respectively, for the comparable quarterperiod in 2002. The 2003results for the first quarter resultssix months of 2003 include a pre-tax gain of $31.2 million, or $20.0 million after-tax, from the previously announced sale of approximately 25,500 acres of timberlands, as well as a $0.7 million after-tax loss on the sale of certain paper making equipment.equipment and $0.4 million after-tax loss on discontinued operations. Earnings for the first quartersix months of 2003 before these asset salesitems were $7.5$8.1 million, or $0.17$0.19 per diluted share. On this basis, the decline in earnings was primarily due to lower non-cash pension income, lower sales volumes and higher costs of products sold and lower non-cash pension income in the first quartersix months of 2003. Reported earnings in the quarter-to- quarterperiod-to-period comparison were also favorably impacted by the weakening of the U.S. Dollar versus the Euro and the resulting impact on translated results of international operations. The weaker U.S. Dollar had an estimated favorable impact on net income of approximately $0.8$2.1 million after tax, in the first quartersix months of 2003. NET SALES Our consolidated net sales totaled $143.6$271.9 million for the first quartersix months of 2003 compared to $132.0$268.0 million for the year-earlier first quarter,six months, an increase of $11.6$3.9 million, or 8.8%1.5%. Sales growth was primarily attributable the benefits of a weaker U.S. Dollar relative to increasedthe Euro, which more than offset a decrease in constant-currency average net selling price. In the period-to-period comparison, the weaker U.S. Dollar benefited translated consolidated net sales of international operations by approximately $15.7 million. Increased volumes in our Long Fiber & Overlay and Engineered Products business units. The increase was also due to the effect of an 8.7% increaseunits were more than offset by lower volumes in average net selling price, driven, in large part, by the effect of a weaker U.S. Dollar relative to the Euro. In the quarter-to-quarter comparison, the weaker U.S. Dollar benefited translated net sales of international operations by approximately $7.7 million.Printing & Converting. -21- During the first quartersix months of 2003, sales volume for our Engineered Products increased by approximately 6.0%4.0% compared to the first quartersix months of 2002, and average net selling prices increased moderately.slightly. Our Long-Fiber & Overlay Papers business unit experienced 14.2% increased sales volume for its products. However, excluding the effects ofproducts and average net selling prices increased 10.1%, although this price increase was entirely due to a weaker U.S. Dollar relative todollar in the Euro, this unit's pricing remained relatively constant.comparison. In the Printing and Converting Papers business unit, our net sales volume declined less than 1%4.4% compared to the same period a year ago.ago, primarily due to weaker market-related demand in this segment together with our decisions in early in 2003 not to pursue volume at unattractive pricing. In addition, during the second quarter of 2003, Printing and& Converting Papers volume was adversely impacted by a more maturecurrent willingness of some customers to purchase lower-cost, lower-quality alternatives offered by competitors, particularly in the book publishing market. Average net selling prices in this business unit continued to experience declining prices, reversing favorable pricing trends that were seen duringdeclined slightly in the third quarter of 2002.period-to-period comparison. Tobacco Papers represent a business unit that we are exiting pending completion of our agreement to provide tobacco papers to an affiliate of one of the buyers of our Ecusta Division. We expect sales from this unit to approximate $8.0 million to $10.0 million in 2003. The lower proportion of tobacco papers sales relative to our total sales is expected to have a favorable impact on our gross margin. -19- GLATFELTER margin percentage. ENERGY SALES, NET Energy sales, net totaled $2.3$5.1 million in the first quartersix months of 2003 compared with $2.2$4.7 million in the comparable quarterperiod of 2002. Energy sales represent net revenue earned from the sale of excess power generated by our Spring Grove, PA mill. COST OF PRODUCTS SOLD AND GROSS PROFIT Cost of products sold ("COS") increased $15.6$18.9 million, or 15.6%9.0%, in the quarter-to-quarterperiod-to-period comparison. COS is approximately $5.3increased despite lower sales volumes primarily due $10.8 million higher in the first quarter of 2003 than in the prior-year first quarter due to the weakening of the U.S. Dollar compared to the Euro and the resulting impact on translated COS of international operations. In addition, theThe increase in COS also consisted of approximately $2.0$5.6 million of lower non-cash pension income, $3.7 million of higher market pulp and wastepaper costs, $2.0$2.3 million of energy-related costs, and $0.6 million attributable to the impact of heavy snows during 2003. In addition, due to soft demand, we took market-related downtime at the Spring Grove, Neenah, WI and Gernsbach, Germany mills. Further, in the second quarter of 2003, we commenced the scheduled shutdown and rebuild of a long-fiber & overlay paper machine in Gernsbach. During the second quarters of 2003 and $1.9 million2002, we completed our annually scheduled maintenance shutdown at our Spring Grove mill. Shutdowns result in reduced production leading to unfavorable manufacturing variances that negatively affect costs of lower non-cash pension income. Approximately $1.5 million of the increase in COS was due to higher sales volumes.products sold. Gross profit in the first quartersix months of 2003 totaled $30.6$48.6 million, a decline of $3.9$14.6 million from the year-earlier quarter, and ourfirst half of 2002. Our gross margin was 21.3%17.9% and 26.1%23.5% in the first quartersix months of 2003 and 2002, respectively, reflecting the net effect of the factors discussed above in Net Sales and COS.Cost of Products Sold and Gross Profit. Our gross margin includes net non-cash pension income resulting from the overfunded status of our defined benefit pension plans. The following table is presented to provide additional analysis of the changes in COS eliminating the benefit of net non-cash pension income.
THREESIX MONTHS ENDED MARCH 31 ----------------JUNE 30 In millions 2003 2002 CHANGE - ----------- ------ ------ ------------- ------- ------- Cost of products sold excluding net pension income $119.8 $106.1 $ 13.7236.3 $ 223.0 $ 13.3 Benefit of pension income (4.5) (6.4) 1.9 ------ ------ ------(7.9) (13.5) 5.6 ------- ------- ------- Cost of products sold as reported $115.3 $ 99.7228.4 $ 15.6 ====== ====== ======209.5 $ 18.9 ======= ======= =======
Our net non-cash pension income allocable to cost of products sold is expected to total $18.6$15.3 million for the full year 2003 compared to $26.9 million in 2002. Non-cash pension income is estimated each year using certain actuarial assumptions and certain other factors, including the fair value of our pension assets as of the first date of the calendar year. TheAlthough our pension plan is considerably overfunded, during 2002, the fair value of our pension assets has decreased significantly since January 1, 2002.significantly. -22- SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES In the first quartersix months of 2003, SG&A expenses totaled $15.2$29.8 million compared with $14.5$28.7 million in the year-earlier quarter. The increase wassame period a year ago. Effective cost control initiatives were more than offset by cost increases primarily due toconsisting of a $0.9$1.5 million unfavorable effect of a weaker U.S. Dollar, on translated SG&A expenses of international operations, a $0.5$1.5 million reduced benefit from non-cash pension income, and a $1.0 million increase in depreciation expense related to our investment in a worldwide ERP information system, and an $0.8 million reduced amount of non-cash pension income. -20- GLATFELTER system. The following table is presented to provide additional analysis of SG&A expenses eliminating the benefit of net non-cash pension income.
THREESIX MONTHS ENDED MARCH 31 -----------------JUNE 30 In millions 2003 2002 Change - ----------- ----- ----- ------CHANGE ------- ------- ------- SG&A excluding net pension income $15.8 $15.9 $(0.1)$ 30.9 $ 31.3 $ (0.4) Benefit of pension income (0.6) (1.4) 0.8 ----- ----- -----(1.1) (2.6) 1.5 ------- ------- ------- SG&A as reported $15.2 $14.5 $ 0.7) ===== ===== =====29.8 $ 28.7 $ 1.1 ======= ======= =======
The fair value of our pension assets has decreased significantly since January 1, 2002. For the full year 2003, non-cash pension income allocable to SG&A expenses is projected to be $2.6$2.2 million compared to $5.7 million in 2002. GAINLOSS (GAIN) ON SALES OF PLANT, EQUIPMENT AND TIMBERLANDS During the first quartersix months of 2003 we recognized a net gain from the sale of plant, equipment and timberlands of $30.6$31.4 million. This primarily represents a $31.2 million gain from the sale in March 2003 of approximately 25,500 acres of timberlands to a subsidiary of The Conservation Fund, a non profit land conservation fund (the "Buyer""Timberland Buyer"). As consideration for the timberlands, we received a 10-year note from the Timberland Buyer in the principal amount of $37.9 million (the "Note"). The Note bears interest at 3.22% per annum with interest-only payments due in quarterly installments. After five years the interest rate on the Note will be adjusted to the then existing bank prime rate. The full amount of the Note is secured by a letter of credit issued by a financial institution. As more fully discussed in Liquidity and Capital Resources, we pledged the Note and letter of credit as collateral for a $34.0 million term loan from a financial institution. In connection with the timberland sale, we entered ininto a Supply Agreement (the "Agreement") with the Timberland Buyer pursuant to which we agreed to purchase from the Timberland Buyer a minimum of 275,400 tons of pine pulpwood at market prices over the eight-year term of the Agreement. INTEREST EXPENSE, NET Interest expense, net consisted of the following:
THREESIX MONTHS ENDED MARCH 31 --------------JUNE 30 In millions 2003 2002 CHANGE - ----------- ----- ----- ------------- ------- ------- Interest expense on debt $(3.4) $(3.7) $0.3$ (7.1) $ (7.7) $ 0.6 Interest income on investments and other - net 0.2 0.2 -- ----- ----- ----0.7 1.0 (0.3) ------- ------- ------- Interest expense, net $(3.2) $(3.5) $0.3 ===== ===== ====$ (6.4) $ (6.7) $ 0.3 ======= ======= =======
Interest expense decreased in the quarter-to-quarter comparison primarily due to lower average debt outstanding in the current yearfirst six months compared to the prior-year quarter.period. On average, total debt outstanding declined approximately $50.0$28 million. The weakening of the U.S. Dollar compared to the Euro, and the resulting impact on translated interest expense for U.S. Dollar results partially offset the favorable effect of lower debt balances. OTHER INCOME (EXPENSE), NET Other income (expense), net totaled $(0.9)$(1.0) million in the first six months of 2003, primarily due to foreign currency transaction losses and net expense on cross-currency rate swaps. -23- INCOME TAXES Income taxes increased $9.1$5.2 million to $15.1$15.4 million for the quarter ended March 31,first six months of 2003. The change in the income tax provision for the first quartersix months of 2003 compared to the same period of 2002 is primarily due to a $24.8$13.9 million increase in earnings before income taxes. -21- GLATFELTERDISCONTINUED OPERATIONS During the second quarter of 2003, we entered into an agreement to sell a non-strategic subsidiary located in Wisches, France. For financial reporting purposes this subsidiary is classified as held for sale and reported as discontinued operations for all periods presented. The underlying assets are recorded at the lower of carrying amount or fair value less cost to sell. Accordingly, loss from discontinued operations included a charge of $0.5 million, after tax, to write-down the carrying value of the assets held for sale. The sale of the subsidiary was completed in July 2003. SECOND QUARTER OF 2003 VERSUS SECOND QUARTER OF 2002 The following table sets forth summarized results of operations.
THREE MONTHS ENDED JUNE 30 In millions 2003 2002 CHANGE ------- ------- ------- Net sales $ 129.6 $ 136.7 $ (7.1) Energy sales, net 2.8 2.5 0.3 ------- ------- ------- Total revenue 132.4 139.2 (6.8) Cost of products sold 114.1 110.4 3.7 ------- ------- ------- Gross profit 18.3 28.8 (10.5) Operating expenses Selling, general and administrative expenses 14.7 14.3 0.4 Loss (gain) on sale of plant, equipment and timberlands (0.8) (0.5) (0.3) ------- ------- ------- Total operating expenses 13.9 13.8 0.1 ------- ------- ------- Operating income 4.4 15.0 (10.6) Interest expense (3.7) (4.0) 0.3 Interest income 0.5 0.8 (0.3) Other income (expense), net (0.1) -- (0.1) ------- ------- ------- Nonoperating income (expense) (3.3) (3.2) (0.1) ------- ------- ------- Income from continuing operations before 1.1 11.8 (10.7) income taxes Income taxes 0.4 4.2 (3.8) ------- ------- ------- Income from continuing operations 0.7 7.6 (6.9) Discontinued operations Loss from discontinued operations before taxes (0.6) -- (0.6) Income tax benefits 0.2 -- 0.2 ------- ------- ------- Net loss from discontinued operations (0.4) -- (0.4) ------- ------- ------- Net income $ 0.3 $ 7.6 $ (7.3) ======= ======= =======
Net income and diluted earnings per share for the second quarter of 2003 were $0.3 million and $0.01, respectively, compared to $7.6 million and $0.17, respectively, for the comparable quarter in 2002. The 2003 second quarter results include a net loss from discontinued operations totaling $0.4 million. Income from continuing operations totaled $0.7 million in the second quarter of 2003. On this basis, the decline in earnings was primarily due to lower non-cash pension income, lower sales volumes and higher costs of products sold. Reported earnings in the quarter-to-quarter comparison were also favorably impacted by the weakening of the U.S. Dollar versus the Euro and the resulting impact on translated results of international operations. The weaker U.S. Dollar had an estimated favorable impact on net income of approximately $1.3 million in the second quarter of 2003. -24- NET SALES Our consolidated net sales totaled $129.6 million for the second quarter of 2003 compared to $136.7 million for the year-earlier quarter, a decrease of $7.1 million, or 5.2%. The decline was primarily attributable to weaker demand together with price competition in the Printing & Converting business unit. The Company's Engineered Products business unit experienced solid sales volume growth in the quarter-to-quarter comparison and net average selling prices in this unit increased slightly. The Long-Fiber & Overlay business unit also experienced a quarter-to-quarter increase in net sales; however, this increase was primarily due to the impact of a weaker U.S. dollar on translated results of international operations. In the quarter-to-quarter comparison, the weaker U.S. Dollar benefited translated consolidated net sales of international operations by approximately $8.0 million. ENERGY SALES, NET Energy sales, net totaled $2.8 million in the second quarter of 2003 compared with $2.5 million in the comparable quarter of 2002. Energy sales represent net revenue earned from the sale of excess power generated by our Spring Grove, PA mill. COST OF PRODUCTS SOLD AND GROSS PROFIT Cost of products sold ("COS") increased $3.7 million, or 3.4 %, in the quarter-to-quarter comparison. COS increased despite lower sales volumes primarily due several unfavorable items including approximately $5.5 million increase in the comparison due to the weakening of the U.S. Dollar relative to the Euro. In addition, the increase in COS consisted of approximately $3.1 million of lower non-cash pension income, $1.7 million of higher market pulp and wastepaper costs and $0.3 million of energy-related costs. In addition, due to soft demand, we took market-related downtime at the Spring Grove, Neenah, WI and Gernsbach, Germany mills. Further, in the second quarter of 2003 we commenced the scheduled shutdown and rebuild of a long-fiber & overlay paper machine in Gernsbach. During the second quarters of 2003 and 2002, we completed our annually scheduled maintenance shutdown at our Spring Grove mill Shutdowns result in reduced production leading to unfavorable manufacturing variances that negatively affect costs of products sold. Gross profit in the second quarter of 2003 totaled $18.3 million, a decline of $10.5 million from the year-earlier quarter. Our gross margin was 14.1% and 21.1% in the second quarter of 2003 and 2002, respectively, reflecting the net effect of the factors discussed above in Net Sales and Cost of Products Sold and Gross Profit. Our gross margin includes net non-cash pension income resulting from the overfunded status of our defined benefit pension plans. The following table is presented to provide additional analysis of the changes in COS, eliminating the benefit of net non-cash pension income.
THREE MONTHS ENDED JUNE 30 In millions 2003 2002 CHANGE ------- ------- ------- Cost of products sold excluding net pension income $ 117.7 $ 117.1 $ 0.6 Benefit of pension income (3.6) (6.7) (3.1) ------- ------- ------- Cost of products sold as reported $ 114.1 $ 110.4 $ 3.7 ======= ======= =======
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES In the second quarter of 2003, SG&A expenses totaled $14.7 million compared with $14.3 million in the year-earlier quarter. Effective cost control initiatives were more than offset by a $0.9 million reduced amount of non-cash pension income, $0.6 million unfavorable effect of a weaker U.S. Dollar on translated SG&A expenses of international operations, and a $0.5 million increase in depreciation expense related to our investment in a worldwide ERP information system. The following table is presented to provide additional analysis of SG&A expenses eliminating the benefit of net non-cash pension income.
THREE MONTHS ENDED JUNE 30 In millions 2003 2002 CHANGE ------- ------- ------- SG&A excluding net pension income $ 15.2 $ 15.7 $ (0.5) Benefit of pension income (0.5) (1.4) (0.9) ------- ------- ------- SG&A as reported $ 14.7 $ 14.3 $ 0.4 ======= ======= =======
-25- INTEREST EXPENSE, NET Interest expense, net consisted of the following:
THREE MONTHS ENDED JUNE 30 In millions 2003 2002 CHANGE ------- ------- ------- Interest expense on debt $ (3.7) $ (4.0) $ (0.3) Interest income on investments and other - net 0.5 0.8 (0.3) ------- ------- ------- Interest expense, net $ (3.2) $ (3.2) $ (0.0) ======= ======= =======
Interest expense decreased in the quarter-to-quarter comparison primarily due to lower debt outstanding in the current quarter compared to the prior-year quarter. On average, total debt outstanding declined approximately $11 million. The weakening of the U.S. Dollar compared to the Euro, and the resulting impact on translated interest expense for U.S. Dollar results partially offset the favorable effect of lower debt balances. BUSINESS UNITS We manage our organization along separate business units: Engineered Products, Long-Fiber & Overlay Papers, and Printing and Converting Papers, as well as Tobacco Papers, which is being exited. In the latter part of 2002, we completed the implementation of a new information system to provide, among other things, more complete business unit reporting. However, we are currently unable to provide detaildetailed business unit profitability reporting for periods prior to the system implementation. Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the business unit are allocated primarily based on an estimated utilization of support area services. The following table setstables set forth net sales by business unit:
THREE MONTHS ENDED MARCH 31JUNE 30 PERCENT OF TOTAL --------------- ---------------- Dollars in millions 2003 2002 CHANGE 2003 2002 - ------------------- ------ ------ ------ ------ ------- BUSINESS UNIT------ BUSINESS UNIT Engineered Products $ 32.334.8 $ 29.735.1 $ 2.6 22.5% 22.5%(0.2) 26.9% 25.7% Long-Fiber & Overlay Papers 35.3 26.6 8.7 24.6 20.129.4 24.7 4.6 22.7 18.1 Printing and Converting Papers 72.0 70.7 1.3 50.1 53.662.9 71.7 (8.8) 48.5 52.4 Tobacco Papers 4.0 5.0 (1.0) 2.82.5 5.2 (2.7) 1.9 3.8 ------ ------ ------ ------ ------ Total $143.6 $132.0$129.6 $136.7 $ 11.6(7.1) 100.0% 100.0% ====== ====== ====== ====== ======
SIX MONTHS ENDED JUNE 30 PERCENT OF TOTAL Dollars in millions 2003 2002 CHANGE 2003 2002 ------ ------ ------ ------ ------ BUSINESS UNIT Engineered Products $ 65.8 $ 64.1 $ 1.7 24.2% 23.9% Long-Fiber & Overlay Papers 64.7 51.3 13.4 23.8 19.2 Printing and Converting Papers 134.9 142.4 (7.5) 49.6 53.1 Tobacco Papers 6.5 10.2 (3.7) 2.4 3.8 ------ ------ ------ ------ ------ Total $271.9 $268.0 $ 3.9 100.0% 100.0% ====== ====== ====== ====== ======
-26- The following table sets forth profitability information by business unit and the composition of consolidated income before income taxes:
THREE MONTHS ENDED MARCH 31,SIX MONTHS ENDED JUNE 30, 2003 JUNE 30, 2003 Operating Profit Operating Operating Operating Dollars in millions (Loss) Margin Profit Margin - ------------------- ------ --------------- --------- --------- --------- BUSINESS UNIT Engineered Products $(0.7) (2.1)% $ 1.9 5.9%1.0 1.5% Long-Fiber & Overlay Papers 6.2 17.60.8 3.2 7.3 11.3 Printing and Converting Papers 1.2 1.7(1.9) (3.1) (0.7) (0.5) Tobacco Papers (1.3) (32.5)(1.5) (60.4) (2.8) (43.2) ----- ----- Total Business Unit $ 8.0 5.4%(3.3) (2.5) 4.8 1.8 Energy sales, net 2.32.8 5.0 Pension income, net 5.14.1 9.0 Gain on sale of plant, equipment and timberlands, net 30.60.8 31.4 ----- ----- Total consolidated operating income 46.04.4 50.2 Interest expense, net (3.6)(3.2) (6.4) Other income (expense), net (0.5)(0.1) (1.0) ----- ----- Income from continuing operations before income taxes $41.9$ 1.1 $42.8 ===== =====
As discussed above, due to soft demand, during the second quarter of 2003, we took market-related downtime at the Spring Grove, Neenah, WI and Gernsbach, Germany mills. Further, we commenced the scheduled shutdown and rebuild of a long-fiber & overlay paper machine in Gernsbach. During the second quarters of 2003 and 2002, we completed our annually scheduled maintenance shutdown at our Spring Grove mill. Shutdowns result in reduced production leading to unfavorable manufacturing variances that negatively affect costs of products sold. Management evaluates results of operations before energy sales, gains from asset sales and the effects of non-cash pension income because it believes this is a more meaningful representation of the operating performance of its core papermaking businesses, the profitability of business units and the extent of cash flow generated from core operations. This presentation is closely aligned with the management and operating structure of our company. It is also on this basis that management performance is evaluated internally and by the Company's Board of Directors. -22- GLATFELTER OUTLOOK Thus far in 2003, demand for printing and converting papers has remained sluggish. Recently announced increasesHistorically, changes in pulp costs indicate a possibility of increasing selling prices for Printing and Converting Papers during the year. Historically, pulp price increases have preceded changes in selling price increases for this business unit by several months. However, this trend may not repeat itself due to the competitive climate in the marketplace. The outlook for the Engineered Products and Long-Fiber & Overlay Papers business units is relatively stable. We anticipate a reduction in sales volume during the remainder of 2003 for Long-Fiber & Overlay Papers due to downtime associated with the rebuild of a paper machine in Gernsbach. COS is subject to variations in market prices for, among others, market pulp, wastepaper and energy, in addition to fluctuations in the value of the U.S. Dollardollar relative to the Euro on translated results of international operations. Generally, the cost of these materials has experienced significant increases over recent quarters. Although we are unable to predict with any degree of certainty the extent or composition of further increases, if any, we believe the extent or magnitude of any additional cost increases may be moderate during the balance of 2003.2003 relative to current levels. The cost of market pulp and wastepaper is expected to be higher in 2003 than in 2002 based on price increases in the pulp market in effect during the first quartersix months of 2003, our evaluation of market trends, and indicators including, but not limited to, short term prices for market pulp, chip availability, capacity and market consumption. -27- Market prices for natural gas significantly influence our Neenah and Gernsbach facilities' production costs. The Neenah and Gernsbach facilities require approximately 1.4 million decatherms and 0.9 million decatherms of heat, respectively, annually. A significant portion of the Neenah facility's steam requirements is met through a long-term supply agreement with Minergy Corporation. The cost of steam purchased from Minergy is based on the market price for natural gas. Based on expected production levels, a hypothetical $1 per decatherm increase in the cost of gas is expected to(approximately 20%) would increase the cost of operating our Neenah facility by approximately $1.4 million per year. In some instances, we can partially mitigate the effects of price increases in natural gas by internally generating a portion of our steam needs at the Neenah facility. Under a supply contract, the cost of gas consumed by Gernsbach is based on the price of oil. Thus far during 2003, Gernsbach has experienced much less volatility in its cost of natural gas than that of our Neenah facility. LIQUIDITY AND CAPITAL RESOURCES CAPITAL RESOURCES AND LIQUIDITY Total assets were $1.0 billion and $953.2 million and shareholders' equity was $394.6$388.2 million and $373.8 million, at March 31,June 30, 2003 and December 31, 2002, respectively. Our business is capital intensive and requires significant expenditures for new or enhanced equipment, andfor environmental compliance matters and to support our business strategy, research and development efforts to develop new or enhanced products. Liquidity is provided primarily from operating cash flow together with credit facilities. In addition, during the first quartersix months of 2003, we completed the 25,500-acre sale of timberlands as part of our ongoing initiative to realize value from all of our assets. The following table summarizes cash flow information.
THREESIX MONTHS ENDED MARCH 31 --------------JUNE 30 In millions 2003 2002 CHANGE - ----------- ----- ----- ------------- ------- ------- Cash and cash equivalents at beginning of period $32.2 $88.0 $(55.8)$ 32.2 $ 88.0 $ (55.8) Cash provided by (used for) Operating activities 9.0 5.7 3.332.0 29.7 2.3 Investing activities (24.9) (7.4) (17.5)(44.5) (25.5) (19.0) Financing activities 29.3 (0.8) 30.16.6 (71.1) 77.7 Discontinued operations (0.3) 0.1 (0.4) Effect of exchange rate changes on cash 0.6 0.3 0.3 ----- ----- ------1.4 0.5 0.9 ------- ------- ------- Net cash provided (used) 14.0 (2.2) 16.2 ----- ----- ------(4.8) (66.3) 61.5 ------- ------- ------- Cash and cash equivalents at end of period $46.2 $85.8 $(39.6) ===== ===== ======$ 27.4 $ 21.7 $ 5.7 ======= ======= =======
-23- GLATFELTER An analysis of cash flows follows: Operating Activities. Cash provided by operating activities totaled $9.0$32.0 million for the first threesix months of 2003 and $5.7$29.7 million in the year-earlier first quarter.comparable period in 2002. Operating cash flow increased primarily due to initiatives to improve working capital. Although the timberland sale resulted in an after-tax gain of $20.2$20.0 million, cash will be received from the buyerTimberland Buyer upon payment of its 10-year note.Note. Cash from the timberland sale was realized by pledging the Note as collateral for a $34.0 million term loan. The resulting cash proceeds are reflected as cash provided by financing activities. Investing Activities. Net cash used in investing activities totaled $24.9$44.5 million in the first quartersix months of 2003 compared with $7.4$25.5 million in the first quartersix months of 2002. Capital expenditures during 2003 primarily relate to the New Century Project and the rebuild of a papermaking machine in Gernsbach, Germany. Financing Activities. Net financing activities provided $29.3$6.6 million of cash during the first quartersix months of 2003 compared with an $0.8a $71.1 million use of cash in the first quartersix months of 2002. The primary source of cash from financing activities during the first quartersix months of 2003 was the $34.0 million borrowed under a term loan secured by the pledge of the Note received in connection with the timberland sale. Proceeds from this borrowing together with $2.7were partially offset by a $12.5 million of othernet reduction in borrowings primarily under our revolving credit facility were partially offset by $7.6and $15.3 million of cash dividends paid on our common stock during the quarter.first half of 2003. In the first quartersix months of 2002, $7.5we completed a refinancing of our old revolving credit facility and repaid $133.0 -28- million of debt using $71.1 million of existing cash and $61.9 of borrowings under a new facility. During the first six months of 2002, $15.0 million of cash dividends paid were substantially offset by $6.2$10.5 million of proceeds from the exercise of stock options at a time when the market price of our common stock exceeded the exercise price of stock options. The following table sets forth Glatfelter'sour outstanding indebtedness.
MARCH 31JUNE 30 December 31 In thousands 2003 2002 - ------------ --------- -------------------- Revolving credit facility, due June 2006 $ 70,42059,269 $ 67,681 6-7/8% Notes, due July 2007 150,000 150,000 Note payable - SunTrust, due March 2008 34,000 -- Other notes, various 1,8941,545 1,823 --------- --------- Total long-term debt 256,314244,814 219,504 Less current portion (828)(798) (795) --------- --------- Long-term debt, excluding current portion $ 255,486244,016 $ 218,709 ========= =========
On June 24, 2002, we entered into an unsecured $102.5 million multi-currency revolving credit facility (the "Facility") with a syndicate of three major banks. An additional $22.5 million was added to the Facility on September 24, 2002 with a fourth major bank. The Facility, which replaced an old facility, enables us to borrow up to the equivalent of $125.0 million in certain currencies. Borrowings incur interest based on the domestic prime rate or a Eurocurrency rate, at our option, plus a margin ranging from .525% to 1.05%. Borrowings can be made for any time period from one day to six months. The margin and a facility fee on the commitment balance are based on the higher of our debt ratings as published by Standard & Poor's and Moody's. The Facility requires Glatfelterus to meet certain leverage and interest coverage ratios, with both of which we are in compliance. The Facility also provides an additional source of liquidity in the form of a $50.0 million accounts receivable securitization program. Should we elect to do so, we have the ability to securitize certain eligible domestic accounts receivable. Although the Facility provides this financing vehicle, we have no plans to use it in the foreseeable future. As the Facility matures on June 24, 2006, it has been classified on the Balance Sheet as "Long-term debt." As of March 31,June 30, 2003, $70.4$59.3 million was outstanding and an additional $54.6$65.7 million was available for borrowing under the Facility. -24- GLATFELTER In conjunction with our refinancing, we entered into a cross-currency swap transaction with a major financial institution, effective June 24, 2002, with a termination date of June 24, 2006. Under this transaction, we swapped $70.0 million for approximately E73 million and(euro)73 million. We will pay interest on the Euro portion of the swap at a floating Eurocurrency Rate, plus applicable margins and will receive interest on the dollar portion of the swap at a floating U.S. Dollar LIBOR rate, plus applicable margins. The cross-currency swap effectively hedges exposure to foreign currency risk associated with certain intercompany borrowings through 2006. On March 21, 2003, we sold approximately 25,500 acres of timberlands and received as consideration a $37.9 million 10-year interest-bearing noteNote from the buyer (See(see Note 5)6). We pledged the Note as collateral under a $34.0 million promissory note payable to SunTrust Financial (the "Note Payable"). The Note Payable bears interest at a fixed rate of interest at 3.82% for five years at which time the Company can elect to renew the obligation. PNC Financial Services Group, Inc. ("PNC") beneficially owns approximately 35% of our common stock, primarily as a trustee for numerous trusts for the benefit of Glatfelter family members. PNC Bank, National Association, a subsidiary of PNC, is a member of a syndicate of banks under the Facility. One member of our Board of Directors is the retired Regional Chairman of PNC Bank National Association, Philadelphia/South Jersey markets. -29- In 1997, we issued $150.0 million principal amount of 6 7/8% Notes due July 15, 2007. Interest on the 6 7/8% Notes is payable semiannually on January 15 and July 15. The 6 7/8% Notes are redeemable, in whole or in part, at our option at any time at a calculated redemption price plus accrued and unpaid interest to the date of redemption, and constitute unsecured and unsubordinated indebtedness. The net proceeds from the sale of the 6 7/8% Notes were used primarily to repay certain short-term unsecured debt and related interest. CAPITAL SPENDING During the first quartersix months of 2003, capital expenditures totaled $25.2$45.5 million compared with $8.0$25.7 million in the first quartersix months of 2002 and $51.2 million for the full year 2002. Capital expenditures are expected to be $75.2 million for the full year 2003. ForBeginning in 2004 and for the near-term period beyond 2003,foreseeable future thereafter, capital expenditures are expected to be at or below levels of annual depreciation. The following table summarizesMajor capital spending by major project, by year:
L&OP In millions New Century Gernsbach - ----------- ----------- --------- Prior to 2003 $12.3 $ 5.6 During first quarter 2003 8.1 13.9 ----- ----- To date 20.4 19.5 Forecast 2003 14.9 13.3 After 2003 1.5 -- ----- ----- Project total $36.8 $32.8 ===== =====
initiatives currently underway consist of the following: New Century Project - The New Century Project is an initiative underway at our Spring Grove facility under the Voluntary Advanced Technical Incentive Program as set forth by the EPA's "Cluster Rule". This project includes new hardwood brownstock washing, installation of hardwood oxygen delignification, 100% chlorine dioxide substitution on both the hardwood and softwood fiber lines, and a hardwood ozone bleaching system. To comply with the Cluster Rule, we will also install equipment to reduce air emissions of air pollutants and odorous compounds. Long-Fiber & Overlay Papers ("L&OP") Gernsbach - During 2002, we began our project to expand long-fiber and overlay papers capacity in Gernsbach, Germany. The rebuild of our #9 paper machine is expected to allow us to produce new and advanced products and achieve greater cost efficiency. The increase in the expected cost to complete the paper machine rebuild reflects the effect of the weakening of the U.S. Dollar relative to the Euro and the resulting impact on translated capital expenditures of our subsidiary in Gernsbach, Germany. -25- GLATFELTER The following table summarizes capital spending by major project, by year:
L&OP In millions New Century Gernsbach ----------- --------- Prior to 2003 $12.3 $ 5.6 During the first six months of 2003 15.7 20.0 ----- ----- Through June 30, 2003 28.0 25.6 Forecast 2003 7.4 7.2 After 2003 1.4 -- ----- ----- Project total $36.8 $32.8 ===== =====
DIVIDEND PAYMENTS During the first quartersix months of 2003 and 2002 and for the full year 2002, cash dividends paid on common stock totaled $7.6$15.3 million, $7.5$15.1 million and $30.3 million, respectively. Our Board of Directors determines what, if any, dividends will be paid to our shareholders. Dividend payment decisions are based upon then-existing factors and conditions and, therefore, historical trends of dividend payments are not necessarily indicative of future payments. Environmental MattersAs previously announced, management is considering all appropriate actions necessary to further strengthen the Company's financial position, including re-evaluating its dividend policy. -30- ENVIRONMENTAL MATTERS We are subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of our mills. To comply with environmental laws and regulations, we have incurred substantial capital and operating expenditures in past years. We anticipate that environmental regulation of our operations will continue to become more burdensome and that capital and operating expenditures necessary to comply with environmental regulations will continue, and perhaps increase, in the future. In addition, we may incur obligations to remove or mitigate any adverse effects on the environment resulting from our operations, including the restoration of natural resources and liability for personal injury and for damages to property and natural resources. Because environmental regulations are not consistent worldwide, our ability to compete in the world marketplace may be adversely affected by capital and operating expenditures required for environmental compliance. (See Item 1 - Financial Statements - Note 1213 for a summary of significant environmental matters.) We expect to meet all our near- and longer-term cash needs from a combination of operating cash flow, cash and cash equivalents, sale of additional timberlands, our existing credit facility or other bank lines of credit and other long-term debt. However, as discussed in Item 1 - Financial Statements - Note 12,13, an unfavorable outcome of various environmental matters could have a material adverse impact on our consolidated financial position, liquidity and/or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Our market risk exposure primarily results from changes in interest rates and currency exchange rates. At March 31,June 30, 2003, we had debt outstanding of approximately $256.2$244.8 million, of which $70.4$59.3 million, or 27.5%24.2% was at variable rate.interest rates. The table below presents average principal outstanding and related interest rates for the next five years.years and the amounts of cross-currency swap agreements. Fair values included herein have been determined based upon rates currently available to us for debt with similar terms and remaining maturities.
Period or Year Ended December 31 At March 31,June 30, 2003 ----------------------------------------------------- --------------------------------------------------------------------------------------- ---------------------- Carrying Fair Dollars in thousands 2003 2004 2005 2006 2007 Value Value - ------------------------------- ----------- ----------- ----------- -------- -------- -------- -------- -------- -------- -------- LONG-TERM DEBT LONG-TERM DEBT Average principal outstanding At fixed interest rates $180,499 $184,610 $180,174 $180,000$180,323 $184,639 $184,183 $184,000 $115,250 $185,894 $193,594$185,545 $195,684 At variable interest rates 70,420 70,420 70,420 34,036 70,420 70,42059,269 59,269 59,269 28,647 59,269 59,269 Weighted-average interest rate On fixed interest rate debt 6.38% 6.31% 6.31% 6.31% 5.97% On variable interest rate debt 3.44 3.44 3.44 3.442.56 2.56 2.56 2.56 CROSS-CURRENCY SWAP Pay variable - EURIBOR E72,985 E72,985 E72,985 E72,985(euro)72,985 (euro)72,985 (euro)72,985 (euro)34,993 Variable rate paid 3.30% 3.30% 3.30% 3.30%payable 2.89% 2.89% 2.89% 2.89% Receive variable - US$ LIBOR $70,000 $70,000 $70,000 $70,000$33,562 Variable rate received 1.94% 1.94% 1.94% 1.94%receivable 1.67% 1.67% 1.67% 1.67%
Variable rateVariable-rate debt outstanding represents borrowing under our revolving credit facility. Borrowings incur interest based on the domestic prime rate or a Eurocurrency rate, at our option, plus a margin. March 31,At June 30, 2003, the interest rate paid was 3.44%2.56%. An instantaneousA hypothetical 100 basis point increase or decrease in the interest rate on variable rate debt would increase or decrease annual interest expense by $0.7 million. -26- GLATFELTER At March 31,$0.6 million.At June 30, 2003, allapproximately $34.3 million of variable-rate debt was recorded at S&H, our wholly-owned subsidiary in Gernsbach, Germany, where the functional currency is the Euro. -31- At March 31,June 30, 2003, we had a cross-currency swap agreement outstanding with a termination date of June 24, 2006. Under this transaction, we swapped $70.0 million for approximately E73(euro)73 million and will pay interest on the Euro portion of the swap at a floating Eurocurrency Rate (EURIBOR), plus applicable margins and will receive interest on the dollar portion of the swap at a floating U.S. Dollar LIBOR rate, plus applicable margins. The cross-currency swap is designed to provide protection from the impact that changes in currency rates have on certain U.S. Dollar-denominated debt obligations recorded at our S&H subsidiary in Gernsbach, Germany. The cross currency swaps are recorded at fair value on the Consolidated Balance Sheet under the caption "Accrued compensation, other expenses and changesdeferred income taxes". Changes in fair value are recognized in earnings as "Other income (expense)" in the Consolidated Statements of Income. Changes in fair value of the cross-currency swap transaction are substantially offset by changes in the value of U.S. Dollar denominated obligations when they are remeasured in Euros, the functional currency of S&H (See Item 1 - Financial Statements - Note 10)11). We are subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. Dollar. During the quartersix months ended March 31,June 30, 2003, approximately 69%71% of our net sales were shipped from the United States, 25%24% from Germany, and 6%5% from other international locations. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Our chief executive officer and our principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)13a-15(e) and 15d-14(c)15d-15(e)), within 90 daysas of the filing of this Quarterly Report on Form 10-Q,June 30, 2003, have concluded that, as of the evaluation date, our disclosure controls and procedures were adequate and effective to ensure that material information relating to P. H. Glatfelter Company and its consolidated subsidiaries would be made known to them by others within those entities. CHANGES IN INTERNAL CONTROLS There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of the evaluation, nor were there any significant deficiencies or material weaknesses in our internal controls. As a result, no corrective actions were required or undertaken. -27- GLATFELTER-32- PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of holders of Glatfelter common stock was held on April 23, 2003. At this meeting, shareholders voted on the following matters (with the indicated tabulated results). i. The election of three members of the Board of Directors to serve for full three-year terms expiring in 2006.
DIRECTOR For Withheld ------------------- ---------- --------- G.H. Glatfelter, II 37,139,714 2,892,200 R. J. Naples 37,393,179 2,638,735 R.L. Smoot 37,388,144 2,643,770
ii. A shareholder proposal to redeem any poison pill previously issued, if any, and not adopt or extend any poison pill unless such adoption or extension has been submitted to a shareholder vote. For 13,528,423 Against 21,313,721 Withheld 219,593 Broker non-votes 4,960,127
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS The following exhibits are incorporated by reference or filed herewith. 10.1 Form of Change in Control Employment agreementAgreement by and between the RegistrantP. H. Glatfelter Company and John C. van Roden, Jr., Chief Financial Officer. 10.2 Severance agreementcertain employees, along with a Schedule of Change in Control Employment Agreements by and between the RegistrantP. H. Glatfelter Company and Robert C. Newcomer, President and Chief Operating Officer (exhibits ommitted). 10.3 Term Loan Agreement, datedsuch employees which have not been filed as exhibits to this Form 10-Q. (A) Schedule of March 21, 2003, among GPW Timberlands, LLC, (a wholly owned subsidiary of the Registrant) and Suntrust Bank, as Administrative Agent.Change in Control Employment Agreements, filed herewith. 15 Letter in lieu of consent regarding review report of unaudited interim financial information. 99.131.1 Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer. 31.2 Certification of John C. van Roden, Jr., Senior Vice President and Chief Financial Officer, of Glatfelter, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer 32.1 Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 - Chief Executive Officer. 99.232.2 Certification of John C. van Roden, Jr., Senior Vice President and Chief Financial Officer, of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 - Chief Financial Officer -33- (b) REPORTS ON FORM 8-K During the quarter ended March 31,June 30, 2003, the Company filed the following Current Reports on Form 8-K. i. Form 8-K dated as of January 13,April 8, 2003, reporting certain environmental matter developments involving our facility in Neenah, Wisconsin, filedthe appointment John C. van Roden, Jr. as Chief Financial Officer, pursuant to Item 5. ii. Form 8-K dated asApril 22, 2003, to report the issuance of January 16,the Company's earnings press release for the three months ended March 31, 2003, reporting the retirement, effective June 30, 2003, of Robert P. Newcomer, President and Chief Operating Officer, filed pursuant to Item 5. iii. Form 8-K dated as of March 21, 2003, reporting the completion of the Company's previously announced agreement to sell approximately 25,500 acres of land, filed pursuant to Item 5. -28- GLATFELTER 9. SIGNATURES 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. Date: MayAugust 13, 2003 By: /s/ John C. van Roden, Jr. ------------------------------------------------------------- John C. van Roden, Jr. Senior Vice President and Chief Financial Officer -29- GLATFELTER CERTIFICATION PURSUANT TO SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002 I, George H. Glatfelter II, Chief Executive Officer of P. H. Glatfelter Company, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 2003 of P. H. Glatfelter Company; 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of Glatfelter as of, and for the periods presented in this Quarterly Report; 4. Glatfelter's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Glatfelter and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to Glatfelter, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; (b) evaluated the effectiveness of Glatfelter's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and (c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Glatfelter's other certifying officer and I have disclosed, based on our most recent evaluation, to Glatfelter's auditors and the audit committee of the board of directors: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect Glatfelter's ability to record, process, summarize and report financial data and have identified for Glatfelter's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in Glatfelter's internal controls; and 6. Glatfelter's other certifying officer and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 By: /s/ George H. Glatfelter II ---------------------------------- George H. Glatfelter II Chief Executive Officer -30- GLATFELTER CERTIFICATION PURSUANT TO SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002 I, John C. van Roden, Jr., Senior Vice President and Chief Financial Officer of P. H. Glatfelter Company, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 2003 of P. H. Glatfelter Company; 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of Glatfelter as of, and for the periods presented in this Quarterly Report; 4. Glatfelter's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Glatfelter and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to Glatfelter, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; (b) evaluated the effectiveness of Glatfelter's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and (c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Glatfelter's other certifying officer and I have disclosed, based on our most recent evaluation, to Glatfelter's auditors and the audit committee of the board of directors: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect Glatfelter's ability to record, process, summarize and report financial data and have identified for Glatfelter's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in Glatfelter's internal controls; and 6. Glatfelter's other certifying officer and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 By: /s/ John C. van Roden, Jr. ---------------------------------- John C. van Roden, Jr. Senior Vice President and Chief Financial Officer -31- GLATFELTER-34- EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - -------------- ------------------ -------------------------------------------------------------- 10.1 Form of Change in Control Employment agreementAgreement by and between the RegistrantP. H. Glatfelter Company and John C. van Roden, Jr., Chief Financial Officer. 10.2 Severance agreementcertain employees, along with a Schedule of Change in Control Employment Agreements by and between the RegistrantP. H. Glatfelter Company and Robert C. Newcomer, President and Chief Operating Officer (exhibits omitted). 10.3 Term Loan Agreement, datedsuch employees which have not been filed as exhibits to this Form 10-Q. (A) Schedule of March 21, 2003, among GPW Timberlands, LLC, (a wholly owned subsidiary of the Registrant) and Suntrust Bank, as Administrative Agent.Change in Control Employment Agreements, filed herewith. 15 Letter in lieu of consent regarding review report of unaudited interim financial information. 99.131.1 Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 - Chief Executive Officer. 31.2 Certification of John C. van Roden, Jr., Senior Vice President and Chief Financial Officer, of Glatfelter, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer 32.1 Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 18 U.S.C. Section 1350 - Chief Executive Officer. 99.232.2 Certification of John C. van Roden, Jr., Senior Vice President and Chief Financial Officer, of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 - Chief Financial Officer.Officer
32-35-