I N T E R N AT I O N A L
O P E R AT I N G
LO C AT I O N S
Gernsbach Facility
Hördner Landstraße 3-7
76593 Gernsbach, Germany
ph: 49-7224-66-0
fax: 49-7224-66-274
Scaër Facility
BP 2
29390 Scaër, France
ph: 33-0-2-98-66-42-00
fax: 33-2-98-59-0998
Lanao del Norte Facility
Bo. Maria Cristina
9217 Balo-I, Lanao del Norte
Philippines
ph: 632-893-7640
fax: 632-893-2819
OT H E R LO C AT I O N S
China Representative Office
Century Financial Tower, 8F808
No 1 Suhua Road
Suzhou-SIP, Jiangsu 215021
ph: 86-512-676-25077
fax: 86-512-676-25070
S A L E S O F F I C E S
Pennsylvania
228 South Main Street
Spring Grove, PA 17362
ph: 717-225-4711
fax: 717-225-5400
New Jersey
1085 Morris Avenue, 2nd Floor
Union, NJ 07083
ph: 908-289-6644
ph: 212-752-3560
fax: 908-289-1393
Wisconsin
225 W. Wisconsin Avenue
Neenah, WI 54956
ph: 920-727-2200
fax: 920-727-2305
North Carolina
One King Road
Pisgah Forest, NC 28768
ph: 828-877-2110
fax: 828-877-4086
Gernsbach, Germany
Hördner Landstraße 3-7
76593 Gernsbach, Germany
ph: 49-7224-66-0
fax: 49-7224-66-274
U . S . O P E R AT I N G
LO C AT I O N S
Spring Grove Facility
228 South Main Street
Spring Grove, PA 17362
ph: 717-225-4711
fax: 717-225-6834
Neenah Facility
225 W. Wisconsin Avenue
Neenah, WI 54956
ph: 920-727-2200
fax: 920-727-2600
Glatfelter
Pulp Wood Company
228 South Main Street
Spring Grove, PA 17362
ph: 717-225-4711
fax: 717-225-2850
2004 ANNUAL REPORT
annual_report_2004_d.indd 1-2
3/23/05 9:38:02 AM
©2005 Glatfelter
O U R B U S I N E S S
Headquartered in York, Pennsylvania, Glatfelter is a global
manufacturer of specialty papers and engineered products.
U.S. operations include facilities in Spring Grove, Pennsylvania,
and Neenah, Wisconsin. International operations include
facilities in Germany, France and the Philippines.
Our products are marketed worldwide either through wholesale
paper merchants, brokers and agents, or direct to customers.
The company’s common stock is traded on the New York Stock
Exchange under the symbol GLT.
L o n g F i b e r & O v e r l a y P a p e r s
Fo o d a n d B e v e r a g e
• Tea bag papers
• Coffee pods/pads and filters
• Food casing papers
C o m p o s i t e L a m i n a t e s
• Laminate counter tops
• Laminate furniture
• Laminate flooring
Te c h n i c a l S p e c i a l t i e s
• Stencil papers
• Wet wipe tissues
• Adhesive tapes
• Battery pasting papers
• Cryogenics
• Vacuum bags
• Specialty non-wovens
M e t a l l i z e d P r o d u c t s
• Holographic labels & wrap
• Glue-applied beverage labels
• Gift wrap
S p e c i a l t y P a p e r s
D i g i t a l I m a g i n g
• Point of purchase displays
• Photo reproductions
• Posters/Banners
• Boarding passes
• Concert tickets
• Engineered drawings
• Apparel tags
C a s t i n g a n d S p e c i a l t y R e l e a s e
• Reflective signage
• Fleet graphics
• Simulated leather
• Iron-on transfers
• Vinyl films & foams
• Gasketing
• Adhesive tape
P r e s s u r e S e n s i t i v e
• Postage stamps
• Stamp liners
• Peel & stick labels
I n d u s t r i a l S p e c i a l t i e s
• Disposable surgical gowns & wipes
• Fluorescent board & tabs
• Playing cards
• Greeting cards
B o o k P u b l i s h i n g P r o d u c t s
• Trade books
Best sellers
Book clubs
Business and professional
• Textbooks
Elementary to high school & college
Computer software instruction books
• Ancillary materials
Student workbooks
Teacher’s guides
C o n v e r t i n g P a p e r s
• Envelopes
• High-end retail shopping bags
• Drawing & art papers
• China markers
L i g h t w e i g h t P r i n t i n g P a p e r s
• Financial publications
• Pharmaceutical inserts
• Legal publications
annual_report_2004_d.indd 6
3/23/05 12:42:16 PM
L E T T E R T O O U R
S H A R E H O L D E R S
George H. Glatfelter II
Chairman and
Chief Executive Officer
D e a r F e l l o w S h a r e h o l d e r,
There is one word that best describes our performance in 2004:
Turnaround.
As the year commenced, we got off to a slow start as the
industry was battered by unfavorable market conditions.
But during the second quarter, we gained momentum that
accelerated throughout the year. To be sure, Glatfelter benefited
from economic conditions that brightened in the second half.
However, the story of this Company in 2004 had far less to do
with a cyclical upswing in the paper industry than with the
resolve of Glatfelter employees to “look through” the cycle and
address a number of foundational issues that had challenged
our business for some time.
To understand our commitment to focused strategic change, I
will reference my closing comments in last year’s Annual Report:
“I don’t know what 2004 has in store for our company, but I
can assure you that we will be doing business differently. Our
employees and I realize that we cannot simply brush off the
2003 performance of this company with excuses about our
business environment. We need to generate financial results
that justify the confidence that you have placed in us. This is
what we intend to do.”
Good companies do what they say. It’s called execution. In the
paragraphs that follow, I will revisit the pledges we made in
our 2003 Annual Report and you can judge our performance
accordingly.
“ We i n t e n d t o c h a n g e t h e w a y
t h e b u s i n e s s o p e r a t e s i n o r d e r t o
a c h i e v e s u b s t a n t i a l , s u s t a i n a b l e
i m p r o v e m e n t s i n p r o f i t a b i l i t y. ”
We recognized the competitive challenges of today’s global
business environment and we confronted them head on. We
condensed the energies of the entire organization into two
“Focus Points” for 2004-05: (1) the restructuring of our North
American operations, and (2) revenue growth from our Long
Fiber and Overlay business. These two goals mattered most in
2004; and they will continue to be critical to our performance
in 2005.
In North America, we took a critical look at the contributions of
our asset base. As a result, we initiated a plan to generate $8
million of financial improvements from our Neenah, Wisconsin,
facility. This plan involved the closure of non-core assets and the
reduction of nearly 50% of the workforce.
We coupled this effort with a sweeping and innovative
restructuring project at our Spring Grove, Pennsylvania, facility
and a focus on growing in our higher-value, niche markets in
North America. This was designed to generate $15 million to
$20 million in annual financial improvements beginning in
2006. Using an Interest-Based Bargaining process, local union
leadership and P.A.C.E. International worked creatively with
management to find ways to achieve our targets. We embraced
collaboration instead of confrontation, and started with a “clean
sheet” approach to redesign job responsibilities across the
facility. Some positions were eliminated. Some were combined.
Jobs that were not critical to operations were outsourced.
Work rules were redesigned. And an early retirement plan was
developed to aid in workforce transition. The organizational
redesign effort led to a 20% reduction in the mill’s hourly
workforce without any decline in production volume or quality.
The changes were incorporated in a new collective bargaining
agreement ratified by 85% of the voting membership. In
addition, we eliminated approximately 25 salaried positions
at the facility. Collectively, the Neenah and Spring Grove
reductions have reduced our North American workforce by 27%
since 2003.
We also took a hard look at our overhead (SG&A) in the North
American-based operations and cut it by $2.0 million in 2004.
More reductions are expected in 2005.
These were tough decisions that we executed well. We are
serious about cost control. As 2005 begins, we are ahead of
schedule in meeting our North American restructuring targets.
Meaningful financial benefits are beginning to accrue and
should be fully realized in 2006.
2
annual_report_2004_d.indd 7
3/23/05 12:42:16 PM
In Europe, we combined cost reduction efforts with an
aggressive plan to grow revenue in the Company’s Long
Fiber and Overlay Papers markets. The objective: leverage
new technology at our Gernsbach, Germany facility to grow
volumes of tea and coffee filter paper and overlay papers for
the decorative laminate industry. Marketing alliances were
established to serve high-growth specialty paper opportunities,
and the opening of a Chinese office expanded our presence in
the booming Asian market.
These initiatives are generating results. In 2004, revenue from
the Long Fiber and Overlay Business Unit grew by 24%, and we
remain optimistic about the growth characteristics of these
markets.
Finally, to more effectively manage our North American business,
we combined the Printing and Converting and Engineered
Products business units into a new Specialty Papers Business
Unit. This combination allows us to more effectively manage
the demand planning process, optimize product mix, minimize
process variability and meet the demands of our customers
“ We w i l l c o n c e n t r a t e a g r e a t d e a l
o f a t t e n t i o n o n o u r c o r e P r i n t i n g a n d
C o n v e r t i n g B u s i n e s s , s p e c i f i c a l l y o u r
b o o k p u b l i s h i n g b u s i n e s s . ”
Book Publishing is the largest product line of our Specialty Papers
Business Unit. Its performance is critical to the success of the
Company. In 2003, commodity producers dragged down the
market by offering lower quality papers at reduced prices. We lost
market share. We confronted the situation in 2004 by listening
closely to our customers. In March, I visited with many of our key
publishers to learn first hand about their expectations of Glatfelter
as a top-tier supplier. We responded quickly. In June, we launched
“Performance Plus,” a program designed to streamline product
offerings, improve product quality, reduce costs, and provide the
best service in the business.
This initiative enhanced margins by improving operating
efficiencies and eliminating low-value, commodity grades of
book paper from our product mix. Additionally, we have recently
recouped market share and are reaffirming our position as the
clear supplier of choice. We intend to aggressively defend our
leadership position in this market against all competitors.
“ O u r V i s i o n i s t o b e c o m e t h e g l o b a l
s u p p l i e r o f c h o i c e i n S p e c i a l t y P a p e r s
a n d E n g i n e e r e d P r o d u c t s . ”
Our employees will tell you that I begin each group meeting
by reviewing our Vision. Some may find that practice amusing.
I don’t. The Vision defines the journey we have chosen to
differentiate our Company from others, deliver value to
shareholders, and achieve security for employees. It is that
important!
In 2004, we supported our Vision by continuing to challenge
the organization’s creativity and innovation. And employees
responded with results. Approximately 60% of our sales came
from products developed in the last five years.
Furthermore, we supported the Vision by adopting new business
processes that have enhanced the capabilities of the enterprise.
We instituted an integrated supply chain management approach
that has reduced our procurement and logistics costs by $1.6
million, and generated manufacturing efficiencies throughout
North American operations.
We also introduced a comprehensive Sales and Operations
Planning Process (S&OP) in North America. This process, along
with the establishment of our Specialty Papers business unit, will
enable more efficient scheduling, stronger inventory control, and
most importantly, improved demand planning to better forecast
and manage variations in order volume. S&OP has supported
our drive to a higher value product mix and higher margins. It
will also leverage our Enterprise Resource Planning System
investment in SAP™ that was successfully instituted in 2002. We
intend to adopt S&OP process improvements in our European
facilities during 2005.
“ We a r e c o m m i t t e d t o i n c r e a s i n g
o u r i n c o m e a n d s h a r e h o l d e r v a l u e . ”
Last year, I pledged that we would make fundamental changes
in our business to improve financial results. We have. Highlights
from 2004 include:
• Operating income, excluding nonrecurring items, increased
$1.7 million to $33.1 million.
• Earnings, excluding nonrecurring items, grew from $0.25
per share to $0.30 per share.
• Generated $57.9 million in pre-tax gains from the
divestiture of non-strategic timberlands and the
Company airplane.
• Successfully completed a secondary offering on behalf of
our major shareholders that increased our public float by 27%.
• Net debt was reduced by $67 million.
• Net debt-to-capital improved to 28.9% from 39.1%.
annual_report_2004_d.indd 8
3/23/05 12:42:17 PM
These financial results punctuated the strength of our
turnaround. They helped support an upward movement in our
share price and built a stronger balance sheet. We intend to do
better in 2005. And we will.
In summary, Glatfelter’s 2004 performance was characterized by
strong execution on the part of everyone in the organization.
That’s a good thing, because the global paper industry remains
a difficult place these days. Glatfelter employees recognize
that simply riding the cycles through good and bad markets
won’t create sustainable value. We continually challenge
ourselves to look through the cycles, eschewing incremental
advances for bold thinking that generates material, step-change
improvement.
F o c u s e d E x e c u t i o n D r i v e s O p t i m i s m
i n 2 0 0 5
Looking ahead, we are modestly optimistic about the prospects
for the coming year. We continue to track favorably against our
2004-05 Focus Point objectives. The improvements made in
our business processes over the past year have energized and
empowered our organization.
Yet challenges remain. Our industry continues to confront
structural issues that will ultimately define its future. I am
particularly concerned about the rapidly rising costs of raw
materials, energy, and healthcare in the United States. It also is
clear we must improve the financial performance of the Neenah
facility. This effort will hinge upon the success of a workforce
redesign project similar to the one implemented at Spring
Grove in 2004.
Our European facilities must control rising costs as well. The
impact of a historically strong Euro will make products exported
from Europe less competitive in some international markets.
Our success will continue to result from a clear focus and strong
execution. We intend to target the three key issues that matter
most, execute them well and deploy our resources to generate
breakthrough improvement. Pursuing these strategies in
2005 will further strengthen our Company and drive value to
shareholders:
First, we must continue to execute our 2004-05 Focus Points.
That means achieving our revenue growth projections for
our Long Fiber and Overlay Papers business in Europe and
improving the profitability of our North American operations.
Second, we must drive revenue growth in high-value,
defensible niche markets.
Growth is an essential component of our Vision. Our goal is to
generate 80% of our revenue from higher-value, niche products
by 2006. That’s up from 73% today. These products will play
a key role in generating organic growth. We are continually
enhancing our product offerings through significant investment
in product development activities, including product
customizations developed in collaboration with our customers.
As a result more and more customers are turning to Glatfelter as
their supplier of choice.
Finally, improve operating income and free cash flow.
Financial strength is of primary importance to all Glatfelter
stakeholders. We have come through a difficult time and
emerged a much stronger enterprise. At the end of 2003
our earnings were declining. Today they are improving. Free
cash flow was negative. Now, it is positive. Our net debt had
increased by $46 million. We lowered it by $67 million. Yes,
we’ve made solid progress in 2004, but plenty of opportunity
remains. Our turnaround has generated cost structure and
business process improvements that will favorably impact
earnings in the years ahead.
Before I close, I would like to recognize the long and
distinguished service of M. A. “Jake” Johnson II, who is retiring
from our Board of Directors after 35 years of service. I am very
grateful for the wise counsel and positive contributions Jake
rendered to the Board on behalf of our shareholders. I have
known Jake my entire career and can personally attest to the
significant value he has brought to our Company.
I will close by thanking our shareholders for your continuing
support and by offering a special welcome to the many
new shareholders who participated in the 2004 secondary
offering. I ask you to reflect upon our Vision and Core Values.
We own a rich 140-year heritage that gives us strength to face
the future. For the past five years we have transformed our
enterprise from an old-line paper company to a strong global
competitor uniquely positioned around higher-value, niche
products. It has been a tough, yet very rewarding ride. And we
are beginning to see the benefits. This is a result of Glatfelter
people demonstrating innovative thinking, strong resolve, and
the ability to focus on the few things that matter most. We
have executed a successful turnaround and are committed to
creating new opportunities to build shareholder value.
George H. Glatfelter II
Chairman and
Chief Executive Officer
March 24, 2005
annual_report_2004_d.indd 5
3/23/05 12:42:15 PM
E X E C U T I V E O F F I C E R S
George H. Glatfelter II
Chairman and
Chief Executive Officer
Dante C. Parrini
Executive Vice President and
Chief Operating Officer
John C. van Roden, Jr.
Executive Vice President and
Chief Financial Officer
John P. Jacunski
Vice President and
Corporate Controller
Werner A. Ruckenbrod
Vice President
Long Fiber & Overlay Papers
Mark A. Sullivan
Vice President
Global Supply Chain
D i r e c t o r s
Kathleen A. Dahlberg
Founder and President/CEO
Open Vision Partners
Nicholas DeBenedictis
Chairman and Chief Executive Officer
Aqua America Corporation
George H. Glatfelter II
Chairman and Chief Executive Officer
J. Robert Hall
Chief Executive Officer
Ardale Enterprises, LLC
Richard C. Ill
President and Chief Executive Officer
Triumph Group, Inc.
M. Alanson Johnson II
Retired Executive Vice President,
Treasurer and Chief Financial Officer, Glatfelter
Ronald J. Naples
Chairman and Chief Executive Officer
Quaker Chemical Corporation
Richard L. Smoot
Retired Regional Chairman
PNC Bank, NA
Philadelphia/South Jersey Markets
Lee C. Stewart
Investment Banker
Daniel Stewart & Company
I N F O R M AT I O N
World Headquarters
P. H. Glatfelter Company
96 S. George Street
Suite 500
York, PA 17401
ph: 717-225-4711
fax: 717-846-7208
www.glatfelter.com
Stock Exchange
New York Stock Exchange
Stock Symbol
GLT
Annual Meeting
The Annual Meeting of
Shareholders will be held on
April 27, 2005, at 10:00 a.m. Eastern
Time, at the York Expo Center,
334 Carlisle Ave., York, Pa.
Transfer Agent, Dividend
Disbursing Agent and Registrar
Mellon Investor Services, LLC
85 Challenger Road
Ridgefield Park, NJ 07660
800-756-3353
Information Sources:
For the latest quarterly
business results or other
information requests, you
may write or call Investor
Relations at the headquarters
address and phone number,
write to ir@glatfelter.com or
visit the worldwide Web site at
www.glatfelter.com.
O U R CO R E VA LU E S
I n t e g r i t y
C u s t o m e r F o c u s
We are ethical and responsible in all of our business
endeavors, all the time.
F i n a n c i a l D i s c i p l i n e
We are responsible for the prudent management of the
resources entrusted to us and for the generation of financial
value for all constituents.
R e s p e c t f o r C o - w o r k e r s
We treat each other with honesty and respect. We recognize
that what we have and what we will achieve is through the
efforts of our employees. We will strive to provide them with
rewarding challenges and opportunities for advancement.
We are dedicated to understanding and anticipating the needs
of our customers and helping them to achieve their business
objectives.
E n v i r o n m e n t a l R e s p o n s i b i l i t y
We recognize that our business impacts the environment. We
are committed to continuous environmental improvement
and the prevention of pollution. We will be in compliance with
all environmental laws and regulations.
S o c i a l R e s p o n s i b i l i t y
We recognize our responsibility to contribute to the betterment
of the communities in which we operate and the world in which
we live.
annual_report_2004_d.indd 3-4
3/23/05 9:38:02 AM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
[X]
Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2004
or
[ ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-3560
P. H. Glatfelter Company
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of
incorporation or organization)
96 South George Street, Suite 500
York, Pennsylvania 17401
(Address of principal executive offices)
23-0628360
(IRS Employer Identification No.)
(717) 225-4711
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common Stock, par value $.01 per share
Name of Exchange on which registered
New York Stock Exchange
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 √ No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the filer is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes √ No .
Based on the closing price as of June 30, 2004, the aggregate market value of Common Stock of the Registrant
held by non-affiliates was $538.1 million.
Common Stock outstanding on March 2, 2005 totaled 43,965,207 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this Annual Report on Form 10-K/A: Proxy
Statement to be dated on or about March 30, 2005 (Part III).
P. H. GLATFELTER COMPANY
ANNUAL REPORT ON FORM 10-K/A
Amendment No. 1
for the Year Ended
DECEMBER 31, 2004
Table of Contents
Business
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Executive Officers
Market for the Registrant's Common Stock and
Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Quantitative and Qualitative Disclosures about
Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions
Principal Accountant Fees and Services
PART I
Item 1
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Exhibits, Financial Statement Schedules
SIGNATURES
CERTIFICATIONS
SCHEDULE II
Page
1
6
6
7
7
8
8
9
19
20
47
47
47
47
47
47
47
47
48
51
52
54
Explanatory Note
This Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004 is being filed for the
purposes of including as exhibits to the Annual Report an employment agreement and related ancillary agreements which were
not available at the time of filing, correcting a typographical error in “Total liabilities and shareholders’ equity” on the
consolidated balance sheet, and correcting the presentation of amounts set forth in Note 21 – “Quarterly Results (Unaudited)” of
the Notes to Consolidated Financial Statements to eliminate certain unnecessary information that included a typographical error.
PART I
This Amendment No. 1 to our 2004 Annual Report on
Form 10-K/A and documents incorporated herein by
reference contain forward-looking statements based on
expectations, estimates, and projections as of the date of
this filing. Actual results may differ materially from those
expressed in such forward-looking statements. See Item 7.
— “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Forward-Looking
Statements”.
ITEM 1.
BUSINESS
Overview Glatfelter began operations in 1864 and
today we believe we are one of the world’s leading
manufacturers of specialty papers and engineered
products. Headquartered in York, Pennsylvania, we own
and operate paper mills
in Spring Grove,
Pennsylvania, Neenah, Wisconsin, Gernsbach, Germany
and Scaër, France, as well as an abaca pulp mill in the
Philippines. Our common stock is listed on the New York
Stock Exchange under the symbol “GLT”. As used
herein, “Glatfelter,” “we,” “our” and similar terms include
P. H. Glatfelter Company and its subsidiaries unless the
context indicates otherwise.
located
We serve customers in numerous markets, including
book publishing, envelope & converting, food and
beverage, pressure-sensitive, digital imaging, composite
laminates, and other highly technical niche markets.
Many of
in which we operate are
characterized by higher-value-added products and, in
some cases, by higher growth prospects and lower
cyclicality than commodity paper markets. Examples of
some of our key product offerings include papers for:
the markets
(cid:127) Tea bags and coffee filters;
(cid:127) Trade book publishing;
Specialized envelopes;
(cid:127)
Playing cards;
(cid:127)
(cid:127)
Pressure-sensitive postage stamps;
(cid:127) Metallized labels for beer bottles; and
(cid:127) Digital imaging applications.
We market our products worldwide both through
wholesale paper merchants, brokers and agents and
directly to our customers.
Our Business Units During the year, we changed
the way we manage our business and transitioned from
three distinct business units to two: the Europe-based
Long Fiber & Overlay Papers business unit and the North
America-based Specialty Papers business unit. While the
Long Fiber & Overlay Papers business unit remains
unchanged, the formation of the Specialty Papers business
unit, which consists of the former Engineered Products
and the Printing & Converting Papers business units,
allows us to more effectively manage the demand
planning process, optimize product mix, minimize process
variability and meet the demands of our customers. As a
result of this transition, all segment data has been restated
to give effect to our new management structure. The
following table summarizes consolidated net sales and the
relative net sales contribution of each of our business
units for the past three fiscal years:
Dollars in thousands
Net sales
2004
$543,524
2003
$533,193
2002
$540,347
Business unit composition
Specialty Papers
Long Fiber & Overlay Papers
Tobacco (1)
Total
(1) As of July 2004, we no longer produce products for the
62.1%
37.8
0.1
100.0%
67.2%
31.0
1.8
100.0%
71.2%
25.1
3.7
100.0%
Tobacco industry.
Net tons sold by each business unit for the past three
years were as follows:
Specialty Papers
Long Fiber & Overlay Papers
Tobacco
Total
2004
421,504
48,528
390
470,422
2003
446,110
42,993
6,463
495,566
2002
474,343
40,751
13,109
528,203
North
Specialty Papers Our
America-based
Specialty Papers business unit focuses on papers for the
production of high-quality hardbound books and other
book publishing needs, envelope & converting industries
and highly technical customized products for the digital
imaging, casting and release, pressure sensitive, and
several niche technical specialty markets.
Total book publishing papers represented 41.8%,
47.4%, and 53.6% of this business unit’s revenue in the
years ended 2004, 2003 and 2002, respectively. We
believe we are the leading supplier of book publishing
papers in the United States. Specialty Papers also
produces paper
into specialized
envelopes in a wide array of colors, finishes and
capabilities. Net sales of envelope & converting papers
represented 24.2%, 20.6% and 19.1% of this business
unit’s net sales in the years ended 2004, 2003 and 2002,
respectively. The book publishing and envelope &
converting papers markets are generally more mature and,
is converted
that
-1 -
GLATFELTER
therefore, have modest growth characteristics.
Item 7 – Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
from of
Specialty Papers’ highly technical engineered paper
products include those designed for multiple end uses,
such as papers for pressure-sensitive postage stamps,
disposable medical garments, playing cards and digital
technical
imaging applications. Revenue
engineered products represented 32.5%, 30.1% and 26.7%
of this business unit’s net sales in the years ended 2004,
2003 and 2002, respectively. Such products comprise an
array of distinct business niches that are in a continuous
state of evolution. These include digital imaging, casting
and specialty release, pressure-sensitive, and industrial
in
specialty. Many of
end-user
demanding,
applications and, therefore, command higher per ton
values and generally exhibit greater pricing stability
relative to commodity grade paper products. Some of our
products are new and high growth while others are more
mature and further along on the development curve.
Because many of these products are technically complex
and involve substantial customer-supplier development
collaboration, product pricing has remained relatively
stable.
these products are utilized
specialized
customer
and
Long
Long Fiber & Overlay Papers
Fiber &
Overlay Papers, based in Gernsbach, Germany, focuses
on higher-value-added products, such as paper for tea
bags and coffee pods/pads and filters, decorative
laminates used for furniture and flooring, and metallized
products used in the labeling of beer bottles. Long fiber
papers, which is the generic term we use to describe
products made from abaca pulp (primarily tea bag and
coffee filter papers), accounted for approximately 52.3%,
58.5% and 56.3% of this business unit’s net sales in the
years ended 2004, 2003 and 2002, respectively. This
focus on long fiber papers has made us one of the world’s
largest producers of tea bag papers. The balance of this
unit’s sales are comprised of overlay and technical
specialty products, which include flooring and furniture
overlay papers, metallized products, and papers for
adhesive tapes, vacuum bags, holographic labels and gift
wrap. Many long fiber and overlay papers are technically
sophisticated. We believe we are well positioned to
produce these extremely lightweight papers because we
understand their complexities, which require the use of
highly specialized
fiber and specifically designed
papermaking equipment.
Our Competitive Strengths Since
commencing
operations over 140 years ago, we believe that Glatfelter
has developed
leading
manufacturers of specialty papers and engineered
products. We believe that the following competitive
strengths have contributed to our success:
into one of
the world’s
(cid:127)
Leading market positions in higher-value, niche
segments. We have focused our resources to achieve
market-leading positions in certain higher-value, niche
segments. Our products include various highly specialized
paper products designed for technically demanding end
uses. Consequently, many of our products achieve
premium pricing relative to that of commodity paper
grades. In 2004, approximately 73% of our sales were
derived from these higher-value, niche products. The
specialized nature of these products generally provides
greater pricing stability relative to commodity paper
products.
(cid:127)
Customer-centric business focus. We offer a
unique and diverse product line that can be customized to
serve the individual needs of our customers. Our size
allows us to develop close relationships with our key
in our product
to be adaptable
customers and
development, manufacturing,
sales and marketing
practices. We believe that this approach has led to the
development of
relationships,
defensible market positions, and
increased pricing
to commodity paper producers.
stability
Additionally, our customer-centric focus has been a key
driver to our success in new product development.
customer
excellent
relative
(cid:127)
Significant investment in product development.
In order to keep up with our customers’ ever-changing
needs, we continually enhance our product offerings
through significant investment in product development. In
each of the past three years, we invested approximately $5
million in product development activities. We derive a
significant portion of our
from products
developed, enhanced or improved as a result of these
activities. Revenue generated from products developed,
enhanced or improved within the five previous years as a
result of these activities represented approximately 60%,
47% and 37% of net sales in the years ended 2004, 2003
and 2002, respectively.
revenue
Other
In August 2001, we completed the divestiture
of our Ecusta Division, a supplier of paper primarily to
the tobacco and financial printing industries. Until July
2004, we supplied tobacco papers to fulfill our obligations
under a supply agreement entered into in connection with
the divestiture. We no longer manufacture or sell tobacco
paper products.
Additional financial information for each of our
business units during the past three years is included in
(cid:127)
Integrated production. As a partially integrated
producer, we are able to mitigate changes in the costs of
certain raw materials and energy. Our Spring Grove mill
is a vertically integrated operation producing in excess of
85% of the annual pulp required for its paper production.
The principal raw material used to produce this pulp is
pulpwood, consisting of both hardwoods and softwoods.
We own approximately 84,000 acres of timberlands and
obtain approximately 25% of our pulpwood requirements
- 2 -
GLATFELTER
for our Spring Grove facility from Company-owned
timberlands, which helps stabilize our fiber costs in a
highly fragmented market. Our Spring Grove facility also
generates 100% of the steam and electricity required for
its operations. In addition, our Philippine mill processes
abaca fiber to produce abaca pulp, which is a key raw
material used by our Long Fiber & Overlay business unit
in Gernsbach and Scaër.
Our Business Strategy Our vision is to become
the global supplier of choice in specialty papers and
engineered products. We are continuously developing and
refining strategies to strengthen our business and position
it for the future. Execution of these strategies is intended
to capitalize on our strengths in customer relationships,
technology, and people, as well as our leadership
positions in certain markets. In recent years, our industry
has been challenged by a supply and demand imbalance,
particularly
for commodity-like products. To be
successful in the current market environment, our strategy
is focused on aggressively reducing costs and continually
repositioning our product portfolio to increase our focus
on higher-value, niche products and to better align our
product offerings with our customers’ ever-changing
needs. Certain key elements of our business strategy are
outlined below:
returns
through
leadership positions
Reposition our product portfolio. By leveraging
(cid:127)
our
in several specialty niche
markets, we plan to accelerate growth, improve margins
and generate better
the
financial
optimization of our product portfolio.
In 2004,
approximately 73% of our total sales were derived from
what we consider to be higher-value, niche products. Over
time, we plan to increase our concentration on such
products by driving growth in our sales of trade book
papers, uncoated specialty products, long fiber and
overlay products, and other specialty products. We
believe that this strategy will realign our business more
closely with our customers’ needs and further reduce our
exposure to the higher level of cyclicality experienced in
commodity paper grades.
(cid:127)
Execute Long Fiber & Overlay Papers growth
plan. A core component of our long-term strategy is to
drive growth in our Long Fiber & Overlay Papers
business unit. Currently, we are one of the leading
producers of tea bag and coffee pod/pad papers in the
world, and we believe that this segment has promising
growth characteristics as certain markets move toward tea
bags versus loose tea leaves. We believe that we are well
positioned to capitalize on this growth by leveraging our
strong customer relationships and market-leading position
in this segment. In addition, our rebuilt paper machine in
Gernsbach will allow us to penetrate certain technical
specialty markets,
the wall coverings,
textile/apparel and industrial markets.
including
(cid:127)
Employ low cost approach to specialty product
manufacturing. While we are focused on higher-value,
niche products, we seek to employ a commodity-like,
low-cost approach to our manufacturing activities. In
2004, we initiated the North American Restructuring
Program that is designed to improve operating results by,
among other factors, improving workforce efficiencies
and implementing improved supply chain management
processes. A major component of
the workforce
efficiencies
from an approximately 20%
workforce reduction agreed to by our union members at
our Spring Grove facility. The financial benefits from
these efforts began to phase-in during the third quarter of
2004, and are expected to approximate $15 million to $20
million annually, beginning in 2006. During 2005, the
financial benefits are expected to increase throughout
much of the year aggregating an amount under the low
end of the range of ultimate benefits.
resulted
(cid:127) Maintain a strong balance sheet and preserve
financial flexibility. We are focused on prudent financial
management and the maintenance of a conservative
capital structure. Concurrent with the announcement of
certain restructuring initiatives in 2003, we reduced our
dividend in order to conserve approximately $15 million
in annual cash flow to retain financial flexibility and
strengthen our balance sheet. Furthermore, we are
committed to maintaining a strong balance sheet and our
flexibility to pursue strategic opportunities that will
benefit our
this
commitment in 2004, during which we reduced net debt
by approximately $67 million.
shareholders. We demonstrated
Raw Material and Energy The
table
provides an overview of the estimated amount of principal
raw materials (“PRM”) to be used by each of our
manufacturing facilities on an annual basis:
following
Domestic
Spring Grove
Pulpwood
Wood- and other pulps
Neenah
Wood- and other pulps
Pulp substitutes
International
Gernsbach
Wood- and other pulps
Abaca pulp
Synthetic fiber
Scaër
Wood pulp
Abaca pulp
Synthetic fiber
Philippines
Abaca fiber
Estimated
Annual
Quantity
(short tons)
Percent of
PRM
Purchased
1,006,000
37,000
75%
100
70,000
41,000
32,900
8,450
2,000
1,450
2,670
1,200
17,980
100
100
100
–
100
100
–
100
100
- 3 -
GLATFELTER
Our Spring Grove mill is a vertically integrated
operation producing in excess of 85% of the annual pulp
required for paper production. The principal raw material
used to produce this pulp is pulpwood, of which both
hardwoods and softwoods are used. At December 31,
2004, we owned approximately 84,000 acres of
woodlands. In addition to this source of pulpwood, we are
committed, under a Supply Agreement expiring in 2011,
to buy at market prices a minimum annual amount of pine
pulpwood averaging 34,425 tons per annum over the
eight-year
the agreement. The pulpwood
purchased under this agreement is to be harvested from
land we sold in March 2003.
term of
In addition to these sources, hardwoods are available
within a relatively short distance of our Spring Grove
mill. Softwoods are obtained primarily from Maryland,
Delaware and Virginia. To protect our sources of
pulpwood, we actively promote conservation and forest
management among suppliers and woodland owners.
Our Spring Grove, Pennsylvania facility generates
100% of the steam and electricity required for its
operations. Principal fuel sources used by the Spring
Grove facility are coal, recycled pulping chemicals, bark
and wood waste, and oil. This facility also produces
excess electricity that is sold to the local power company
under a long-term co-generation contract expiring in
2010. Net energy sales were $10.0 million in both 2004
and 2003, and $9.8 million in 2002.
Until
the fourth quarter of 2003, our Neenah,
Wisconsin facility recycled high-grade wastepaper as its
primary raw material. Since
the
restructuring at the Neenah facility, the pulp requirements
for this facility are fulfilled with purchased pulp and pulp
substitutes.
initiation of
the
The Neenah facility purchases steam under a twenty-
year contract, expiring in 2018, from a third party steam
supplier which processes sludge from the Neenah facility
and from other mills in the Neenah area. Steam acquired
under the contract is based on the cost of coal. The
Neenah facility generates approximately 15% of its
required electrical power and purchases the remainder.
Our Philippine mill processes abaca fiber to produce
abaca pulp. This abaca pulp production provides a unique
advantage by supplying a key raw material used by our
Long Fiber & Overlay business unit in Gernsbach and
Scaër. Events may arise from the relatively unstable
political and economic environment
the
Philippine facility operates that could interrupt the
production of abaca pulp. Management periodically
evaluates the supply chain, including the supply of abaca
pulp to our Gernsbach and Scaër facilities. Any extended
interruption of the Philippine operation could have a
material impact on our consolidated financial position
in which
and/or results of operations. We have approximately three
months of abaca pulp supply available to us. In addition,
we have established contingency plans for alternative
sources of abaca pulp. However, the cost of obtaining
abaca pulp from such alternative sources would likely be
higher.
The Gernsbach and Scaër facilities both generate all of
the steam required for their operations. The Gernsbach
facility generated approximately 30% of
its 2004
electricity needs and purchased the balance. The Scaër
its 2004 electric power
facility purchased all of
to produce
requirements. Natural gas was used
the
substantially all
in
Gernsbach’s
September 2004, the Scaër facility switched from fuel oil
to natural gas.
internally generated energy at
facility during 2004. Beginning
Based on information currently available, we believe
that we will continue to have ready access, for the
foreseeable future, to all principal raw materials used in
the production of our products. The cost of our raw
material is subject to change, including, but not limited to,
costs of wood and pulp products and energy costs.
in
product
developed
customizations
New Product Development
In order to keep up
with our customers’ ever-changing needs, we are
continually enhancing our product offerings through
significant investment in product development activities,
including
in
partnership or close collaboration with our customers. In
each of the past three years, we invested approximately
$5.2 million on product development. Revenue generated
from products developed, enhanced or improved within
the five previous years as a result of these activities
represented approximately 60%, 47% and 37% of net
the years ended 2004, 2003 and 2002,
sales
respectively. In determining revenue attributable
to
product
an
independently developed framework, which we believe to
be generally accepted in the field of new product
management. This
framework categorizes products
developed, enhanced or improved as those that (i) are new
to the world, (ii) represent a product line new to our
Company, (iii) are a new product within an existing
product line, (iv) are a significant improvement of an
existing product, (v) are repositioned
into a new
application or market, or (vi) are a lower cost alternative
to an existing product of the Company and seen by our
customers as a new offering. Approximately 48% of our
revenue attributable to developed, enhanced or improved
products come from products that fit within category (ii)
and (iii), above.
activities, we
development
utilize
Concentration of Customers
In 2004, 2003 and
2002, no single customer represented more than 10% of
our consolidated net sales.
- 4 -
GLATFELTER
Competition Our industry is highly competitive.
We compete on the basis of the quality of our products,
customer service, product development activities, price
and distribution. We offer our products throughout the
United States and globally in approximately 80 countries.
Our competition in the markets in which we participate
comes from companies of various sizes, some of which
have greater financial and other resources than we do. In
the engineered products markets of our Specialty Papers
business unit and in the Long Fiber & Overlay Papers
business unit, competition is product line specific as the
necessity
specialized
manufacturing equipment limits the number of companies
offering multiple product
lines. We compete with
specialty divisions of large companies such as, among
others, Ahlstrom, International Paper, MeadWestvaco,
Sappi and Stora Enso as well as other companies such as J
R Crompton. Service, product performance, technological
advances and product pricing are important competitive
factors with respect to all our products. We believe our
reputation in these areas continues to be excellent.
technical expertise and
for
There are a number of companies in the United States
that manufacture printing and converting papers. We
believe we are the recognized leader in book publishing
papers and compete in these markets with, among others,
Domtar and Weyerhaeuser. In the envelope sector we
compete with, among others, Blue Ridge, International
Paper and Weyerhaeuser. Capacity in the worldwide
uncoated free-sheet industry has exceeded demand in
recent years. Although we believe demand increases will
narrow this gap, the worldwide excess capacity is not
expected to decline significantly for the next few years.
Demand for our products in the markets we serve is
primarily driven by consumption of the products we
produce, which is often affected by general economic
conditions. In recent years, the global paper industry in
which we compete has been adversely impacted by paper
producing capacity exceeding the demand for products.
The Specialty Papers business unit, in particular, has been
negatively affected by such over capacity. Downturns in
our target markets could result in decreased demand for
our products. In addition to fluctuations in demand for our
products in the markets we serve, the markets for our
paper products are also significantly affected by changes
in industry capacity and output levels. There have been
periods of supply/demand imbalance in the pulp and
paper industry that have caused pulp and paper prices to
be volatile.
Our ability to compete in a global market place is also
influenced by the relative value of the functional currency
of our operations compared to the currency of the markets
in which we sell our products and the location of our
competitors. Due to the significant strengthening of the
Euro relative to the U.S. dollar and other currencies over
the last few years, our Europe-based facilities have seen
increasing pricing and competitive pressures.
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
for environmental
operating expenditures
compliance. For a discussion of environmental matters,
see Item 8. – Financial Statements and Supplementary
Data – Note 19.
required
Employees The following table summarizes our
workforce as of December 31, 2004:
Location
U.S.
Corporate/Spring Grove
Neenah
International
Gernsbach
Scaër
Philippines
Total
Employees
Salaried
Union
626
148
774
403
93
54
550
1,324
337
51
388
193
56
27
276
664
Total
963
199
1,162
596
149
81
826
1,988
Different
locals of
the Paper, Allied-Industrial,
Chemical and Energy Workers International Union, or
PACE, represent the hourly employees at our U.S.
facilities.
A five-year labor agreement ending January 2008
covering employees in Spring Grove was ratified in
November 2002. Among other changes, the contract
provides for wage increases of 3% for years 2005 through
2007.
the North American
Restructuring Plan, the agreement was amended in July
2004 providing workplace flexibility, certain job changes
and early retirement incentives.
In connection with
On October 22, 2002, hourly employees at our
Neenah, Wisconsin facility ratified a five-year labor
agreement with an expiration date of August 1, 2007.
Under this agreement, effective August 1st of each year,
wages increase 3% for the duration of the agreement.
- 5 -
GLATFELTER
Various unions represent employees at our Schoeller
& Hoesch facility. One-year labor agreements covering
employees at the Gernsbach, Germany and Scaër, France
facilities were entered into during 2004. The terms of the
agreements provide for wage increases in 2004 of
approximately 1.5%. Negotiations
the
agreements began in February 2005. The terms and
conditions of the agreements will remain in effect until
new agreements are reached, although any wage increase
negotiated in the new agreements will be retroactive to
the respective expiration dates of the old agreements.
renew
to
Employees at our pulpmill in the Philippines are
covered by a five-year labor agreement, which was
negotiated at the end of 2002.
We consider
the overall relationship with our
employees to be satisfactory.
investor
accessed
Available Information Our
can
relations
website
at
be
www.glatfelter.com/e/investock.asp. We make available
on our site free of charge our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K and other related information as
soon as reasonably practical after they are filed with the
Securities and Exchange Commission. In addition, our
website includes a Corporate Governance page consisting
of, among others, our Governance Principles and Code of
Business Conduct, Board of Directors and Executive
Officers, Nominating, Audit
and Compensation
Committees of the Board of Directors and their respective
Charters, Code of Business Ethics for the CEO and Senior
Financial Officers of Glatfelter, our “whistle-blower”
policy and other related material. We intend to satisfy the
disclosure requirement for any future amendments to, or
waivers from, our Code of Business Conduct or Code of
Business Ethics for the CEO and Senior Financial
Officers by posting such information on our website. We
will provide a copy of the Code of Business Conduct or
Code of Business Ethics for the CEO and Senior
Financial Officers, without charge, to any person who
requests one, by calling (717) 225-2724.
ITEM 2. PROPERTIES
Our leased corporate offices are located in York,
Pennsylvania. We own and operate paper mills located in
Spring Grove, Pennsylvania; Neenah, Wisconsin;
Gernsbach, Germany; and Scaër, France. In addition, we
the Philippines.
own and operate a pulp mill
Substantially all of
in our
papermaking and related operations, with the exception of
some leased vehicles, is also owned. All of our properties,
other than those that are leased, are free from any material
liens or encumbrances. We consider all of our buildings to
be in good structural condition and well maintained and
our properties to be suitable and adequate for present
operations.
the equipment used
in
The
following
table summarizes
the estimated
production capacity of each of our facilities:
Estimated Annual Production Capacity (short tons)
Spring Grove
Neenah
Gernsbach
Scaër
Philippines
310,000 Uncoated
66,000 Coated
125,000 Uncoated
44,200 Lightweight
11,000 Metallized
5,300 Lightweight
11,400 Abaca pulp
The Spring Grove facility includes five uncoated paper
machines that have been rebuilt and modernized from
time to time. It has an off-line combi-blade coater and a
Specialty Coater ("S-Coater"), which together yield a
potential annual production capacity for coated paper of
approximately 66,000 tons. Since uncoated paper is used
in producing coated paper, this is not additional capacity.
We view the S-Coater as an important asset that allows us
to expand our more profitable engineered paper products
business.
The Spring Grove facility also includes a pulpmill that
has a production capacity of approximately 650 tons of
bleached pulp per day. We have a precipitated calcium
carbonate ("PCC") plant at our Spring Grove facility that
produces PCC at a lower cost than could be purchased
from others and lowers the need for higher-priced raw
material typically used for increasing the opacity and
brightness of certain papers.
Our wholly-owned subsidiary Schoeller & Hoesch
GmbH & Co. KG (“S&H”) owns and operates paper mills
in Gernsbach, Germany and Scaër, France. S&H also
owns a pulpmill
that supplies
substantially all of the abaca pulp requirements of the
S&H paper mills.
the Philippines
in
The Gernsbach facility includes five uncoated paper
machines with an aggregate annual lightweight capacity
of about 44,200 tons. In 2003, we rebuilt a paper machine
with new state-of-the-art inclined wire technology (PM
#9). We believe
this machine provides us greater
flexibility and technological capabilities. The Gernsbach
facility also has the capacity to produce 11,000 tons of
metallized papers annually, using a lacquering machine
and two metallizers. We purchase the base paper used to
manufacture the metallized paper.
In 2004, our Philippine facility, which supplies abaca
pulp to S&H, began operation of a new globe digester that
increased our annual abaca pulp production by
approximately 8%.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various lawsuits that we consider
to be ordinary and incidental to our business. The ultimate
outcome of these lawsuits cannot be predicted with
certainty; however, we do not expect such lawsuits
- 6 -
GLATFELTER
individually or in the aggregate, will have a material
adverse effect on our consolidated financial position,
liquidity or results of operations.
For a discussion of commitments, legal proceedings
and related contingencies, see Item 8 – Financial
Statements and Supplementary Data – Note 19.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.
Not Applicable – no matters were submitted to a vote
of security holders during the fourth quarter of 2004.
EXECUTIVE OFFICERS
The following table sets forth certain information with
respect to our executive officers as of March 10, 2005.
Name
George H. Glatfelter II
Age
53
Office with the Company
Chairman and Chief Executive
Officer
Dante C. Parrini
40
Executive Vice President and Chief
John C. van Roden, Jr.
55
Executive Vice President and Chief
John P. Jacunski
39
Vice President and Corporate
Financial Officer
Operating Officer
Werner A. Ruckenbrod
47
Vice President Long Fiber &
Mark A. Sullivan
50
Vice President Global Supply
Overlay Papers
Controller
Chain
Officers are elected to serve at the pleasure of the
Board of Directors. Except in the case of officers elected
to fill a new position or a vacancy occurring at some other
date, officers are generally elected at the organizational
meeting of the Board of Directors held immediately after
the annual meeting of shareholders.
George H. Glatfelter II is our Chairman and Chief
Executive Officer. From April 2000 to February 2001,
Mr. Glatfelter was Chairman, President and Chief
Executive Officer. From June 1998 to April 2000, he was
Chief Executive Officer and President.
Mr. Glatfelter serves as a director of Met-Pro
Corporation; the American Forest and Paper Association;
the National Council for Air and Stream Improvements;
and the Alliance for the Chesapeake Bay.
Dante C. Parrini became Executive Vice President
and Chief Operating Officer in February 2005. Prior to
this, Mr. Parrini was Senior Vice President and General
Manager, a position he held since January 2003. From
December 2000 until January 2003, Mr. Parrini was Vice
President - Sales and Marketing. From July 2000 to
December 2000, he was Vice President - Sales and
Marketing, Glatfelter Division and Corporate Strategic
Marketing.
John C. van Roden, Jr. was elected Executive Vice
President and Chief Financial Officer in February 2005.
Prior to that he was Senior Vice President and Chief
Financial Officer since he joined us in April 2003. From
September 1998 to September 2002, Mr. van Roden was
Senior Vice President and Chief Financial Officer of
Conectiv of Wilmington, DE.
Mr. van Roden is a Director of HB Fuller Company
and Ascendant Capital Partners, LLC.
John P. Jacunski joined us in October 2003, and
serves as Vice President & Corporate Controller. Mr.
Jacunski was previously Vice President and Chief
Financial Officer at WCI Steel, Inc. from June 1999 to
October 2003. From May 1995 to June 1999 he was
WCI’s Corporate Controller. Prior to joining WCI, Mr.
Jacunski was with KPMG, an international accounting
and consulting firm, where he served
in various
capacities.
Werner A. Ruckenbrod is Vice President Long Fiber
& Overlay Papers with responsibilities for the operations
and performance of this business unit. Mr. Ruckenbrod
joined our subsidiary, S&H, in 1984. Since joining our
company, Mr. Ruckenbrod has held various production
related positions.
Mark A. Sullivan was appointed Vice President
Global Supply Chain in February 2005. Mr. Sullivan
in December 2003, as Chief
joined our company
Procurement Officer. His experience includes a broad
array of operations and supply chain management
responsibilities during 20 years with
the DuPont
Company. He served with T-Mobile USA as an
independent contractor during 2003, and Concur
Technologies from 1999 until 2002.
- 7 -
GLATFELTER
As of March 2, 2005, we had 2,054 shareholders of
record. A number of the shareholders of record are
nominees.
In accordance with our non-employee director
compensation policy, two-thirds of the $18,000 retainer
that non-employee directors received in 2004 was paid in
shares of our common stock. We granted an aggregate of
3,696 shares of our common stock to our non-employee
directors in May 2004 and an aggregate 3,346 shares of
common stock to our non-employee directors on November
2004 in connection with payment of the retainer. The
grants were made in reliance upon the exemption from the
registration requirements of the Securities Act set forth in
Section 4(2) of the Securities Act.
PART II
ITEM 5.
MARKET FOR THE REGISTRANT'S
COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Common Stock Prices and Dividends Declared
Information
The following table shows the high and low prices of
our common stock traded on the New York Stock
Exchange under the symbol “GLT” and the dividend
declared per share for each quarter during the past two
years.
Quarter
High
Low
Dividend
2004
Fourth
Third
Second
First
2003
Fourth
Third
Second
First
$15.49
14.23
14.09
12.93
$13.29
15.45
15.05
14.15
$11.34
11.50
10.45
10.44
$11.70
11.67
10.70
9.65
$0.09
0.09
0.09
0.09
$0.09
0.09
0.175
0.175
ITEM 6. SELECTED FINANCIAL DATA
Summary of Selected Consolidated Financial Data
As of or for the year ended December 31
In thousands, except per share
Net sales
Energy sales, net
Total revenue
2004
$543,524
9,953
553,477
Restructuring charges and unusual
2003
$533,193
10,040
543,233
2002
$540,347
9,814
550,161
2001 (1)
$632,602
9,661
642,263
items
(20,375)
(24,995)
(2,241)
(60,908)
Gains on dispositions of plant,
equipment and timberlands
Gains from insurance recoveries
Income from continuing
operations
Income per share from continuing
operations
Basic
Diluted
Total assets
Total debt
Shareholders’ equity
Cash dividends declared per
common share
58,509
32,785
56,102
1.28
1.27
1,052,270
211,227
420,370
32,334
–
12,986
0.30
0.30
1,027,019
254,275
371,431
0.36
0.53
1,304
–
37,637
0.87
0.86
953,202
220,532
373,833
0.70
2,015
–
6,829
0.16
0.16
966,604
277,755
353,469
0.70
2000
$721,945
9,243
731,188
(3,336)
467
–
43,367
1.02
1.02
1,023,325
306,822
372,703
0.70
1. Our Ecusta Division was sold in August 2001. Ecusta Division net sales totaled $90.8 million. In 2001, we recorded
a pre-tax loss on the sale, which was recorded as an unusual item, totaling $58.4 million. In 2000, we recorded a pre-
tax restructuring charge of $3.3 million related to workforce reductions at the Ecusta facility.
2. The above Summary of Selected Consolidated Financial Data, and the comparability thereof, includes the impact of
certain charges and gains from asset dispositions. For a discussion of these restructuring charges, unusual items and
gains from sales of plant, equipment and timberlands that affect the comparability of this information, see Item 8 –
Financial Statements and Supplemental Data Notes 5 to 7 and Note 9.
- 8 -
GLATFELTER
ITEM 7. MANAGEMENT'S DISCUSSION AND
viii.
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
risks associated with our international operations,
political
economic
including
environments
currency
fluctuations
exchange rates;
and
in
local
and
to
identify
Forward-Looking Statements This Annual Report on
Form 10-K 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 Report on Form 10-K
are forward looking. We use words such as “anticipates”,
“believes”, “expects”, “future”, “intends” and similar
expressions
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, costs of products sold, non-cash pension
income,
restructuring charges, environmental costs,
capital expenditures 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 abaca fiber, and changes in energy-related
costs;
iv.
iii. our ability to develop new, high value-added
Engineered Products and Long Fiber & Overlay
Papers;
the impact of competition, changes in industry
paper
the
construction of new mills, the closing of mills and
incremental changes due to capital expenditures or
productivity increases;
production
including
capacity,
v. our ability
to execute our North American
Restructuring Program, growth strategies and cost
reduction initiatives;
vi. cost and other effects of environmental compliance,
cleanup, damages, remediation or restoration, or
personal injury or property damages related thereto,
such as 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; and the costs of
environmental matters at our
former Ecusta
Division mill;
the gain or loss of significant customers and/or on-
going viability of such customers;
vii.
ix. geopolitical events, including war and terrorism;
x. enactment of adverse state, federal or foreign tax or
other legislation or changes in government policy
or regulation;
xi. adverse results in litigation;
xii. disruptions in production and/or increased costs due
to labor disputes;
xiii. our ability to realize the value of our timberlands;
xiv.
the recovery of environmental-related losses under
our insurance policies; and
xv. our ability to identify, finance and consummate
future alliances or acquisitions.
Introduction We manufacture, both domestically
and internationally, a wide array of specialty papers and
engineered products. Substantially all of our revenue is
earned from the sale of our products to customers in
numerous markets, including book publishing, food and
beverage, decorative laminates for furniture and flooring,
and other highly technical niche markets. Refer to Item 1
– Business for additional information.
Overview During the past few years, our industry
has been adversely impacted by an imbalance between
supply and demand for certain of our products. In this
environment during 2003, we experienced declining sales
volumes and lower average selling prices primarily in the
more commodity-like products offered by our Specialty
Papers business unit. Two significant developments
occurred over the course of the latter part of 2003 and
throughout 2004 that improved our financial performance
in the year over year comparison:
1) We undertook two major restructuring initiatives –
the North America Restructuring Program in 2004
and Neenah Restructuring in 2003 (each of which is
discussed in more detail in the following sections),
and
2) Demand for products improved and selling prices
strengthened beginning in the second quarter of 2004,
reversing deteriorating trends experienced in 2003.
reducing costs by enhancing
The restructuring initiatives are focused on improving
the profitability of our product mix by targeting higher
value niche markets, increasing workforce productivity,
supply chain
and
management strategies. Together with continued strength
in our Europe-based Long Fiber & Overlay Papers
business unit and improved market conditions in North
America, these actions contributed to a widening gross
margin and increased gross profit. Our operating results
also reflect increasing raw material prices particularly
pulp and energy related costs and affects of a weaker U.S.
dollar on translated international operations.
- 9 -
GLATFELTER
In addition, over the past two years we generated gains
of approximately $89.1 million from the sale of non-
strategic timberlands and the corporate aircraft. We were
also successful in collecting $32.8 million in insurance
recoveries
to environmental claims. These
proceeds were primarily used to reduce our debt levels.
related
Highlights from 2004 include:
• Achieved 60% of total sales from new products
introduced in the last five years.
• Developed and executed
Restructuring Program:
•
the North American
improved product and
Introduced
service
offerings for the book publishing market and
increased market share in the premium book
market.
• Developed a pipeline of products to grow
•
revenue from uncoated specialty papers.
reduction
Implemented a 20% workforce
full production
program while maintaining
capability at
the Company’s Spring Grove
facility. This program will be completed by the
end of the first quarter of 2005.
• Reduced production costs by
implementing
supply-chain
improved
management strategies in North America.
expanded
and
• Reduced certain SG&A expenses.
• Achieved strong growth in targeted markets led by a
13% increase in volume in the Long Fiber & Overlay
Papers business unit.
Improved pricing in North America which more than
offset raw material cost increases.
•
• Enhanced financial flexibility by reducing net debt by
$67 million through improved operating performance
and monetization of timberland assets.
RESULTS OF OPERATIONS
2004 versus 2003
The following table sets forth summarized results of
operations:
Year Ended December 31
In thousands
Net sales
Gross profit
Operating income
Income from continuing operations
Net loss from discontinued
operations
Net income
Earnings per diluted share from
continuing operations
Earnings per diluted share
2004
$543,524
92,414
103,394
56,102
–
56,102
1.27
1.27
2003
$533,193
79,546
34,250
12,986
(325)
12,661
0.30
0.29
The consolidated results of operations for the years
ended December 31, 2004 and 2003 include the following
significant items:
In thousands, except per share
2004
Gains on sale of timberlands
and corporate aircraft
Insurance recoveries
Restructuring charges
2003
Gain on sale of timberlands
Restructuring charges
Ecusta related reserves
Asset write downs
After-tax
Income (loss)
Diluted EPS
$34,151
21,310
(12,723)
$19,965
(8,582)
(7,315)
(2,124)
$0.78
0.48
(0.29)
$0.46
(0.20)
(0.17)
(0.05)
The above items increased earnings from continuing
operations by $42.7 million, or $0.97 per diluted share in
2004, and by $1.9 million, or $0.04 per diluted share, in
2003.
Business Units As discussed in Item 1 - Business,
in 2004 we changed the way we manage our business and
transitioned from three distinct business units to two: the
Europe-based Long Fiber & Overlay Papers business unit
and the North America-based Specialty Papers business
unit. While the Long Fiber & Overlay business Unit
remains unchanged, the combination of the former
Engineered Products and the Printing & Converting
Papers business units into Specialty Papers allows us to
more effectively manage the demand planning process,
optimize product mix, minimize process variability and
meet the demands of our customers. As a result of this
transition, all segment data has been restated to give effect
to the further refinement of our organizational structure
discussed above.
- 10 -
GLATFELTER
The following table sets forth profitability information by business unit and the composition of consolidated income from
continuing operations before income taxes:
Year Ended December 31
In thousands
Net sales
Energy sales, net
Total revenue
Cost of products sold
Gross profit (loss)
SG&A
Pension income
Restructuring recorded as component of COS
Restructuring charges
Unusual items
Gains on dispositions of plant, equipment and
timberlands
Gain on insurance recoveries
Total operating income (loss)
Nonoperating income (expense)
Income from continuing operations before
Long Fiber & Overlay
Other and Unallocated
Total
Specialty Papers
2003
2004
$357,989
$337,436
10,040
9,953
368,029
347,389
325,897
312,136
42,132
35,253
44,494
38,330
2004
$205,232
–
205,232
163,843
41,389
23,067
2003
$165,389
–
165,389
130,838
34,551
16,669
2004
$856
–
856
1,021
(165)
(53)
(17,342)
–
20,375
–
(58,509)
(32,785)
88,149
(12,631)
2003
$9,815
–
9,815
15,448
(5,633)
125
(17,149)
6,511
6,983
11,501
(32,334)
–
18,730
(13,834)
2004
$543,524
9,953
553,477
477,000
76,477
61,344
(17,342)
–
20,375
–
(58,509)
(32,785)
103,394
(12,631)
2003
$533,193
10,040
543,233
472,183
71,050
61,288
(17,149)
6,511
6,983
11,501
(32,334)
–
34,250
(13,834)
(3,077)
–
(2,362)
–
18,322
–
17,882
–
income taxes
$(3,077)
$(2,362)
$18,322
$17,882
$75,518
$4,896
$90,763
$20,416
Supplementary Data
Net tons sold
Depreciation expense
421,504
$37,186
446,110
$44,216
48,528
$14,412
42,993
$11,813
390
–
6,463
–
470,422
$51,598
495,566
$56,029
Results of individual business units are presented
based on our management accounting practices and
management structure. There
is no comprehensive,
for management
authoritative body of guidance
accounting equivalent to accounting principles generally
accepted in the United States of America; 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. Costs incurred by support areas
not directly aligned with the business unit are allocated
primarily based on an estimated utilization of support area
services.
Management evaluates results of operations before
non-cash pension income, restructuring related charges,
unusual items, effects of asset dispositions and insurance
recoveries 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 Company’s performance is
evaluated internally and by our Board of Directors.
Sales and Costs of Products Sold
In thousands
Net sales
Energy sales – net
Total revenues
Costs of products sold
Gross profit
Gross profit as a percent
of Net sales
Year Ended December 31
2004
$543,524
9,953
553,477
461,063
$92,414
2003
$533,193
10,040
543,233
463,687
$79,546
17.0%
14.9%
Change
$10,331
(87)
10,244
(2,624)
$12,868
Net sales in the Specialty Papers business unit declined
$20.6 million, or 5.7% in the year-to-year comparison.
Approximately $13.9 million of this decline was due to
lower volume primarily attributable to the shutdown in late
2003 of a paper machine at the Neenah facility. Selling
prices in this business unit declined during most of 2003,
stabilized in the first quarter of 2004 and subsequently
the year.
strengthened
Comparing the full year 2004 to 2003, average selling
prices for the Specialty Papers business unit declined
slightly.
the remainder of
throughout
Long Fiber & Overlay Papers’ net sales increased $39.8
million, or 24.1%, in the comparison due to an increase in
volumes shipped, particularly in the Food and Beverage
and Composite Laminates sectors, and a $16.0 million
favorable
translation
foreign
adjustments. Although the weaker U.S. dollar favorably
impacted translated net sales of international operations, it
currency
effect
of
- 11 -
GLATFELTER
adversely affected the price competitiveness of Long Fiber
& Overlay Papers’ products in certain geographic markets.
The following tables set forth the contribution to
consolidated net sales by each business unit:
Business Unit
Special Papers
Long-Fiber & Overlay Papers
Tobacco Papers
Total
Percent of Total
2004
2003
62.1%
37.8
0.1
100.0%
67.2%
31.0
1.8
100.0%
Costs of products sold declined $2.6 million in the
comparison due to lower production costs related to the
decline in sales volumes in the Specialty Papers business
unit, nonrecurring restructuring charges from 2003 and
other cost reduction initiatives. Partially offsetting these
factors was the unfavorable effect of foreign currency
translation adjustments, costs associated with increased
sales volume in the Long Fiber & Overlay business unit,
and higher raw material and energy prices. The following
table summarizes changes in costs of products sold for the
year ended December 31, 2004 compared to the 2003.
In millions
Foreign currency changes
Lower sales volume, net
2003 Neenah restructuring related charges
Other
Total
Year Ended
December 31, 2004
(Favorable)
unfavorable
$12,322
(8,262)
(6,511)
(173)
$(2,624)
Non-Cash Pension Income Non-cash
pension
income results from the considerably over-funded status
of our plans. The amount of pension income recognized
is determined using various actuarial
each year
assumptions and certain other factors, including the fair
value of our pension assets as of the beginning of the
year. The following summarizes non-cash pension income
for each year:
In thousands
Recorded as:
Costs of products sold
SG&A expense
Total
Year Ended December 31
2004
2003
Change
$15,937
1,405
$17,342
$15,007
2,142
$17,149
$930
(737)
$193
The
following
expenses,
restructuring charges, gains from asset dispositions and
other nonrecurring items:
summarizes SG&A
In thousands
SG&A expenses
Restructuring charges
Gains on dispositions of
plant, equipment and
timberlands
Unusual items
Gains from insurance
recoveries
Year Ended December 31
2004
$59,939
20,375
2003
$59,146
6,983
Change
$793
13,392
(58,509)
–
(32,334)
11,501
(26,175)
(11,501)
$(32,785)
–
$(32,785)
Selling, General and Administrative (“SG&A”)
SG&A expenses increased $0.8 million in the year-to-
year comparison. The increase was primarily due to a
$1.6 million unfavorable impact of foreign currency
translation adjustments, higher legal and accounting and
professional fees, mostly related to insurance recoveries,
and costs associated with
the North
American Restructuring Program. Lower variable
compensation expenses and the impact of cost reduction
initiatives substantially offset these costs.
implementing
Restructuring Charges As discussed earlier, we
undertook two major restructuring initiatives beginning in
the
table
summarizes restructuring charges incurred in connection
with these initiatives:
fourth quarter of 2003. The
following
In thousands
Restructuring initiative:
North American Restructuring
Program
Neenah Restructuring
Recorded as:
Costs of products sold
Restructuring charge
Total Neenah
Total
Year Ended December 31
2004
2003
$17,187
$–
–
3,188
3,188
$20,375
6,511
6,983
13,494
$13,494
North American Restructuring Program The
North American Restructuring Program is designed to
improve operating results by enhancing product and
service offerings in Specialty Papers’ book publishing
markets, growing revenue from uncoated specialty papers,
reducing our workforce at our Spring Grove facility by
approximately 20%, and implementing improved supply
chain management processes. The financial benefits from
these efforts began to phase-in during the third quarter of
2004, and are expected to approximate $15 million to $20
million annually, beginning in 2006. During 2005, the
financial benefits are expected to increase throughout
much of the year aggregating an amount under the low
end of the range of ultimate benefits.
In 2004, we negotiated a new labor agreement that
enabled us to reduce workforce levels at our Spring
Grove, PA facility by approximately 20%. As part of the
new labor agreement, we offered a voluntary early
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GLATFELTER
retirement benefits package to eligible employees. The
acceptance of these special termination benefits resulted
in a charge of $16.5 million in 2004, substantially all of
which was for enhanced pension benefits, post-retirement
medical benefits and other related employee severance
costs.
We also recorded restructuring charges totaling $0.7
million, for severance and related pension and other post
employment benefits (“OPEB”) associated with
the
elimination of certain non-represented positions. The
following table sets forth activity in the North American
Restructuring Program restructuring reserve.
In thousands
Beginning balance
Amounts accrued
Payments made
To be paid:
From pension plan assets
As OPEB benefits
Ending balance
Year Ended
December 31,
2004
$0
17,187
(644)
(11,255)
(5,228)
$60
The ending balance set forth above represents the
portion of the North American Restructuring Program
charges that is expected to require near term cash
payments from us and primarily consists of severance and
benefits continuation. Amounts representing enhanced
pension benefits will be paid from our pension plan assets
and are recorded as a reduction to the carrying value of
our prepaid pension assets. The amounts for OPEB
benefits were recorded as “Other long-term liabilities” in
the Consolidated Balance Sheets. We will pay the OPEB
benefits as they are incurred over the course of the
affected employees’ benefit period, which could range up
to 8 years.
Neenah Restructuring
In September 2003, we
announced the decision to permanently shut down a paper
making machine and the deinking process at our Neenah,
WI facility. The abandoned machines and processes had
been primarily supporting our book publishing products
of the Specialty Papers business unit. This initiative
resulted in the elimination of approximately 190 positions
and was completed by March 31, 2004. The results of
operations in 2003 include related pre-tax charges of
approximately $13.5 million, of which $6.5 million are
reflected
income statements as
components of costs of products sold, and $7.0 million
are reflected as “restructuring charges.”
the consolidated
in
The results of operations in 2004 include $3.2 million
of Neenah related restructuring charges, of which $3.0
million represents a fee paid to modify a steam supply
contract in connection with the restructuring initiative at
the Neenah facility. The remaining amount represents
adjustments to estimated benefit continuation costs.
The following table sets forth information with respect
to Neenah restructuring charges:
In thousands
Contract modification fee
Depreciation on abandoned
equipment
Severance and benefit continuation
Pension and other retirement
benefits
Other
Total
Year Ended December 31
2004
$3,000
–
188
–
–
$3,188
2003
$–
5,974
1,874
4,878
768
$13,494
The following table summarizes activity in the Neenah
Restructuring reserve:
In thousands
Beginning balance
Amounts accrued
Payments made
Ending balance
Year Ended December 31
2004
$1,625
3,188
(4,065)
$748
2003
$–
2,105
(480)
$1,625
As of December 31, 2004, the amounts accrued related
to the Neenah restructuring represent only those charges
that are expected to result in cash payments and primarily
consist of severance payments, benefits continuation and
medical retirement benefits. The Neenah restructuring
charge totaled $16.7 million, of which $6.5 million was
non-cash related, and $5.4 million is to be paid out of
pension plan assets.
Gain on Sales of Plant, Equipment and
Timberlands During 2004 and 2003, we completed
sales of timberlands and, in 2004, the corporate aircraft.
The following table summarizes these transactions.
Dollars in thousands
2004
Timberlands
Corporate Aircraft
Other
Total
2003
Timberlands
Other
Total
Acres
Proceeds
Gain
4,482
n/a
n/a
25,500
n/a
$56,586
2,861
724
$60,171
$55,355
2,554
600
$58,509
$37,850
2,892
$40,742
$31,234
1,100
$32,334
All property sales completed in 2004 were sold for
cash. As consideration for the timberlands sold in 2003,
we received a 10-year note from a subsidiary of The
Conservation Fund in the principal amount of $37.9
million (the “Note”), which is included in “Other assets”
in the Consolidated Balance Sheet.
Insurance Recoveries During 2004, we reached
successful resolution of certain claims under insurance
policies related to the Fox River environmental matter.
Insurance recoveries included in the results of operations
for 2004 totaled $32.8 million and were received in cash.
- 13 -
GLATFELTER
Interest Expense For the year ended December 31,
2004, interest expense declined $0.9 million to $13.4
million,
levels. Average
outstanding debt declined $25.4 million in the year-to-year
comparison.
largely due
lower debt
to
Income Taxes Our provision for income taxes from
continuing operations in 2004 and 2003, totaled $34.7
million and $7.4 million, respectively, and the effective
tax rate in the same periods was 38.2% and 36.4%,
respectively. The increase in the effective tax rate was
primarily due to the proportion of taxable income
attributable
timberland sales and foreign source
income, both of which are taxed at higher effective rates.
to
Foreign Currency We own and operate paper and
pulp mills in Germany, France and the Philippines. The
local currency in Germany and France is the Euro, while
in the Philippines the currency is the Peso. These
operations generate approximately 34% of our sales and
33% of operating expenses. The translation of the results
from these international operations into U.S. dollars is
subject to changes in foreign currency exchange rates.
The table below summarizes the effect from foreign
currency translation on reported results compared to
2003:
In thousands
Net sales
Costs of products sold
SG&A expenses
Income taxes and other
Net income
Year Ended
December 31, 2004
Favorable
(unfavorable)
$15,994
(12,322)
(1,629)
(305)
$1,738
The above table only presents the financial reporting
impact of foreign currency translations. It does not
present the impact of certain competitive advantages or
disadvantages of operating or competing
in multi-
currency markets. The strengthening of the Euro relative
to certain other currencies in 2004 compared to 2003,
adversely affected the price competitiveness of our
Germany-based Long Fiber & Overlay Papers business
unit relative to certain competitors.
Discontinued Operations
In July 2003, we sold
our Wisches, France subsidiary for approximately $2.0
million and the buyer’s assumption of approximately $1.1
million of debt owed to us by our subsidiary. At closing,
we received $1.7 million with the remaining amounts to
be paid in two annual installments, the first of which was
received in July 2004. The financial results of this
subsidiary are reported as discontinued operations for all
periods presented. Prior to the sale, the underlying assets
were recorded at the lower of carrying amount or fair
loss
less cost
to sell. Accordingly,
value
from
discontinued operations for the year ended December 31,
2003, includes a charge of $0.5 million, after tax, to write-
down the carrying value of the assets prior to the sale.
Revenue
from
discontinued operations totaled $2.6 million and $3.5
million for 2003 and 2002, respectively. The financial
results of this operation were previously reported in the
Specialty Papers business unit.
determining
included
results
in
2003 versus 2002
The following table sets forth summarized results of
operations:
In thousands
Net sales
Gross profit
Operating income
Income from continuing operations
Net loss from discontinued
operations
Net income
Earnings per diluted share from
continuing operations
Earnings per diluted share
Year Ended December 31
2003
$533,193
79,546
34,250
12,986
(325)
12,661
0.30
0.29
2002
$540,347
126,281
71,645
37,637
(42)
37,595
0.86
0.86
The consolidated results of operations for the years
ended December 31, 2003 and 2002 include the following
significant items:
In thousands, except per share
2003
Gain on sale of timberlands
Restructuring related charges
Ecusta related reserves
Asset write downs
After-tax
Income (loss)
$19,965
(8,582)
(7,315)
(2,124)
2002
Escrow settlement
Restructuring charges
Environmental matters
2,315
(2,719)
(1,500)
EPS
$0.46
(0.20)
(0.17)
(0.05)
0.05
(0.06)
(0.03)
The above items increased earnings from continuing
operations by $1.9 million, or $0.04 per diluted share in
2003, and decreased earnings from continuing operations
in 2002 by $1.9 million, or $0.04 per share. The decline in
earnings was primarily due to lower sales volumes and
selling prices in the Specialty Papers business unit and
higher costs of products sold, primarily due to lower non-
cash pension income, higher raw material prices, and
increased market-related down time.
- 14 -
GLATFELTER
Business Units
The following table sets forth profitability information by business unit and the composition of
consolidated income from continuing operations before income taxes:
Year Ended December 31
In thousands
Net sales
Energy sales, net
Total revenue
Costs of products sold
Gross profit
SG&A
Pension income
Restructuring recorded as component of COS
Restructuring charges
Unusual items
Gains on dispositions of plant, equipment and
timberlands
Total operating income (loss)
Nonoperating income (expense)
Income from continuing operations before
Long Fiber & Overlay
Other and Unallocated
Total
Specialty Papers
2002
2003
$384,784
$357,989
9,814
10,040
394,598
368,029
329,304
325,897
65,294
42,132
43,347
44,494
2003
$165,389
–
165,389
130,838
34,551
16,669
2002
$135,715
135,715
102,767
32,948
15,193
2003
$9,815
–
9,815
15,448
(5,633)
125
(17,149)
6,511
6,983
11,501
(32,334)
18,730
(13,834)
2002
$19,848
–
19,848
18,709
1,139
907
(32,648)
–
4,249
(2,008)
(1,304)
31,943
(12,516)
2003
$533,193
10,040
543,233
472,183
71,050
61,288
(17,149)
6,511
6,983
11,501
2002
$540,347
9,814
550,161
450,780
99,381
59,447
(32,648)
–
4,249
(2,008)
(32,334)
34,250
(13,834)
(1,304)
71,645
(12,516)
(2,362)
–
21,947
–
17,882
–
17,755
–
income taxes
$(2,362)
$21,947
$17,882
$17,755
$4,896
$19,427
$20,416
$59,129
Supplementary Data
Net tons sold
Depreciation expense
446,110
$44,216
474,343
$35,438
42,993
$11,813
40,751
$9,565
6,463
–
13,109
–
495,566
$56,029
528,203
$45,003
Sales and Costs of Products Sold
In thousands
Net sales
Energy sales – net
Total revenues
Costs of products sold
Gross profit
Gross profit as a percent
of Net sales
Year Ended December 31
2003
$533,193
10,040
543,233
463,687
$79,546
2002
$540,347
9,814
550,161
423,880
$126,281
Change
$(7,154)
226
(6,928)
39,807
$(46,735)
14.9%
23.4%
The decline in net sales was primarily due to a $19.8
million net sales volume-related decline as lower volumes
in Specialty Papers and tobacco more than offset sales
volume growth in Long Fiber & Overlay Papers business
units. In addition each business unit experienced lower
average selling prices,
in constant currency rates,
aggregating $13.3 million. The impact of lower sales
volumes and selling prices was partially offset by a $27.9
million favorable effect of a weaker U.S. dollar on
translated international results.
Costs of products sold increased $39.8 million in the
comparison due to the following significant items:
In millions
Foreign currency changes
Lower pension income
Higher raw material and energy prices
Restructuring related
Lower sales volume
Other
Total
Year Ended
December 31, 2003
(Favorable)
unfavorable
$19.8
11.9
10.4
6.5
(17.9)
9.1
$39.8
In the preceding table, “other” primarily consisted of
depreciation, market-related downtime and assets write-
offs.
Non-Cash Pension Income Non-cash pension income
results from the considerably over-funded status of our
plans. The amount of pension income recognized each
year is determined using various actuarial assumptions
and certain other factors, including the fair value of our
pension assets as of the beginning of the year. Because
the value of our plan assets as of January 1, 2003, was
lower than the previous year and due to changes in
actuarial assumptions, the amount of non-cash pension
income recognized in 2003 was less than 2002.
The following summarizes non-cash pension income
for each year.
In thousands
Recorded as:
Costs of products sold
SG&A expense
Total
Year Ended December 31
2003
2002
Change
$15,007
2,142
$17,149
$26,900
5,748
$32,648
$(11,893)
(3,606)
$(15,499)
In thousands
SG&A expenses
Restructuring charge
Unusual items
Gain on sale of plant,
equipment and
timberlands
Year Ended December 31
2003
$59,146
6,983
11,501
2002
$53,699
4,249
(2,008)
Change
$5,447
2,734
13,509
(32,334)
(1,304)
(31,030)
- 15 -
GLATFELTER
Selling, general and administrative (“SG&A”)
SG&A expenses increased $5.4 million during 2003
compared to 2002. During 2003, a weaker U.S. dollar
resulted in a $2.6 million increase in translated SG&A
expenses for our international operations. The remaining
increase was primarily due to a lower benefit from non-
cash pension income and higher depreciation, primarily
attributable to an information technology system
implemented in the latter part of 2002.
In 2003, we
Restructuring charge
recorded
restructuring charges related to the Neenah Restructuring
initiative. For a complete discussion of this charge, refer
to the analysis of 2004 versus 2003 section of this Item 7.
In 2002 we recorded a $4.2 million charge related to a
workforce reduction at our corporate and Spring Grove,
PA locations.
Unusual Items Unusual items during 2003 reflect a
charge of $11.5 million related to our former Ecusta
Division, which was sold in 2001. Under the Ecusta
Division acquisition agreement, we are indemnified for
certain liabilities that have been assumed by the buyers.
We had previously accrued liabilities related to certain
post-retirement benefits, workers compensation claims
and vendor payables and established a corresponding
receivable due from the buyers. We paid the portion of
sought
these
reimbursement from the buyers, which, to date, they have
refused. In 2002, we recognized a $3.5 million gain from
the settlement of an escrow account with the previous
owners of our Schoeller & Hoesch Division. This was
partially offset by a $1.5 million charge for certain
environmental matters related to the Pennsylvania DEP.
liabilities
became
that
due
and
Gain on Sales of Plant, Equipment and
Timberlands During 2003 we recognized a net gain
from the sale of plant, equipment and timberlands of
$32.3 million. This primarily includes a $31.2 million
pre-tax gain from the March 2003 sale of approximately
“Maryland
25,500
Timberlands”) to a subsidiary of The Conservation Fund,
a non-profit land conservation fund (the “Timberland
Buyer”).
timberlands
acres
(the
of
Foreign Currency We own and operate paper and
pulp mills in Germany, France and the Philippines. The
local currency in Germany and France is the Euro, while
in the Philippines the currency is the Peso. These
operations generate approximately 31% of our sales and
operating expenses. The translation of the results from
these international operations into U.S. dollars is subject
to changes in foreign currency exchange rates.
The following table summarizes the effect from
foreign currency translation on reported results compared
to 2002:
In thousands
Net sales
Costs of products sold
SG&A expenses
Income taxes and other
Net income
Year Ended
December 31, 2003
Favorable
(unfavorable)
$27,869
(19,776)
(2,648)
(1,278)
$4,167
The above table only presents the financial reporting
impact of foreign currency translations. It does not
present the impact of certain competitive advantages or
disadvantages of operating or competing in a global,
multi-currency environment. In 2003, the strengthening of
the Euro relative to certain other currencies adversely
affecting average selling prices,
the functional
currency, of products sold by S&H.
in
LIQUIDITY AND CAPITAL RESOURCES
is capital
Our business
intensive and requires
significant expenditures for new or enhanced equipment,
for environmental compliance matters and to support our
business strategy and research and development efforts.
The following table summarizes cash flow information
for each of the years presented.
In thousands
Cash and cash equivalents at
beginning of period
Cash provided by (used for)
Operating activities
Investing activities
Financing activities
Discontinued operations
Effect of exchange rate changes on
cash
Net cash provided (used)
Cash and cash equivalents at
end of period
Year Ended
December 31
2004
2003
$15,566
$32,219
39,584
42,109
(59,753)
–
2,445
24,385
46,996
(62,367)
(2,462)
(304)
1,484
(16,653)
$39,951
$15,566
The decrease in cash generated from operations was
primarily due to payments for federal income taxes and to
modify the steam contract at the Neenah facility, as well
as changes in working capital. These uses of cash were
partially offset by the $6.3 million net benefit of insurance
recoveries in excess of cash payments pursuant to the Fox
River Consent Decree.
The changes in investing cash flows reflects cash
proceeds in 2004 from dispositions of property, equipment
and timberlands and lower capital expenditures, which
totaled $18.6 million in 2004 and $66.8 million in 2003.
Prior to 2004, we completed certain major capital projects,
including a paper machine rebuild and environmental
related initiatives. The reduction in capital expenditures is
not expected to have a significant effect on our results of
- 16 -
GLATFELTER
operations, as we will continue to complete necessary
repairs and maintenance activities. We currently expect
capital expenditures in 2005 to approximate $30 million to
$35 million.
Excess cash flow from operating and investing activities
during 2004 were used to reduce long-term debt by
approximately $42 million and to make dividend payments.
The following table sets forth our outstanding long-term
indebtedness:
In thousands
Revolving credit facility, due June 2006
67/8% Notes, due July 2007
Note payable – SunTrust, due March 2008
Other notes, various
Total long-term debt
Less current portion
Long-term debt, excluding current portion
Year Ended
December 31
2004
$23,277
150,000
34,000
446
207,723
(446)
$207,277
2003
$64,047
150,000
34,000
1,228
249,275
(806)
$248,469
The significant terms of the debt obligations are set
and
Item 8. – Financial Statements
in
forth
Supplementary Data, Note 16.
During 2004 and 2003, cash dividends paid on common
stock totaled $15.8 million and $26.9 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.
We are subject to loss contingencies resulting from
regulation by various federal, state, local and foreign
governmental
the
environmental impact of mills we operate, or have
operated. To comply with environmental laws and
authorities with
respect
to
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
for environmental
operating expenditures
compliance. See Item 8 – Financial Statements – Note 19
for a summary of significant environmental matters.
required
We expect to meet all of our near- and longer-term
cash needs from a combination of operating cash flow,
cash and cash equivalents, our existing credit facility or
other bank lines of credit and other long-term debt.
However, as discussed in Item 8 – Financial Statements
and Supplementary Data – Note 19, an unfavorable
outcome of various environmental matters could have a
material adverse impact on our consolidated financial
position, liquidity and/or results of operations.
Off-Balance-Sheet Arrangements As of December
31, 2004 and 2003, we had not entered into any off-
balance-sheet arrangements. A
financial derivative
instrument to which we are a party and guarantees of
indebtedness, which solely consists of obligations of
subsidiaries and a partnership, are reflected in the
consolidated balance sheets included herein in Item 8 –
Financial Statements and Supplementary Data.
Contractual Obligations The following table sets forth contractual obligations as of December 31, 2004.
In thousands
Long-term debt (1)
Operating leases (2)
Purchase obligations (3)
Other long term obligations (4)
Total
Total
$207,723
15,435
145,913
92,357
$461,428
2005
$446
2,289
43,059
7,168
$52,962
Payments Due During the Year
Ended December 31,
2008 to
2009
$34,000
1,428
15,744
12,866
$64,038
2006 to
2007
$173,277
2,225
29,317
43,235
$248,054
2010 and
beyond
$–
9,493
57,793
29,088
$96,374
(1) Represents principal payments due on long-term debt. We have $150 million of debt maturing in July 2007 and bearing a fixed rate of interest at
67/8%, payable semiannually, $34 million note maturing in March 2008 and bearing a fixed rate of interest of 3.82%. In addition, at December
31, 2004, $23 million, bearing a variable interest rate, was outstanding under our revolving credit facility that matures in June 2006.
(2) Represents rental agreements for various land, buildings, and computer and office equipment.
(3) Represents open purchase order commitments and other obligations, primarily for steam and pulpwood contracts with minimum annual
purchase obligations. In certain situations, prices are subject to variations based on market prices. In such situations, the information above is
based on prices in effect at December 31, 2004 or expectations based on historical experience and/or current market conditions.
(4) Represents expected benefits to be paid pursuant to medical retirement plans and nonqualified pension plans over the next ten years and $29
million related to cross currency swap maturing in June 2006.
- 17 -
GLATFELTER
Critical Accounting Policies and Estimates The
preceding discussion and analysis of our consolidated
financial position and results of operations is based upon
our consolidated financial statements, which have been
prepared
in accordance with accounting principles
generally accepted in the United States of America. The
preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and
liabilities. On an on-going basis, we evaluate our
estimates, including those related to inventories, long-
lived assets, pension and post-retirement obligations,
environmental liabilities and income taxes. 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.
We believe
the
following
represent
in
significant and subjective estimates used
preparation of our consolidated financial statements.
the most
the
reserves
Inventory Reserves We maintain
for
excess and obsolete inventories to reflect our inventory at
the lower of its stated cost or market value. Our estimate
for excess and obsolete inventory is based upon our
assumptions about future demand and market conditions.
If actual market conditions are more or less favorable than
those we have projected, we may need to increase or
decrease our reserves for excess and obsolete inventories,
which could affect our reported results of operations.
Long-lived Assets 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.
Pension and Other Post-Retirement Obligations
Accounting for defined-benefit pension plans, and any
curtailments
requires various assumptions,
including, but not limited to, discount rates, expected
rates of return on plan assets and future compensation
thereof,
growth rates. Accounting for our retiree medical plans,
and any curtailments thereof, 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 or as facts and
circumstances dictate 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.
Environmental Liabilities 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
legal or
remediation actions continue and/or further
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.
Income Taxes We record the estimated future tax
effects of temporary differences between the tax bases of
assets and liabilities and amounts reported in our balance
sheets, as well as operating loss and tax credit carry
forwards. These deferred tax assets and liabilities are
measured using enacted tax rates and laws that will be in
effect when such amounts are expected to reverse or be
utilized. We regularly review our deferred tax assets for
recoverability based on historical taxable income, projected
future taxable income, the expected timing of the reversals
of existing
tax planning
temporary differences and
strategies. If we continue to operate at a loss in certain
jurisdictions or are unable to generate sufficient future
taxable income, or if there is a material change in the actual
effective tax rates or time period within which the
underlying
taxable or
temporary differences become
deductible, we could be required to increase the valuation
allowance against our deferred tax assets resulting in a
substantial increase in our effective tax rate and a material
adverse impact on our reported results.
important
Other significant accounting policies, not involving the
same level of uncertainties as those discussed above, are
nevertheless
the
Consolidated Financial Statements. Refer to Item 8 –
Financial Statements and Supplementary Data – Notes to
additional
Consolidated Financial Statements
accounting policies.
to an understanding of
for
- 18 -
GLATFELTER
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Dollars in thousands
Long-term debt
Average principal outstanding
At fixed interest rates
At variable interest rates
Weighted-average interest rate
On fixed interest rate debt
On variable interest rate debt
Cross-currency swap
Pay variable – EURIBOR
Variable rate payable
Receive variable – US$ LIBOR
Variable rate receivable
2005
Year Ended December 31
2007
2008
2006
2009
Carrying Value
Fair Value
At December 31, 2004
$184,225
23,277
$184,000
23,277
$115,250
–
6.31%
2.96
6.31%
3.05
5.97%
–
€72,985
2.92%
$70,000
3.18%
€34,993
2.92%
$33,562
3.18%
–
–
–
–
$8,500
–
3.82%
–
–
–
–
–
–
–
–
–
–
–
–
–
$184,446
23,277
$192,125
23,277
$(29,552)
$(29,552)
Our market risk exposure primarily results from
changes in interest rates and currency exchange rates. At
December 31, 2004, we had long-term debt outstanding of
$207.7 million, of which $23.3 million, or 11.2% was at
variable interest rates.
The table above presents average principal outstanding
and related interest rates for the next five years and the
amount of a cross-currency swap agreement. Fair values
included herein have been determined based upon rates
currently available to us for debt with similar terms and
remaining maturities.
Variable-rate debt outstanding represents borrowings
under our revolving credit facility that incur interest based
on the domestic prime rate or a Eurocurrency rate, at our
option, plus a margin. At December 31, 2004, the interest
rate paid was 2.96%. A hypothetical 100 basis point
increase or decrease in the interest rate on variable rate
debt would increase or decrease annual interest expense
by $0.2 million.
At December 31, 2004, 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 €73 million, pay interest on the Euro
portion of the swap at a floating Eurocurrency Rate
(EURIBOR), plus applicable margins and 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 inter-company obligations recorded at our
S&H subsidiary in Gernsbach, Germany.
in
liabilities.” Changes
The cross currency swap is recorded at fair value on
the Consolidated Balance Sheet under the caption “Other
long-term
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
inter-company obligations when they are re-measured in
Euros, the functional currency of S&H (see Item 8 –
Financial Statements and Supplementary Data – Note 17).
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 year ended December 31, 2004,
approximately 67% of our net sales were shipped from
the United States, 29% from Germany, and 4% from other
international locations.
- 19 -
GLATFELTER
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
that could have a material effect on our financial
statements.
MANAGEMENT’S REPORT ON
INTERNAL
CONTROL OVER FINANCIAL REPORTING
is
for
responsible
establishing
Management of P. H. Glatfelter Company (the
“Company”)
and
maintaining adequate internal control over financial
reporting. The Company’s internal control over financial
reporting is a process designed under the supervision of
the chief executive and chief financial officers to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of the Company’s financial
statements for external reporting purposes in accordance
with accounting principles generally accepted in the
United States.
As of December 31, 2004, management conducted an
assessment of the effectiveness of the Company’s internal
control over financial reporting based on the framework
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on this
assessment, management has determined
the
Company’s internal control over financial reporting as of
December 31, 2004 is effective to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of the Company’s financial statements
for external reporting purposes in accordance with
accounting principles generally accepted in the United
States.
that
Our internal control over financial reporting includes
policies and procedures that pertain to the maintenance of
records that, in reasonable detail, accurately and fairly
reflect transactions and dispositions of assets; provide
reasonable assurances that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted
in the United States, and that receipts and expenditures
are being made only in accordance with authorizations of
management; and provide reasonable assurance regarding
prevention or
timely detection of unauthorized
acquisition, use or disposition of the Company’s assets
Management’s assessment of the effectiveness of the
Company’s internal control over financial reporting as of
December 31, 2004, has been audited by Deloitte &
Touche LLP, an independent registered public accounting
firm, as stated in their report appearing herein, which
expresses unqualified opinions on management’s
assessment and on the effectiveness of the Company’s
internal control over financial reporting as of December
31, 2004.
The Company’s management, including the chief
executive officer and chief financial officer, does not
expect that our internal control over financial reporting
will prevent or detect all errors and all frauds. A control
system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the
control system’s objectives will be met. The design of a
control system must reflect the fact that there are resource
constraints, and
the benefits of controls must be
considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance
that
misstatements due to error or fraud will not occur or that
all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations
include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of
simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by
collusion of two or more people, or by management
override of the controls. The design of any system of
controls is based, in part, on certain assumptions about the
likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals
under all potential future conditions. Projections of any
evaluation of controls effectiveness to future periods are
subject to risks. Over time, controls may become
in conditions or
inadequate because of changes
deterioration in the degree of compliance with policies or
procedures.
- 20 -
GLATFELTER
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
P. H. Glatfelter Company
We have audited management’s assessment, included
in the accompanying Management Report on Internal
Control Over Financial Reporting, that P. H. Glatfelter
Company and subsidiaries (the “Company”) maintained
effective internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal
reporting. Our
responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based
on our audit.
financial
control
over
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial
reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s
the design and
assessment,
operating
and
performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
testing and evaluating
effectiveness of
control,
internal
A company’s internal control over financial reporting
is a process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and
effected by
the company’s board of directors,
management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes
in accordance with generally accepted
accounting principles. A company’s internal control over
financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect
the
transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
in accordance with generally accepted
statements
accounting principles, and that receipts and expenditures
of the company are being made only in accordance with
authorizations of management and directors of
the
company; and (3) provide reasonable assurance regarding
timely detection of unauthorized
prevention or
acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control
over financial reporting, including the possibility of
collusion or improper management override of controls,
material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections
of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are
subject to the risk that the controls may become
inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management’s assessment that the
Company maintained effective internal control over
financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria
established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Also in our opinion, the
Company maintained, in all material respects, effective
internal control over financial reporting as of December
31, 2004, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee
of Sponsoring Organizations
the Treadway
Commission.
of
(United States),
in accordance with
We have also audited,
the
standards of the Public Company Accounting Oversight
Board
financial
statements and financial statement schedule as of and for
the year ended December 31, 2004, of the Company and
our
report dated March 15, 2005, expressed an
unqualified opinion on those financial statements and
financial statement schedule.
the consolidated
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 15, 2005
- 21 -
GLATFELTER
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
P. H. Glatfelter Company
We have audited the accompanying consolidated
balance sheets of P. H. Glatfelter Company and
subsidiaries (the “Company”) as of December 31, 2004
and 2003, and the related consolidated statements of
income, shareholders’ equity, and cash flows for each of
the three years in the period ended December 31, 2004.
Our audits also included the financial statement schedule
listed in the Index at Item 15. These financial statements
and financial statement schedule are the responsibility of
the Company’s management. Our responsibility is to
express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing
the accounting principles used and significant estimates
made by management, as well as evaluating the overall
financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial
position of P. H. Glatfelter Company and subsidiaries as
of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years
in the period ended December 31, 2004, in conformity
with accounting principles generally accepted in the
United States of America. Also, in our opinion, the
financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the
information set forth therein.
in accordance with
We have also audited,
the
standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Company’s
internal control over financial reporting as of December
31, 2004, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee
the Treadway
of Sponsoring Organizations
Commission and our report dated March 15, 2005,
expressed an unqualified opinion on management’s
assessment of the effectiveness of the Company’s internal
control over financial reporting and an unqualified
opinion on the effectiveness of the Company’s internal
control over financial reporting.
of
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 15, 2005
- 22 -
GLATFELTER
P. H. GLATFELTER COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share amounts
Net sales
Energy sales – net
Total revenues
Costs of products sold
Gross profit
Selling, general and administrative expenses
Restructuring charges
Unusual items
Gains on disposition of plant, equipment and timberlands, net
Insurance recoveries
Total
Operating income
Other nonoperating income (expense)
Interest expense
Interest income
Other – net
Total other nonoperating income (expense)
Income from continuing operations before
income taxes
Income tax provision
Income from continuing operations
Discontinued operations
Loss from discontinued operations
Income tax benefit
Loss from discontinued operations
Net income
Basic earnings per share
Income from continuing operations
Loss from discontinued operations
Net income
Diluted earnings per share
Income from continuing operations
Loss from discontinued operations
Net income
Year Ended December 31
2003
2002
2004
$543,524
9,953
553,477
461,063
92,414
$533,193
10,040
543,233
463,687
79,546
$540,347
9,814
550,161
423,880
126,281
59,939
20,375
–
(58,509)
(32,785)
(10,980)
103,394
(13,385)
2,012
(1,258)
(12,631)
90,763
34,661
56,102
–
–
–
$56,102
$1.28
–
$1.28
$1.27
–
$1.27
59,146
6,983
11,501
(32,334)
–
45,296
34,250
(14,269)
1,820
(1,385)
(13,834)
20,416
7,430
12,986
(513)
(188)
(325)
$12,661
$0.30
(0.01)
$0.29
$0.30
(0.01)
$0.29
53,699
4,249
(2,008)
(1,304)
–
54,636
71,645
(15,103)
1,571
1,016
(12,516)
59,129
21,492
37,637
(64)
(22)
(42)
$37,595
$0.87
−
$0.87
$0.86
−
$0.86
The accompanying notes are an integral part of the consolidated financial statements.
- 23 -
GLATFELTER
P. H. GLATFELTER COMPANY and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except par values
Assets
Current assets
Cash and cash equivalents
Accounts receivable (less allowance for doubtful
accounts: 2004 −−−− $2,364; 2003 −−−− $3,115)
Inventories
Prepaid expenses and other current assets
Total current assets
Plant, equipment and timberlands – net
Other assets
Total assets
Liabilities and Shareholders' Equity
Current liabilities
Current portion of long-term debt
Short-term debt
Accounts payable
Dividends payable
Environmental liabilities
Other current liabilities
Total current liabilities
Long-term debt
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity
Common stock, $.01 par value; authorized – 120,000,000
shares; issued – 54,361,980 shares (including shares in
treasury: 2004 –10,412,222; 2003 - 10,579,543)
Capital in excess of par value
Retained earnings
Deferred compensation
Accumulated other comprehensive income (loss)
Less cost of common stock in treasury
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31
2004
2003
$39,951
$15,566
60,900
78,836
18,765
198,452
59,882
71,569
24,685
171,702
520,412
542,960
333,406
$1,052,270
312,357
$1,027,019
$446
3,503
30,174
3,955
7,715
58,214
104,007
$806
5,000
31,472
3,942
27,000
44,250
112,470
207,277
248,469
212,074
207,834
108,542
631,900
86,815
655,588
–
–
544
41,828
525,056
(1,275)
8,768
574,921
(154,551)
420,370
$1,052,270
544
40,469
484,756
–
2,690
528,459
(157,028)
371,431
$1,027,019
The accompanying notes are an integral part of the consolidated financial statements.
- 24 -
GLATFELTER
P.H. GLATFELTER COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Operating activities
Net income
Loss from discontinued operations
Income from continuing operations
Adjustments to reconcile to net cash provided by
continuing operations:
Depreciation, depletion and amortization
Pension income
Restructuring charges and unusual items
Deferred income tax provision
Gains on dispositions of plant, equipment and
timberlands, net
Other
Change in operating assets and liabilities
Accounts receivable
Inventories
Other assets and prepaid expenses
Other liabilities
Net cash provided by continuing operations
Net cash provided (used) by discontinued operations
Net cash provided by operating activities
Investing activities
Purchase of plant, equipment and timberlands
Proceeds from disposal of plant, equipment and timberlands
Proceeds from sale of subsidiary, net of cash divested
Net cash provided (used) by investing activities of
continuing operations
Net cash used by investing activities of discontinued operations
Net cash provided (used) by investing activities
Financing activities
Repayment of debt under previous revolving credit agreement
Net (repayments of) proceeds from revolving credit facility
Proceeds from borrowing from SunTrust Financial
Payment of dividends
Proceeds from stock options exercised
Net cash used by financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of period
Cash and cash equivalents at the end of period
Supplemental cash flow information
Cash paid (received) for
Interest expense
Income taxes
Year Ended December 31
2003
2004
2002
$56,102
–
56,102
$12,661
(325)
12,986
$37,595
(42)
37,637
51,598
(17,342)
16,483
17,364
(58,509)
655
470
(4,276)
(12,721)
(10,240)
39,584
–
39,584
(18,587)
60,171
525
42,109
–
42,109
–
(44,888)
–
(15,782)
917
(59,753)
2,445
24,385
15,566
$39,951
56,029
(17,149)
17,640
7,779
(32,334)
745
4,399
3,060
(359)
(5,800)
46,996
(244)
46,752
(66,758)
2,892
1,499
(62,367)
(60)
(62,427)
(10,124)
34,000
(26,879)
541
(2,462)
1,484
(16,653)
32,219
$15,566
45,003
(32,648)
(2,008)
17,913
(1,304)
1,235
5,969
(2,816)
(5,201)
13,926
77,706
332
78,038
(51,108)
1,498
(49,610)
(44)
(49,654)
(133,027)
68,238
(30,307)
10,491
(84,605)
490
(55,731)
87,950
$32,219
$11,713
3,256
$13,767
(1,575)
$17,074
(12,419)
The accompanying notes are an integral part of the Consolidated Financial Statements.
- 25 -
GLATFELTER
P. H. GLATFELTER COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2004, 2003 and 2002
In thousands, except shares outstanding
Common
Stock
Capital in
Excess of
Par Value
Retained
Earnings
Deferred
Compen-
sation
Accumulated
Other
Compre-
hensive
Income
(Loss)
Treasury
Stock
Total
Shareholders’
Equity
Balance, January 1, 2002
Comprehensive income
Net income
Other comprehensive income
Foreign currency translation adjustments
Change in market value of interest rate
swaps, net of tax of $11
Other comprehensive income
Comprehensive income
Tax effect on employee stock options
exercised
Cash dividends declared
Delivery of treasury shares
Performance shares
401(k) plans
Director compensation
Employee stock options exercised – net
Balance, December 31, 2002
Comprehensive income
Net income
Other comprehensive income
Foreign currency translation adjustments
Other comprehensive income
Comprehensive income
Tax effect on employee stock options
exercised
Cash dividends declared
Delivery of treasury shares
Performance shares
401(k) plans
Director compensation
Employee stock options exercised – net
Balance, December 31, 2003
Comprehensive income
Net income
Other comprehensive income
Foreign currency translation adjustments
Other comprehensive income
Comprehensive income
Tax effect on employee stock options
exercised
Cash dividends declared
Issuance of restricted stock units, net
Delivery of treasury shares
Restricted stock awards
401(k) plans
Director compensation
Employee stock options exercised – net
Balance at December 31, 2004
$544
$40,968
$488,150
$(3,849)
$(172,344)
$353,469
37,595
37,595
162
(21)
141
(3,708)
6,398
6,398
(30,467)
495,278
12,661
(23,183)
484,756
–
2,690
56,102
6,078
6,078
(15,802)
(1,275)
70
1,373
69
11,753
(159,079)
124
1,188
97
642
(157,028)
141
37,736
1,071
(30,467)
73
1,392
68
10,491
373,833
12,661
6,398
19,059
13
(23,183)
111
981
76
541
371,431
56,102
6,078
62,180
38
(15,802)
450
$525,056
$(1,275)
$8,768
275
1,015
105
1,082
$(154,551)
218
845
93
917
$420,370
1,071
3
19
(1)
(1,262)
40,798
13
(13)
(207)
(21)
(101)
40,469
38
1,725
(57)
(170)
(12)
(165)
$41,828
544
544
$544
The accompanying notes are an integral part of the Consolidated Financial Statements.
- 26 -
GLATFELTER
P. H. GLATFELTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
and
P. H. Glatfelter Company
subsidiaries
(“Glatfelter”) is a manufacturer of specialty papers and
engineered
in York,
products. Headquartered
Pennsylvania, our manufacturing facilities are located in
Spring Grove, Pennsylvania; Neenah, Wisconsin;
Gernsbach, Germany; Scaër, France and the Philippines.
Our products are marketed throughout the United States
and in over 80 other countries, either through wholesale
paper merchants, brokers and agents or directly to
customers.
2. ACCOUNTING POLICIES
Principles of Consolidation The consolidated
financial statements include the accounts of Glatfelter and
its wholly owned subsidiaries. All intercompany balances
and transactions have been eliminated.
Accounting Estimates The preparation of financial
statements in conformity with accounting principles
generally accepted in the United States of America
requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities
and disclosures of contingencies as of the balance sheet
date and the reported amounts of revenues and expenses
during the reporting period. Management believes the
estimates and assumptions used in the preparation of these
consolidated financial statements are reasonable, based
upon currently available facts and known circumstances,
but recognizes that actual results may differ from those
estimates and assumptions.
Reclassifications Certain
reclassifications have
been made to the prior years’ statement of cash flows to
conform to those classifications used in the current year.
Cash and Cash Equivalents We classify all highly
liquid instruments with an original maturity of three
months or less at the time of purchase as cash equivalents.
Inventories
Inventories are stated at the lower of
cost or market. Raw materials and in-process and finished
inventories of our domestic manufacturing operations are
valued using the last-in, first-out (LIFO) method, and the
supplies inventories are valued principally using the
average-cost method.
foreign
operations are valued using a method that approximates
average cost.
Inventories at our
Plant, Equipment and Timberlands For financial
reporting purposes, depreciation is computed using the
straight-line method over the estimated useful lives of the
respective assets. For income taxes purposes, depreciation
is primarily calculated using accelerated methods over
lives established by statute or U. S. Treasury Department
procedures. Provision is made for deferred income taxes
applicable to this difference.
The range of estimated service lives used to calculate
financial reporting depreciation for principal items of
plant and equipment are as follows:
Buildings
Machinery and equipment
Other
10 – 45 Years
7 – 35 Years
4 – 40 Years
All timber costs related to the reforestation process,
including, taxes, site preparation, planting, fertilization,
herbicide application and thinning, are capitalized. After
20 years, the timber is considered merchantable and
depletion is computed on a unit rate of usage by growing
area based on estimated quantities of recoverable
material. For purchases of land tracts with existing timber,
inventoried merchantable timber is subject to immediate
depletion based upon usage. Costs related to the purchase
to
timber
of
merchantable timber over a 10-year period, whereupon it
is eligible for depletion.
pre-merchantable
transferred
are
Estimated timber volume is based upon its current
stage in the growth cycle. Growth and yield data is
developed through the use of published growth and yield
studies as well as our own historical experience. This data
is used to calculate volumes for established timber stands.
Timber is depleted on an actual usage basis. For
purchased timber tracts, a systematic timber inventory is
completed and volume is estimated for merchantable
timber. Pre-merchantable timber of purchased tracts is
estimated based upon its current stage in the growth cycle
using growth and yield data.
Maintenance and repairs are charged to income and
major renewals and betterments are capitalized. At the
time property is retired or sold, the net carrying value is
eliminated and any resultant gain or loss is included in
income.
- 27 -
GLATFELTER
Investment Securities Investments in debt securities
are classified as held-to-maturity and recorded at
amortized cost in the consolidated balance sheets when
we have the positive intent and ability to hold until
maturity. At December 31, 2004 and 2003, investments in
debt securities classified as held-to-maturity totaled $9.3
million and $9.8 million, respectively. The noncurrent
portion is included in “Other assets” on the consolidated
balance sheets.
Valuation of Long-lived Assets We evaluate long-
lived assets for impairment when a specific event
indicates that the carrying value of an asset may not be
recoverable. Recoverability is assessed based on estimates
of future cash flows expected to result from the use and
eventual disposition of the asset. If the sum of expected
undiscounted cash flows is less than the carrying value of
the asset, an
is recognized. An
impairment loss, if any, is recognized for the amount by
which the carrying value of the asset exceeds its fair
value.
impairment
loss
Income Taxes Income taxes are accounted for under
the liability method. Deferred tax assets and liabilities are
determined based on differences between the financial
reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse or
be utilized. Valuation allowances, if any, are provided
when a portion or all of a deferred tax asset may not be
realized.
for
Treasury Stock Common stock purchased
treasury is recorded at cost. At the date of subsequent
reissue, the treasury stock account is reduced by the cost
of such stock on the weighted-average cost basis.
Foreign Currency Translation Our subsidiaries
outside the United States use their local currency as the
functional currency. Accordingly, translation gains and
losses and the effect of exchange rate changes on
foreign
transactions designated as hedges of net
investments are included as a component of other
comprehensive income (loss). Transaction gains and
losses are included in income in the period in which they
occur.
Revenue Recognition We recognize revenue on
product sales when the customer takes title and assumes
the risks and rewards of ownership. We record revenue
net of an allowance for customer returns.
Revenue from energy sales is recognized when electricity
is delivered to the customer. Certain costs associated with
the production of electricity, such as fuel,
labor,
depreciation and maintenance are netted against energy
sales for presentation on the Consolidated Statements of
Income. Costs netted against energy sales totaled $8.3
million, $7.7 million and $7.1 million for the years ended
December 31, 2004, 2003 and 2002, respectively. Our
current contract to sell electricity generated in excess of
our own use expires in the year 2010 and requires that the
customer purchase all of our excess electricity up to a
certain level. The price for the electricity is determined
pursuant to a formula and varies depending upon the
amount sold in any given year.
on
for
and
existing
legislation
Environmental Liabilities Accruals
losses
associated with environmental obligations are recorded
when it is probable that a liability has been incurred and
the amount of the liability can be reasonably estimated
remediation
based
technologies. Costs related to environmental remediation
are charged to expense. 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.
Environmental costs are capitalized if the costs extend the
life of the asset, increase its capacity and/or mitigate or
prevent contamination from future operations. Recoveries
of environmental remediation costs from other parties,
including insurance carriers, are recorded as assets when
their receipt is assured beyond a reasonable doubt.
for
Stock-Based
Stock-based Compensation We account for Stock-
based compensation 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
Compensation.”
Compensation expense for restricted stock performance
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
estimating the number of shares ultimately to be issued.
Compensation expense
for awards of nonvested
Restricted Stock Units (“RSUs”) is recognized over their
graded vesting period based on the grant-date value. The
grant-date value is determined based on the grant-date
closing price of Glatfelter common stock. The exercise
price of all employee stock options is at least equal to
their grant-date market value. Accordingly, no
compensation expense is recorded for stock options
granted to employees.
- 28 -
GLATFELTER
Pro Forma Information No compensation expense
has been recognized for the issuance of non-qualified
stock options. The weighted-average grant-date fair value
of options granted during 2004, 2003 and 2002, was
$3.31, $2.72 and $2.48, respectively.
The fair value of each option on the date of grant was
estimated using the Black-Scholes option-pricing model
using the following weighted-average assumptions:
Risk-free interest rate
Expected dividend yield
Expected volatility
Expected life
2004
4.50%
3.17
35.0
6.5 yrs
2003
3.47%
5.74
38.9
6.5 yrs
2002
4.13%
5.15
27.8
6.5 yrs
if compensation expense
The following table sets forth pro forma information
as
stock-based
compensation had been determined consistent with the
fair value method of SFAS No. 123.
for all
In thousands, except per share
Net income as reported
Add: stock-based compensation
expense included in reported
net income, net of tax
Less: stock-based compensation
expense determined under fair
value based method for all
awards, net of tax
Pro forma
Earnings per share
Reported – basic
Pro forma – basic
Reported – diluted
Pro forma – diluted
Year Ended December 31
2003
2004
$12,661
$56,102
2002
$37,595
16
346
235
(339)
$55,779
(1,808)
$11,199
(1,420)
$36,410
$1.28
1.27
1.27
1.27
$0.29
0.26
0.29
0.26
$0.87
0.84
0.86
0.83
Earnings Per Share Basic earnings per share are
computed by dividing net income by the weighted-
average common shares outstanding during the respective
periods. Diluted earnings per share are computed by
dividing net income by the weighted-average common
shares and common share equivalents outstanding during
the period. The dilutive effect of common share
equivalents is considered in the diluted earnings per share
computation using the treasury stock method.
Fair Value of Financial Instruments The amounts
reported on the Consolidated Balance Sheets for cash and
cash equivalents, accounts receivable, other assets, and
short-term debt approximate
fair value. Financial
derivatives are recorded at fair value. The following table
sets forth carrying value and fair value for investment
securities and long-term debt:
2004
2003
Carrying
Value
$9,348
207,723
Fair
Value
$10,714
215,402
Carrying
Value
$9,838
249,275
Fair
Value
$11,353
262,684
Investment securities
Long-term debt
3. RECENT PRONOUNCEMENTS
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, “Rescission of SFAS No. 4, 44 and 64,
Amendment of SFAS No. 13, and Technical Corrections,”
was issued April 2002 and was 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 extinguishments 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
transaction
accounting. We adopted SFAS No. 145 on January 1,
2003, and it did not impact our consolidated financial
position or results of operations.
sale-leaseback
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 was to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. We
adopted SFAS No. 146 on January 1, 2003, and it did not
impact our consolidated financial position or results of
operations.
In November of 2002, the FASB issued Interpretation
45, “Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of the
Indebtedness of Others” (“FIN 45”). FIN 45 requires
entities
types of
guarantees, and expands financial statement disclosures for
others. The accounting requirements of FIN 45 were
effective for guarantees issued or modified after December
31, 2002, and the disclosure requirements were effective
for financial statements for interim or annual periods ended
liabilities for certain
to establish
- 29 -
GLATFELTER
after December 15, 2002. The adoption on January 1, 2003,
of FIN 45 did not have any significant accounting
implications for us as all of our commitments and
guarantees are on behalf of our subsidiaries.
discontinued operations totaled $2.6 million and $3.5
million for 2003 and 2002, respectively. This operation
was previously reported in the Specialty Papers business
unit.
SFAS No. 149, “Amendment of Statement 133 on
Derivative Instruments and Hedging Activities,” was
issued in April 2003, and it amends and clarifies
accounting for derivative instruments including derivative
instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. This standard was
effective for contracts entered into or modified after June
30, 2003, and its adoption did not have an impact on our
consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150,
“Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.” This
Statement requires an issuer to classify a financial
instrument that is within its scope as a liability (or an
asset in some circumstances). SFAS No. 150 was
effective for financial
into or
modified after May 31, 2003, except for certain
provisions that were deferred, and otherwise was effective
at the beginning of the third quarter of 2003. This
statement did not affect the financial instruments we
currently use, and therefore the adoption of SFAS No.
150 did not impact our financial statements.
instruments entered
In December 2004, SFAS No. 123(R), “Share-Based
Payment” was issued. This standard requires employee
stock options other stock-based compensation awards to
be accounted for under the fair value method, and
eliminates the ability to account for these instruments
under the intrinsic value method prescribed by APB
Opinion No. 25, and allowed under the original provisions
of SFAS No. 123. SFAS No. 123(R) is effective for
periods beginning after June 15, 2005. We are evaluating
the transition methods available under this standard but do
not expect its impact to be material to our results of
operations or financial position.
4. DISCONTINUED OPERATIONS
In July 2003, we sold our Wisches, France subsidiary
for approximately $2.0 million and the assumption of
approximately $1.1 million of debt owed to us by our
subsidiary. At closing, we received $1.7 million and the
remaining amounts were to be paid in two annual
installments, the first of which was received in July 2004.
This subsidiary is reported as discontinued operations for
all periods presented. Prior to the sale, the underlying
assets were recorded at the lower of carrying amount or
fair value less cost to sell. Accordingly, loss from
discontinued operations for the year ended December 31,
2003, includes a charge of $0.5 million, after tax, to write-
down the carrying value of the assets prior to the sale.
from
Revenue
determining
included
results
in
5. RESTRUCTURING CHARGES
North American Restructuring Program The
North American Restructuring Program, which was
initiated in the second quarter of 2004, is designed to
improve operating results by enhancing product and service
offerings in Specialty Papers’ book publishing markets,
growing revenue from uncoated specialty papers, reducing
our workforce at our Spring Grove
facility by
approximately 20%, and implementing improved supply
chain management processes. In conjunction with this
initiative, we negotiated a new labor agreement that
enables us to achieve targeted workforce reduction levels
at our Spring Grove, PA facility. As part of the new labor
agreement, we offered a voluntary early retirement
benefits package to eligible employees. These special
termination benefits resulted in a charge of $16.5 million
in 2004, substantially all of which is for enhanced pension
benefits, post-retirement medical benefits and other
related employee severance costs. In addition, we
recorded restructuring charges totaling $0.7 million, for
severance and related pension and other post employment
benefits (“OPEB”) associated with the elimination of
certain non-represented positions. The following table sets
forth activity in the North American Restructuring Program
restructuring reserve.
In thousands
Beginning balance
Amounts accrued
Payments made
To be paid:
From pension plan assets
As OPEB benefits
Ending balance
Year Ended
December 31,
2004
$0
17,187
(644)
(11,255)
(5,228)
$60
The ending balance set forth above represents the
portion of the North American Restructuring Program
charges that is expected to require near term cash
payments from us and primarily consist of severance and
benefits continuation. Amounts representing enhanced
pension benefits will be paid from our pension plan assets
and are recorded as a reduction to the carrying value of
our prepaid pension assets. The amounts for OPEB
benefits were recorded as “Other long-term liabilities” in
the accompanying condensed Consolidated Balance
Sheets. We will pay the OPEB benefits as they are
incurred over the course of the affected employees’
benefit period, which could range up to 8 years.
- 30 -
GLATFELTER
in
initiative, which resulted
Neenah Restructuring In September 2003, we
announced the decision to permanently shut down a paper
making machine and the deinking process at our Neenah,
WI facility. This
the
elimination of approximately 190 positions and the
modification of a long-term steam supply contract, was
initiated to allow us to reallocate resources to more fully
support opportunities in higher growth, more profitable
specialty markets. The machines
and processes
abandoned had supported our Specialty Papers business
unit. The results for 2003 include related pre-tax charges
of $13.5 million, of which $6.5 million are reflected in the
consolidated income statement as components of cost of
products sold, and $7.0 million are reflected as
“restructuring charges.”
The results of operations in 2004 include $3.2 million
of Neenah related restructuring charges, of which $3.0
million represents a fee paid to modify a steam supply
contract at the Neenah facility in connection with the
restructuring initiative. The remaining amount represents
adjustments to estimated benefit continuation costs.
6. UNUSUAL ITEMS
Unusual items in 2003 reflect an $11.5 million charge
relating to our former Ecusta Division, which was sold in
2001. Under the Ecusta Division acquisition agreement,
we are indemnified for certain liabilities that have been
assumed by the buyers. We had previously accrued
liabilities related to certain post-retirement benefits,
workers compensation claims and vendor payables and
established a corresponding receivable due from the
buyers. We paid the portion of these liabilities that
became due and sought reimbursement from the buyers,
which, to date, they have refused.
Unusual items in 2002 included a $1.5 million
contingent liability related to environmental matters with
the Pennsylvania Department
of Environmental
Protection (“Pennsylvania DEP”). This charge was offset
by a $3.5 million gain for the settlement of certain escrow
claims, including interest and associated liabilities related
to the 1998 acquisition of our Schoeller & Hoesch
(“S&H”) subsidiary.
The following table sets forth information with respect
to Neenah restructuring charges:
7. GAIN ON DISPOSITIONS OF PLANT,
EQUIPMENT AND TIMBERLANDS
In thousands
Contract modification fee
Depreciation on abandoned
equipment
Severance and benefit continuation
Pension and other retirement
benefits
Other
Total
Year Ended December 31
2004
$3,000
–
188
–
–
$3,188
2003
$–
5,974
1,874
4,878
768
$13,494
The following table summarizes activity in the Neenah
Restructuring reserve:
In thousands
Beginning balance
Amounts accrued
Payments made
Ending balance
Year Ended December 31
2004
$1,625
3,188
(4,065)
$748
2003
$–
2,105
(480)
$1,625
As of December 31, 2004, the amounts accrued related
to the Neenah restructuring represent only those charges
that are expected to result in cash payments and primarily
consist of severance payments, benefits continuation and
medical retirement benefits. The Neenah restructuring
charge totaled $16.7 million, of which $6.5 million was
non-cash related, and $5.4 million is to be paid out of
pension plan assets.
During 2004 and 2003, we completed sales of
timberlands and, in 2004, the corporate aircraft. The
following table summarizes these transactions.
Dollars in thousands
2004
Timberlands
Corporate Aircraft
Other
Total
2003
Timberlands
Other
Total
Acres
Proceeds Gain/(loss)
4,482
n/a
n/a
25,500
n/a
$56,586
2,861
724
$60,171
$55,355
2,554
600
$58,509
$37,850
2,892
$40,742
$31,234
1,100
$32,334
All property sales completed in 2004 were sold for cash.
As consideration for the timberlands sold in 2003, we
received a 10-year note from a subsidiary of The
Conservation Fund in the principal amount of $37.9 million
(the “Note”), which is included in “Other assets” in the
Condensed Consolidated Balance Sheet.
- 31 -
GLATFELTER
8. EARNINGS PER SHARE
10.
INCOME TAXES
The following table sets forth the details of basic and
diluted earnings per share (EPS):
In thousands, except per share
Income from continuing operations
Loss from discontinued operations
Net income
2004
$56,102
$56,102
2003
$12,986
(325)
$12,661
2002
$37,637
(42)
$37,595
Income taxes are recognized for the amount of taxes
payable or refundable for the current year and deferred
tax liabilities and assets for the future tax consequences of
events that have been recognized in our consolidated
financial statements or tax returns. The effects of income
taxes are measured based on effective tax law and rates.
Weighted average common shares
outstanding used in basic EPS
Common shares issuable upon
exercise of dilutive stock options,
restricted stock awards and
performance awards
Weighted average common shares
outstanding and common share
equivalents used in diluted EPS
Basic EPS
Income from continuing operations
Loss from discontinued operations
Net income
Diluted EPS
Income from continuing operations
Loss from discontinued operations
Net income
43,856
43,731
43,396
operations consisted of the following:
The provision for income taxes from continuing
167
29
395
44,023
43,760
43,791
$1.28
$1.28
$1.27
$1.27
$0.30
(0.01)
$0.29
$0.30
(0.01)
$0.29
$0.87
$0.87
$0.86
$0.86
In thousands
Current taxes
Federal
State
Foreign
Deferred taxes
Federal
State
Foreign
Year Ended December 31
2003
2002
2004
$8,982
5,262
3,053
17,297
14,292
101
2,971
17,364
$(723)
27
347
(349)
1,562
2,950
3,267
7,779
$1,135
18
2,426
3,579
12,653
167
5,093
17,913
Total provision for
income taxes from
continuing operations
$34,661
$7,430
$21,492
The following are domestic and foreign components of
pretax income from continuing operations:
The following table sets forth the potential common
shares outstanding for options to purchase shares of
common stock that were outstanding but were not
included in the computation of diluted EPS for the period
indicated, because their effect would be anti-dilutive.
In thousands
Potential common shares
2004
1,664
2003
1,846
2002
1,996
9. GAIN ON INSURANCE RECOVERIES
During 2004, we reached successful resolution of
certain claims under insurance policies related to the Fox
River environmental matter. Insurance recoveries included
in the results of operations for 2004 totaled $32.8 million
and were received in cash prior to December 31, 2004.
In thousands
United States
Foreign
Total pretax income
Year Ended December 31
2003
2002
2004
$78,627
12,136
$90,763
$16,968
3,448
$20,416
$38,742
20,387
$59,129
A reconciliation between the income tax provision,
computed by applying the statutory federal income tax
rate of 35% to income before income taxes from
continuing operations, and the actual income tax:
In thousands
Federal income tax provision at
Year Ended December 31
2003
2002
2004
statutory rate
$31,767
$7,146
$20,695
State income taxes, net of federal
income tax benefit
Tax effect of bargain sale
Tax effect of tax credits
Valuation allowance
Provision for (resolution of) tax
matters
Other
Total provision for income taxes
from continuing operations
3,486
-
(3,690)
3,078
263
(243)
1,935
(3,991)
(1,493)
5,027
(1,723)
529
120
–
(300)
–
–
977
$34,661
$7,430
$21,492
- 32 -
GLATFELTER
The sources of deferred income taxes were as follows:
In thousands
Deferred tax assets:
Reserves
Compensation
Post-retirement benefits
Property
Pension
Inventories
Tax carryforwards
Other
Subtotal
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Property
Pension
Installment sale
Other
Total deferred tax liabilities
Net deferred tax liabilities
2004
2003
$16,397
3,344
12,583
182
890
368
24,339
3,023
61,126
(20,037)
41,089
124,833
95,741
12,521
5,535
238,630
$197,541
$19,362
4,952
10,448
168
765
427
27,917
11,256
75,295
(15,777)
59,518
127,262
92,009
12,679
6,324
238,274
$178,756
At December 31, 2004, the Company had state and
foreign tax net operating loss (“NOL”) carryforwards of
$60.8 million and $11.7 million, respectively. These NOL
carryforwards are available to offset future taxable
income, if any. The state NOL carryforwards expire
between 2005 and 2024; and
foreign NOL
carryforwards do not expire.
the
In addition, the Company had federal charitable
contribution carryforwards of $11.1 million, which expire
in 2008, federal foreign tax credit carryforwards of $0.9
million, which expire between 2013 and 2014, and
various state tax credit carryforwards totaling $5.0
million, which expire between 2005 and 2019.
The Company has established a valuation allowance of
$20.0 million against the net deferred tax assets, primarily
due to the uncertainty regarding the ability to utilize state
tax carryforwards, a federal charitable contribution
carryforward, and certain deferred foreign tax credits.
At December 31, 2004 and 2003, unremitted earnings
of subsidiaries outside the United States deemed to be
permanently reinvested totaled $55.9 million and $42.5
million, respectively. Because the unremitted earnings of
subsidiaries are deemed to be permanently reinvested as
of December 31, 2004, no deferred tax liability has been
recognized in the Company’s financial statements.
The American Jobs Creation Act of 2004 (the “Act”)
was signed into law on October 22, 2004. The Act creates
a temporary incentive for U.S. corporations to repatriate
accumulated income abroad by providing an 85 percent
dividends received deduction for certain dividends from
controlled foreign corporations. As of December 31,
2004, management has not decided whether, and to what
extent, the Company would repatriate foreign earnings
under the Act. Neither the amount of repatriation nor the
related income tax effect from such repatriation can be
reasonably estimated at this time. The income tax effect is
dependent upon a number of factors, which are being
analyzed, including, among others, the cost of financing,
the cash requirements of foreign entities and the issuance
the U.S. Treasury
of additional guidance
Department. The Company will continue to analyze the
effect of this provision and expects to complete this
analysis before the end of 2005, and will recognize the
income tax effect, if any, in the period when a decision
whether to repatriate is made.
from
The net deferred taxes reported on our Consolidated Balance Sheets as of December 31 are as follows:
In thousands
Current asset
Current liability
Long-term asset
Long-term liability
2004
Federal
$7,880
State
$322
159,143
28,234
Foreign
$708
1,010
6,633
24,697
Total
$8,910
1,010
6,633
212,074
The components of the net deferred tax balances as of December 31 are as follows:
In thousands
Deferred tax assets:
Current
Long-term
Deferred tax liabilities:
Current
Long-term
Federal
State
Foreign
Total
2004
$7,880
21,395
$29,275
–
180,538
$180,538
$322
4,151
$4,473
–
32,385
$32,385
- 33 -
GLATFELTER
$708
6,633
$7,341
$8,910
32,179
$41,089
$1,010
24,697
$25,707
$1,010
237,620
$238,630
$1,071
237,203
$238,274
2003
Total
$22,095
1,071
8,054
207,834
2003
Total
$22,095
37,423
$59,518
11. STOCK-BASED COMPENSATION
On April 23, 1997, the common shareholders amended
the 1992 Key Employee Long-Term Incentive Plan
(“1992 Plan”) to authorize, among other things, the
issuance of up to 5,000,000 shares of Glatfelter common
stock to eligible participants. The 1992 Plan provides for
restricted stock awards, non-qualified stock options,
performance
stock options and
incentive
performance units. To date, there have been no grants of
incentive stock options or performance units.
shares,
2004,
Restricted Stock Units During
157,280
nonvested RSUs, net of forfeitures, were awarded, under
the 1992 Key Employee Long-Term Incentive Plan, to
executive officers and other key employees. Under terms
of the awards, the RSUs vest based solely on the passage
of time on a graded scale over a three, four, and five-year
period. On the grant date, the RSUs, net of forfeitures
were valued at $1.7 million and were recorded as
“Deferred compensation,” a contra-equity account in the
accompanying Condensed Consolidated Balance Sheet.
Stock-based compensation expense with respect to the
RSUs totaled $0.5 million during the 2004.
Restricted Stock Performance Awards The
following table summarizes shares of restricted common
stock awarded under the 1992 Plan:
For the year ended December 31:
2003
2002
Awards
2,660
29,926
Awards issued in 2003 and 2002 vest ratably over a
three-year period. Awarded shares are subject
to
forfeiture, in whole or in part, if the recipient ceases to be
an employee within a specified time period. Awards made
in 2003 and 2002 are also subject to forfeiture if targeted
earnings per share or shareholder returns measures are not
met.
The number of shares otherwise required to be
delivered may be reduced by an amount that would have a
fair market value equal to the taxes we withhold on
delivery. We may also, at our discretion, elect to pay to
the recipients in cash an amount equal to the fair market
value of the shares that would otherwise be delivered. The
following table summarizes stock-based compensation
expense with respect to restricted stock performance
awards for each of the past three years:
In thousands
2004
2003
2002
Compensation
Expense
$(443)
533
362
Non-Qualified Stock Options
The following table summarizes the activity with respect to non-qualified options
to purchase shares of common stock granted under the 1992 Plan:
Outstanding at beginning of year
Granted
Exercised
Canceled
Outstanding at end of year
Shares
2,304,339
51,250
(72,850)
(184,127)
2,098,612
2004
2003
2002
Weighted-
Average
Exercise Price
$14.71
11.18
12.61
15.51
14.65
Shares
2,828,529
40,990
(43,287)
(521,893)
2,304,339
Weighted-
Average
Exercise Price
$15.00
11.75
12.60
16.47
14.71
Shares
3,736,182
309,450
(790,800)
(426,303)
2,828,529
Weighted-
Average
Exercise Price
$14.79
13.98
13.26
15.60
15.00
Exercisable at end of year
1,956,439
$15.17
1,410,614
$15.45
1,436,681
$15.94
- 34 -
GLATFELTER
The following table summarizes information about stock options outstanding at December 31, 2004:
Options Outstanding
Weighted-
Average
Remaining
Contractual Life
4.9
6.4
5.9
2.4
5.1
Weighted-
Average
Exercise Price
$12.11
13.28
15.74
18.13
Shares
434,810
732,097
471,275
460,430
2,098,612
Option Exercisable
Weighted-
Average
Exercise Price
$12.25
13.32
15.74
18.13
Number
Outstanding
373,237
651,497
471,275
460,430
1,956,439
$10.78 to $12.41
12.95 to 14.44
15.44 to 17.16
17.54 to 18.78
An additional 112,720 options became exercisable
January 1, 2005 at a weighted-average exercise price of
$12.42.
In December 2003,
Options granted prior to 2002 become exercisable for
25% of the grant amount, beginning January 1 of the year
following the date of grant, assuming six months has
passed. An additional 25% become exercisable on
January 1 of each of the next three years. Options not
exercisable in this format are exercisable in full either six
months or one year from the date of grant. Stock options
granted after December 31, 2001 vest ratably over three
years beginning January 1 of the year following the date
of grant.
the Compensation
Committee accelerated the vesting of options granted
during December 2001 and December 2002, to become
fully vested as of January 1, 2004. Vesting was
accelerated for an aggregate of 639,610 shares, of which
98,300 were previously vested under their original terms.
Since the options’ exercise price was greater than the
market value of the underlying common stock at the time
vesting was accelerated, no compensation expense was
recognized. All options expire on
the earlier of
termination or, in some instances, a defined period
subsequent to termination of employment, or ten years
from the date of grant.
The exercise price represents the average quoted
market price of Glatfelter common stock on the date of
grant, or the average quoted market prices of Glatfelter
common stock on the first day before and after the date of
grant for which quoted market price information was
available if such information was not available on the date
of grant.
The 1992 plan, as amended, expires in 2007. As of
December 31, 2004, 1,205,815 shares of common stock
were available for future issuance under the 1992 Plan.
12. RETIREMENT PLANS AND OTHER POST-
RETIREMENT BENEFITS
We have both funded and, with respect to our
noncontributory
international operations,
unfunded
defined-benefit pension plans covering substantially all of
our employees. The benefits are based, in the case of
certain plans, on average salary and years of service and,
in the case of other plans, on a fixed amount for each year
the
of service. Plan provisions and funding meet
requirements of
Income
Security Act of 1974. We use a December 31-
measurement date for all of our defined benefit plans.
the Employee Retirement
employees. These
We also provide certain health care benefits to eligible
retired
a
comprehensive medical plan for retirees prior to age 65
and fixed supplemental premium payments to retirees
over age 65 to help defray the costs of Medicare. The plan
is not funded and claims are paid as reported.
benefits
include
In millions
Change in Benefit Obligation
Balance at beginning of
Pension Benefits
2003
2004
Other Benefits
2003
2004
year
Service Cost
Interest Cost
Plan amendments
Actuarial loss
Benefits paid
Impact of curtailments
Impact of special
termination benefits
Balance at end of year
$267.2
3.9
16.1
0.2
15.9
(18.4)
(0.5)
$249.8
3.7
16.3
4.7
10.0
(17.0)
(0.3)
10.8
$295.2
–
$267.2
$39.7
1.0
2.4
2.0
(3.6)
5.1
0.1
46.7
$49.4
1.0
2.5
(4.6)
(4.3)
(4.0)
(0.3)
–
$39.7
Change in Plan Assets
Fair value of plan assts at
beginning of year
Actual return on plan
assets
Employer contributions
Benefits paid
Fair value of plan assets
at end of year
Reconciliation of Funded
Status
Funded Status
Unrecognized transition
assets
Unrecognized prior
service cost
Unrecognized (gain) loss
Net amount recognized
$445.7
$385.9
$–
$
35.8
2.5
(18.4)
74.5
2.3
(17.0)
–
3.6
(3.6)
4.0
(4.0)
$465.6
$445.7
$
$
$170.4
$178.5
$(46.7)
$(39.7)
–
(0.9)
–
–
21.7
33.4
$225.5
24.3
15.2
$217.1
(6.8)
21.1
$(32.4)
(7.6)
20.4
$(26.9)
- 35 -
GLATFELTER
The net prepaid pension cost for qualified pension plans
is primarily included in “Other assets,” and the accrued
pension cost for non-qualified pension plans and accrued
post-retirement benefit costs are primarily included in
“Other long-term liabilities” on the Consolidated Balance
Sheets at December 31, 2004 and 2003.
Amounts recognized in the consolidated balance sheet
consist of the following as of December 31:
In millions
Prepaid benefit cost
Accrued benefit liability
Net amount recognized
Pension Benefits
2003
2004
$236.3
$245.4
(19.2)
(19.9)
$217.1
$225.5
Other Benefits
2003
2004
$
$–
(26.9)
(32.4)
$(26.9)
$(32.4)
The accumulated benefit obligation for all defined
benefit pension plans was $283.2 million and $262.2 at
December 31, 2004 and 2003, respectively.
The weighted-average assumptions used in computing
the benefit obligations above were as follows:
Discount rate – benefit
obligation
Future compensation
growth rate
Pension Benefits
2003
2004
Other Benefits
2003
2004
5.75%
6.25%
5.75%
6.25%
4.0
4.0
Information for pension plans with an accumulated
benefit obligation in excess of plan assets was as follows:
In millions
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2004
$23.1
21.8
–
2003
$29.8
27.1
–
Net periodic benefit (income) cost includes the
following components:
In millions
Pension Benefits
Service cost
Interest cost
Expected return on plan assets
Amortization of transition asset
Amortization of prior service cost
Recognized actuarial (gain) loss
Net periodic benefit (income) cost
Special termination benefits
Curtailment and settlement
Total net periodic benefit
(income) cost
Other Benefits
Service cost
Interest cost
Amortization of prior service cost
Recognized actuarial (gain) loss
Net periodic benefit (income) cost
Special termination benefits
Plan amendments
Total net periodic benefit cost
Year Ended December 31
2003
2004
2002
$3.9
16.1
(39.4)
(0.8)
2.4
0.4
(17.4)
–
11.4
$3.7
16.3
(38.7)
(1.3)
2.8
0.0
(17.2)
5.4
–
$4.3
15.5
(46.7)
(1.9)
1.4
(5.3)
(32.7)
1.7
–
$(6.0)
$(11.8)
$(31.0)
$1.0
2.4
(0.7)
1.2
3.9
5.2
–
$9.1
$1.0
2.5
(0.8)
1.1
3.8
(0.5)
(0.7)
$2.6
$1.4
3.2
(0.4)
1.4
5.6
–
–
$5.6
The weighted-average assumptions used in computing
the net periodic benefit (income) cost information above
were as follows:
In millions
Pension Benefits
Discount rate – benefit expense
Future compensation growth rate
Expected long-term rate of return on
plan assets
Other Benefits
Discount rate – benefit expense
Future compensation growth rate
Expected long-term rate of return on
plan assets
Year Ended December 31
2003
2004
2002
6.25%
4.0
6.75%
4.0
7.0%
3.5
8.5
8.5
9.0
6.25%
–
6.75%
–
7.0%
–
–
–
–
To develop the expected long-term rate of return
assumption, we considered the historical returns and the
future expected returns for each asset class, as well as the
target asset allocation of the pension portfolio. This
resulted in the selection of the 8.5% long-term rate of
return on plan assets assumption for 2004.
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GLATFELTER
Assumed health care cost trend rates at December 31
were as follows:
Health care cost trend rate assumed for
next year
Rate to which the cost trend rate is
assumed to decline (the ultimate
trend rate)
Year that the rate reaches the
ultimate rate
2004
2003
11.5%
13.0%
5.0
2014
5.0
2013
Assumed health care cost trend rates have a significant
effect on the amounts reported for health care plans. A
one percentage-point change in assumed health care cost
trend rates would have the following effects:
In thousands
Nonqualified pension plans
Other benefit plans
$1,680
4,983
Defined Contribution Plans We maintain 401(k)
for certain hourly and salaried employees.
plans
Employees may contribute up to 15% of their salary to
these plans, subject to certain restrictions. We will match
a portion of the employee’s contribution, subject to
certain limitations, in the form of shares of Glatfelter
common stock. The expense associated with our 401(k)
match was $0.7 million, $0.7 million and $1.2 million in
2004, 2003 and 2002, respectively.
In thousands
Effect on:
One percentage point
decrease
increase
13.
INVENTORIES
Post-retirement benefit obligation
Total of service and interest cost
components
$3,744
$(3,303)
376
(325)
Plan Assets Glatfelter’s pension plan weighted-
average allocations at December 31, 2004 and 2003, by
asset category, are as follows:
Asset Category
Equity securities
Debt securities
Cash and real estate
Total
2004
2003
66%
30
4
100%
74%
18
8
100%
Our objective is to achieve an above-market rate of
return on our pension plan assets. Based upon this
objective, along with the timing of benefit payments and
the risks associated with various asset classes available
for investment, we have established the following asset
allocation guidelines:
Equity
Fixed Income & Other
Minimum
60%
20%
Target
70%
30%
Maximum
80%
40%
Real estate can be between 0% and 5% of the target
equity allocation. Glatfelter stock can also be between 0%
and 5% of the target equity allocation, although there
were no holdings of Glatfelter stock as of December 31,
2004 or 2003. Our investment policy prohibits the
investment in certain securities without the approval of
the Finance Committee of the Board of Directors.
Regarding Fixed Income securities, the weighted-average
credit quality will be at least “AA” with a “BBB”
minimum credit quality for each issue.
Cash Flow We do not expect to make contributions
to our qualified pension plans in 2005. Contributions and
benefit payments expected to be made in 2005 under our
non-qualified pension plans and other benefit plans are
summarized below:
Inventories, net of reserves were as follows:
In thousands
Raw materials
In-process and finished
Supplies
Total
2004
$14,974
39,327
24,535
$78,836
2003
$15,106
32,145
24,318
$71,569
If we had valued all inventories using the average-cost
method, inventories would have been $12.6 million and
$14.4 million higher than reported at December 31, 2004
and 2003, respectively. During 2003 we liquidated certain
LIFO inventories, the effect of which did not have a
significant impact on net income.
At December 31, 2004 and 2003, the recorded value of
the above inventories was approximately $0.8 million and
$1.6 million, respectively, lower than inventories for
income tax purposes.
14. PLANT, EQUIPMENT AND TIMBERLANDS
Plant, equipment and timberlands at December 31
were as follows:
In thousands
Land and buildings
Machinery and equipment
Other
Accumulated depreciation
Construction in progress
Timberlands, less depletion
Plant, equipment and timberlands – net
2004
$137,668
902,835
85,891
(611,852)
514,542
3,219
2,651
$520,412
2003
$129,130
880,897
86,306
(560,291)
536,042
4,454
2,464
$542,960
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GLATFELTER
15. OTHER CURRENT LIABILITIES
Other current liabilities is summarized as follows:
In thousands
Accrued payroll and benefits
Other accrued compensation and
retirement benefits
Income taxes payable
Other accrued expenses
Total
16. LONG-TERM DEBT
December 31
2003
$13,791
2004
$19,525
8,838
15,317
14,534
$58,214
6,929
1,565
21,965
$44,250
Long-term debt is summarized as follows:
In thousands
Revolving credit facility, due June 2006
67/8% Notes, due July 2007
Note payable – SunTrust, due March 2008
Other notes, various
Total long-term debt
Less current portion
Long-term debt, excluding current portion
December 31
2003
$64,047
150,000
34,000
1,228
249,275
(806)
$248,469
2004
$23,277
150,000
34,000
446
207,723
(446)
$207,277
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, both of which we are in
compliance with at December 31, 2004.
On July 22, 1997, we issued $150.0 million principal
amount of 67/8% 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
Timberland Buyer. 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 3.82% for five
years at which time we 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 December 31, 2004 and 2003, we had $4.0 million
and $3.3 million, respectively, 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.
17. CROSS-CURRENCY SWAP
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 €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
inter-company obligations recorded at our subsidiary in
Gernsbach, Germany. The cross-currency swap
is
recorded in the Consolidated Balance Sheets at fair value
of $(29.6) and $(22.0) million at December 31, 2004 and
2003, respectively, under the caption “Other long-term
liabilities.” Changes in fair value are recognized in
current earnings as “Other income (expenses)” in the
Consolidated Statements of Income. The mark-to-market
adjustment was offset by the related remeasurement of the
U.S. dollar denominated inter-company obligations.
The credit
risks associated with our
financial
derivatives are controlled through the evaluation and
monitoring of creditworthiness of the counterparties.
Although counterparties may expose us to losses in the
event of nonperformance, we do not expect such losses, if
any, to be significant.
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GLATFELTER
18. SHAREHOLDERS’ EQUITY
The following table summarizes outstanding shares of
common stock:
In thousands
Shares outstanding at
beginning of year
Treasury shares issued for:
Restricted stock
performance awards
401(k) plan
Director compensation
Employee stock options
exercised
Shares outstanding at end of
Year Ended December 31,
2003
2002
2004
43,782
43,644
42,750
19
69
7
73
8
80
7
43
5
92
6
791
year
43,950
43,782
43,644
19. COMMITMENTS, CONTINGENCIES AND
LEGAL PROCEEDINGS
Contractual Commitments The
the minimum annual
following
table
rentals due on
summarizes
noncancelable operating
similar
contractual obligations having initial or remaining terms
in excess of one year. Other contractual obligations
primarily represent minimum purchase commitments
under steam, energy and pulp wood supply contracts.
leases and other
In thousands
2005
2006
2007
2008
2009
Leases
2,289
1,166
1,059
733
695
Other
21,086
19,726
7,872
7,722
7,700
At December 31, 2004, required minimum annual
rentals due under operating leases and other similar
contractual obligation aggregated $15.4 million and
$121.9 million, respectively.
an
(the
Ecusta Division Matters
acquisition
In August 2001, pursuant
to
“Acquisition
agreement
Agreement”), we sold the assets of our Ecusta Division to
four related entities, consisting of Purico (IOM) Limited,
an Isle of Man limited liability company (“Purico”), and
RF&Son Inc. (“RF”), RFS US Inc. (“RFS US”) and RFS
Ecusta Inc. (“RFS Ecusta”), each of which is a Delaware
corporation, (collectively, the “Buyers”).
In August 2002,
the Buyers shut down
the
manufacturing operation of the pulp and paper mill in
Pisgah Forest, North Carolina, which was the most
significant operation of the Ecusta Division. On October
23, 2002, RFS Ecusta and RFS US filed for bankruptcy
under Chapter 7 of the U.S. Bankruptcy Code. During the
fourth 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.
Effective August 8, 2003, the assets of RFS Ecusta
and RFS US, which substantially consist of the pulp and
paper mill and related real property, were sold to several
third parties unrelated to the Buyers (the “New Buyers”).
We understand the New Buyers’ business plan was to
continue certain mill-related operations and to convert
portions of the mill site into a business park.
(“NCDENR”),
Beginning in April 2003, governmental authorities,
including the North Carolina Department of Environment
and Natural Resources
initiated
discussions with us and the New Buyers regarding,
among other environmental issues, certain potential
landfill closure liabilities (“Landfill Closure Costs”)
associated with the Ecusta mill and its properties. The
discussions focused on NCDENR’s desire to establish a
plan and secure financial resources to close three landfills
located at the Ecusta facility and to address other
environmental matters at the facility. During the third
quarter of 2003, the discussions ended with NCDENR’s
conclusion to hold us responsible for the closure of the
landfills. In March 2004, the NCDENR issued us an order
requiring the closure of one of the three landfills at issue.
We intend to pursue reimbursement for any such Landfill
Closure Costs from the Buyers under the indemnification
provisions of the Acquisition Agreement.
Based on our analysis of available information and our
landfill closure experience, we estimated the Landfill
Closure Costs would total approximately $7.6 million.
During 2003, we established a reserve in this amount
through charges to our results of operations. In November
2004, in compliance with the March 2004 NCDENR
order, we completed the physical closure of the subject
landfill. As of December 31, 2004, our reserve for
Landfill Closure Costs declined to $6.4 million, reflecting
costs paid to date. We believe this reserve to be adequate
based on our assessment of remaining Landfill Closure
Costs to be incurred.
In addition to Landfill Closure Costs, prior to 2003 we
had recorded liabilities for Third Party Claims, primarily
related
for
approximately $2.2 million.
compensation
to workers
claims,
We continue to believe the Buyers are responsible for
the Landfill Closure Costs and the Third Party Claims
under provisions of the Acquisition Agreement, and
to seek
believe we have a strong
indemnification. We intend to pursue appropriate avenues
to enforce the provisions of the Acquisition Agreement.
legal basis
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GLATFELTER
In October 2004, the bankruptcy trustee for the estates
of RFS Ecusta and RFS US filed a complaint in the U.S.
Bankruptcy Court for the Western District of North
Carolina against certain of the Buyers and other related
parties (“Defendant Buyers”) and us. The complaint
alleges, among other things, that the Defendant Buyers
engaged in fraud and fraudulent transfers and breached
their fiduciary duties. With respect to Glatfelter, the
complaint alleges that we aided and abetted the Defendant
Buyers in their purported actions in the Defendant Buyers’
structuring of the acquisition of the Ecusta Division and
asserts a claim against us under the Bankruptcy Code. The
trustee seeks damages from us in an amount not less than
$25.8 million, plus interest, and other relief. We believe
these claims are largely without merit and we are
vigorously defending ourselves in this action. Accordingly,
no amounts have been recorded in the accompanying
consolidated financial statements.
The bankruptcy trustee filed another complaint, also in
the U.S. Bankruptcy Court for the Western District of
North Carolina, against us, certain banks and other parties,
seeking, among other things, damages totaling $6.5 million
for alleged breaches of the Acquisition Agreement (the
“Breach Claims”), release of certain amounts held in
escrow totaling $3.5 million (the “Escrow Claims”) and
recoveries of unspecified amounts allegedly payable under
the Acquisition Agreement and a related agreement. As we
previously disclosed, we were first notified of the potential
Breach Claims in July 2002, which are primarily related to
the physical condition of the Ecusta mill at the time of sale.
We believe these claims are without merit. With respect to
the Escrow Claims, the trustee seeks the release of certain
amounts held in escrow related to the sale of the Ecusta
Division, of which $2.0 million was escrowed at the time
of closing in the event of claims arising such as those
asserted in the Breach Claim. The Escrow Claims also
include amounts alleged to total $1.5 million arising from
sales by us of certain properties at or around the Ecusta
mill. We have previously reserved such escrowed amounts
and they are recorded in the accompanying Condensed
Consolidated Balance Sheets as “Other
long-term
liabilities.” We are vigorously defending ourselves in this
action.
Further, governmental authorities are continuing to
monitor the environmental conditions at the Ecusta mill.
We are uncertain as to what additional Ecusta-related
claims, including environmental matters, if any, may be
asserted against us. In September 2004, one of the New
Buyers entered into a Brownfield Agreement with the
NCDENR relating to the Ecusta mill. We believe that the
New Buyers continue to have discussions with the
governmental authorities concerning certain other
environmental related matters at the former Ecusta
facility. The likelihood and extent of potential claims
against us could be mitigated by the successful execution
of the New Buyers’ business plan. Should any claims be
made against us, we would seek indemnification to the
extent possible in accordance with the terms of the
Acquisition Agreement. We cannot ascertain at this time
what additional impact, if any, these matters will have on
our consolidated financial position and/or results of
operations, and no amounts with respect thereto have
been recorded.
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
for environmental
operating expenditures
compliance.
required
In
1999,
Spring Grove, Pennsylvania
the
Pennsylvania Department of Environmental Protection
(“DEP”) issued to us a Notice of Violation (“NOV”)
alleging violations of air pollution control laws primarily
for purportedly
to obtain appropriate pre-
construction air quality permits in conjunction with the
installation of a turbine generator at our Spring Grove
facility.
failing
The Pennsylvania DEP’s NOV pertained
to a
modification for which we did not receive a pre-
construction permit. In October 2004, we entered into a
Consent Order and Agreement with the Pennsylvania
DEP that requires us to pay a $0.1 million penalty,
complete certain other corrective actions and install an air
pollution control device at the Spring Grove facility, the
related capital expenditure requirement does not represent
a material amount. This agreement did not have a material
impact on our consolidated financial position or our
results of operations.
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
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GLATFELTER
acquired the Neenah facility in 1979 as part of the
acquisition of the Bergstrom Paper Company. In part, this
facility used wastepaper as a source of fiber. At no time
did the Neenah facility utilize PCBs in the pulp and paper
making process, but discharges
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®-brand carbonless copy paper in the
wastepaper that was received from others and recycled.
from
the
As described below, various state and federal
governmental agencies have formally notified nine
potentially responsible parties (“PRPs”), including us, that
they are potentially responsible for response costs and
“natural resource damages” (“NRDs”) arising from PCB
contamination in the lower Fox River and in the Bay of
Green Bay, under the Comprehensive Environmental
Response, Compensation and Liability Act (“CERCLA”)
and other statutes. The other identified PRPs are NCR
Corporation, Appleton Papers Inc., Georgia Pacific Corp.
(formerly Fort Howard Corp. and Fort James), WTM I
Co. (a subsidiary of Chesapeake Corp.), Riverside Paper
Corporation, U.S. Paper Mills Corp. (a subsidiary of
Sonoco Products Company), Sonoco Products Company,
and Menasha Corporation.
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
liabilities 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.
in which
The areas of the lower Fox River and in the Bay of
Green Bay
the contamination exists are
commonly referred to 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, Operable Unit
2 (“OU2”) which is the portion of the river between dams
at Appleton and Little Rapids and Operable Units 3
through 5 (“OU3–5”), an area approximately 20 miles
downstream of our Neenah facility.
The following summarizes the status of our potential
exposure:
Response Actions
OU1 and OU2 On January 7, 2003, the Wisconsin
Department of Natural Resources (the “Wisconsin DNR”)
and the Environmental Protection Agency (“EPA”) issued
a Record of Decision (“ROD”) for the cleanup of OU1
and OU2. 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 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.
On July 1, 2003, WTM I entered into an Administrative
Order on Consent (“AOC”) with EPA and the Wisconsin
DNR regarding the implementation of the Remedial Design
for OU1.
On October 1, 2003, the U.S. Department of Justice
lodged a consent decree regarding OU1 (“the OU1 Consent
Decree”) with the U.S. District Court for the Eastern
District of Wisconsin. In the first quarter of 2004, the
United States District Court for the Eastern District of
Wisconsin entered the OU1 Consent Decree. Under terms
of the OU1 Consent Decree, Glatfelter and WTM I each
agreed to pay approximately $27 million, of which $25.0
million from each was placed in escrow to fund response
work associated with remedial actions specified in the
ROD. In addition, EPA agreed to take steps to place $10
million from another source into escrow for the OU1
cleanup. The remaining amount agreed to be paid under
the consent decree is for NRD, NRD assessment and Past
Costs incurred by the government.
The response work will be managed and/or performed
by Glatfelter and WTM I, with governmental oversight,
and funded by the amounts placed into escrow. Based on
information currently available to us, we believe the
required remedial actions can be completed with the
amount of monies committed under the Consent Decree.
If
to an
is
insufficiency of escrow funds, Glatfelter and WTM I each
remain potentially responsible for the costs necessary to
complete the remedial actions.
the Consent Decree
terminated due
The terms of the OU1 Consent Decree and the
underlying escrow agreement restrict the use of the funds to
qualifying remediation activities or restoration activities at
the lower Fox River. In mid 2004, together with WTM I,
we began activities to remediate the area known as OU1.
These activities included, among others, construction of de-
watering
and
water-treatment
commencement of dredging of portions of the OU1. In
2004 we completed dredging, dewatering and disposal
facilities,
and
- 41 -
GLATFELTER
activities covering of approximately 18,000 cubic yards of
contaminated sediment from various locations in OU1.
The terms of the OU1 Consent Decree include
provisions to be followed should the escrow account be
depleted prior to completion of the response work. In this
event, each company would be notified and be provided
an opportunity to contribute additional funds to the
escrow account and thereby to preserve the OU1 Consent
Decree. Should the OU1 Consent Decree be terminated
for this reason, each company would lose the protections
contained in the settlement and the governments may turn
to one or both parties for the completion of OU1 clean up.
In such a situation, the governments may also seek
response work from a third party, or perform the work
themselves and seek response costs from any of the
identified PRPs, including Glatfelter.
At December 31, 2004, our portion of the escrow fund
totaled approximately $20.2 million, of which $7.2
million is recorded in the accompanying Condensed
Consolidated Balance Sheet under the caption “Prepaid
expenses and other current assets” and $13.0 million is
the caption “Other assets.” As of
included under
December 31, 2004, our reserve for environmental
liabilities, substantially all of which
is for OU1
remediation activities, totaled $21.1 million.
OU3 – 5 On July 28, 2003, the EPA and the
Wisconsin DNR issued a ROD (the “Second ROD”) for
the cleanup of OU3 – 5. The Second ROD calls for the
removal of 6.5 million cubic yards of sediment and
certain monitoring at an estimated cost of $324.4 million
but could, according to the Second ROD, cost within a
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.
During the first quarter of 2004, NCR Corp. and
Georgia Pacific Corp. entered into an AOC with the
United States EPA under which they agreed to perform
the Remedial Design for OU3-5, thereby accomplishing a
first step towards remediation.
We do not believe that we have more than a de
minimis
share of any equitable distribution of
responsibility for OU3–5 after taking into account the
location of our Neenah facility relative to the site and
considering other work or funds committed or expended
by us. However, uncertainty regarding responsibilities for
the cleanup of these sites continues due to disagreement
over a fair allocation or apportionment of responsibility.
Natural Resource Damages
The ROD and Second
ROD do not place any value on claims for NRDs
associated with this matter. As noted above, NRD claims
are 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 then 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 has yet to be
completed, 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.
The OU1 Consent Decree required that Glatfelter and
WTM I each pay the governments $1.5 million for NRDs
for the Fox River site, and $150,000 for NRD assessment
costs. Each of these payments was made in return for
credit to be applied toward each settling company’s
potential liability for NRDs associated with the entire
river.
Other Information 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 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 exists 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 PRPs, pursuant to which such PRPs
have agreed to share both defense costs and costs for
scientific studies relating to PCBs discharged into the
- 42 -
GLATFELTER
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 identified PRPs is much less than our
per capita share of the cost sharing agreement.
We also believe that there exist additional potentially
responsible parties other than the 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 are also potentially responsible for this
matter.
While the OU1 Consent Decree clarifies exposure we
may have with regard to the Fox River site, it does not
completely resolve our potential liability related to this
matter. We continue to believe that this matter may 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 We have
reserves for environmental liabilities with contractual
obligations and for those environmental 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. The following table summarizes
information with respect to such reserves as of December
31, 2004 and 2003.
In millions
Recorded as:
Environmental liabilities
Other long-term liabilities
Total
December 31,
2004
2003
$7.7
13.9
$21.6
$27.0
2.4
$29.4
The classification of our environmental liabilities is
based on the development of the underlying remediation
plan and execution of the related escrow agreement for
the funding thereof. The reserve balance declined as a
result of payments associated with remediation activities
under the OU1 Consent Decree and items related to the
Fox River matter. We did not record charges to our results
of operations during 2004 or 2003 related to these
matters.
Other than with respect to the OU1 Consent Decree,
timing of future expenditures for
the amount and
environmental compliance, cleanup, remediation and
personal injury, NRDs and property damage liabilities
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 parties.
Range of Reasonably Possible Outcomes – Neenah,
Wisconsin
Based on currently available information,
including actual remediation costs incurred to date, we
believe that the remediation of OU1 will be satisfactorily
completed for the amounts expected to be committed
under the OU1 Consent Decree. Our assessment is
dependent, in part, on successful use of anticipated
dredging techniques and the ultimate extent of such
dredging, and on the successful negotiation of acceptable
contracts to complete remediation related activities.
The OU1 Consent Decree does not address response
costs necessary to remediate the remainder of the Fox
River site and only addresses NRDs and claims for
reimbursement of government expenses to a limited
extent. Due to judicial interpretations that find CERCLA
imposes joint and several liability, uncertainty persists
regarding our exposure with respect to the remainder of
the Fox River site.
Based on our analysis of currently available information
the cleanup of hazardous
and experience regarding
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 our reserves by amounts that may
prove to be insignificant or that could range, in the
aggregate, up to approximately $115 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 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
considered: (i) the remedial actions agreed to in the OU1
Consent Decree and our belief that the required actions can
be accomplished with the funds to be escrowed under the
OU1 Consent Decree; and (ii) no active remediation of
OU2. We have also assumed dredging for the remainder of
the River and the Bay of Green Bay, as set forth in the
Second ROD, although at a significantly higher cost than
estimated in the 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 than
we will incur and a level of NRD claims and claims for
reimbursement of expenses from other parties
that,
although reasonably possible, is unlikely.
- 43 -
GLATFELTER
In
reserves
estimating both our
for
current
remediation and other environmental
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,
generally based on their financial condition and probable
contribution. Our evaluation of the other PRPs’ financial
condition
the review of publicly disclosed
financial information. Furthermore, we believe certain of
these PRPs have corporate or contractual relationships
with additional entities
that may shift monetary
obligations arising from the lower Fox River and Bay of
Green Bay. The relative probable contribution is based
upon our knowledge that at least two PRPs manufactured
the paper and arranged for the disposal of the wastepaper
that included the PCBs and as such, in our opinion, bear a
higher level of responsibility.
included
is based upon
In addition, our assessment
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 facilities
were under
large multinational
companies that 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.
the ownership of
Summary Our current assessment is that we should
be able to manage these environmental matters without a
long-term, material adverse impact on the Company.
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 implementation of the OU1 Consent Decree and/or if
we are ordered to implement the remedy proposed in the
Second ROD, such developments could have a material
adverse effect on our consolidated financial position,
liquidity and results of operations and may 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.
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. On
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. One of the
insurers that is a defendant in our Wisconsin litigation has
filed a counter-suit against us in the U.S. District Court
for the Middle District of Pennsylvania. The filing of our
lawsuit followed the issuance of a Wisconsin Supreme
Court opinion regarding environmental coverage issues
that is favorable to policyholders. In 2004, we reached
successful resolution of certain claims under insurance
policies related to the Fox River environmental matter.
Insurance recoveries included in the results of operations
for the year ended 2004 totaled $32.8 million and were
fully received in cash prior to the end of the year.
- 44 -
GLATFELTER
20. SEGMENT AND GEOGRAPHIC INFORMATION
In connection with the implementation of the North American Restructuring Program and other initiatives, during 2004, we
changed the way we manage our business and transitioned from three distinct business units to two: the Europe-based Long
Fiber & Overlay Papers business unit and the North America-based Specialty Papers business unit. While the Long Fiber &
Overlay Papers business unit remains unchanged, the formation of the Specialty Papers business unit, which consists of the
former Engineered Products and the Printing & Converting Papers business units, allows us to more effectively manage the
demand planning process, optimize product mix, minimize process variability and meet the demands of our customers. As a
result of this transition, all segment data has been restated to give effect to the further refinement of our organizational structure
discussed above. The following table sets forth profitability and other information by business unit for the year ended
December 31:
In millions
Net sales
Energy sales, net
Total revenue
Cost of products sold
Gross profit
SG&A
Pension income
Restructuring recorded as
component of COS
Restructuring charges
Unusual items
Gains on dispositions of
plant, equipment and
timberlands
Gain on insurance recoveries
Total operating income
(loss)
Nonoperating income
(expense)
Income from continuing
operations before income
taxes
Supplemental Data
Plant, equipment and
timberlands, net
Depreciation expense
Specialty Papers
2003
$358
10
368
326
42
44
2002
$385
10
395
329
66
44
2004
$337
10
347
312
35
38
Long Fiber & Overlay
2003
$165
–
165
131
34
17
2002
$135
–
135
103
32
14
2004
$205
–
205
164
41
23
Other and Unallocated
2003
$10
–
10
15
(5)
–
(17)
2004
$1
–
1
1
–
–
(17)
2002
$20
–
20
19
1
1
(33)
–
20
–
7
7
12
(58)
(33)
(32)
–
–
4
(2)
(1)
–
2004
$543
10
553
477
76
61
(17)
–
20
–
Total
2003
$533
10
543
471
72
61
(17)
7
7
12
(58)
(33)
(32)
–
(3)
(2)
22
18
17
18
88
19
32
103
34
2002
$540
10
550
451
99
59
(33)
–
4
(2)
(1)
–
72
$(3)
$(2)
$22
$18
$17
$18
$75
$5
$19
$90
$20
$59
(13)
(14)
(13)
(13)
(14)
(13)
$351
37
$377
44
$396
35
$169
14
$166
12
$121
10
–
–
–
–
–
–
$520
51
$543
56
$517
45
Results of individual business units are presented
based on our management accounting practices and
is no comprehensive,
management structure. There
authoritative body of guidance
for management
accounting equivalent to accounting principles generally
accepted in the United States of America; 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
Management evaluates results of operations before
non-cash pension income, restructuring related charges,
unusual items, effects of asset dispositions and insurance
recoveries 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 Company’s performance is
evaluated internally and by the Company’s Board of
Directors.
We sell a significant portion of our specialty papers
individual
than 10% of our
through wholesale paper merchants. No
customer accounted
consolidated net sales in 2004, 2003 or 2002.
for more
- 45 -
GLATFELTER
Our 2004, 2003 and 2002 net sales to external customers and location of net plant, equipment and timberlands as of
December 31, 2004, 2003 and 2002 are summarized below. Net sales are attributed to countries based upon origin of
shipment.
In thousands
United States
Germany
Other
Total
2004
2003
Plant,
Equipment and
Timberlands – Net
$351,086
149,513
19,813
$520,412
Plant,
Equipment and
Timberlands – Net
$377,182
147,651
18,127
$542,960
Net sales
$367,903
138,630
26,660
$533,193
2002
Plant,
Equipment and
Timberlands – Net
$396,160
104,477
16,416
$517,053
Net sales
$386,458
128,574
25,315
$540,347
Net sales
$353,284
156,337
33,903
$543,524
21. QUARTERLY RESULTS (UNAUDITED)
In thousands, except per share
Net sales
Gross Profit
Net Income
Diluted
Earnings Per Share
First
Second
Third
Fourth
2004
$132,078
129,029
143,075
139,342
2003
$142,286
129,620
131,904
129,383
2004
$20,499
16,042
27,042
28,831
2003
$30,307
18,269
19,957
11,013
2004
$36,258
(1,629)
2,199
19,274
2003
$26,777
269
(6,665)
(7,720)
2004
$0.83
(0.04)
0.05
0.44
2003
$0.61
0.01
(0.15)
(0.18)
The information set forth above includes the following, on an after-tax basis:
In thousands
First
Second
Third
Fourth
Restructuring Charges and
Unusual Items
Gains on Sales of Plant,
Equipment and Timberlands,
and Other Asset Sales
Insurance Recoveries
2004
$–
(524)
(10,249)
(1,950)
2003
$–
–
(8,639)
(7,258)
2004
$19,559
–
947
13,558
2003
$19,311
–
(1,691)
(433)
2004
$15,221
181
5,908
–
2003
$–
–
–
–
- 46 -
GLATFELTER
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Committee, the members are audit committee financial
experts as this term is set forth in the applicable regulations
of the SEC.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our chief executive officer and our chief financial
officer, after evaluating the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)), as of December 31,
2004, have concluded that, as of the evaluation date, our
disclosure controls and procedures were effective.
Management’s Report on Internal Control over
Independent
and Report of
Financial Reporting
Registered Public Accounting Firm.
Management’s report on the Company’s internal
control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) and the related report
of our independent registered public accounting firm are
included
Item 8. – Financial Statements and
Supplementary Data.
in
Changes in Internal Control over Financial Reporting
There were no significant changes in our internal
control over financial reporting during the three months
ended December 31, 2004, that has materially affected or
are reasonably likely to materially affect our internal
control over financial reporting. In
the course of
internal control over
completing our evaluation of
financial reporting we implemented certain changes and
enhancements to our controls. These primarily related to
segregation of duties and documentation of
the
functioning of controls.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS
AND
EXECUTIVE
OFFICERS OF THE REGISTRANT
Directors The information with respect to directors
required under this Item is incorporated herein by reference
to our Proxy Statement, to be dated on or about March 30,
2005. Our board of directors has determined that, based on
the relevant experience of the members of the Audit
Executive Officers of the Registrant The information
with respect to the executive officers required under this
Item is set forth in Part I of this report.
rules of
We have adopted a Code of Business Ethics for the
CEO and Senior Financial Officers in compliance with
the Securities and Exchange
applicable
Commission that applies to our chief executive officer,
chief financial officer and our principal accounting officer
or controller, or persons performing similar functions. A
copy of the Code of Ethical Business Conduct is filed as an
exhibit to this Annual Report on Form 10-K and is
available on our website,
at
www.glatfelter.com.
free of
charge,
ITEM 11. EXECUTIVE COMPENSATION
The
information
is
incorporated herein by reference to our Proxy Statement,
to be dated on or about March 30, 2005.
required under
Item
this
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
AND
OWNERS
BENEFICIAL
MANAGEMENT
The
information
is
incorporated herein by reference to our Proxy Statement,
to be dated on or about March 30, 2005.
required under
Item
this
ITEM 13. CERTAIN
RELATIONSHIPS
AND
RELATED TRANSACTIONS
The
information
is
incorporated herein by reference to our Proxy Statement,
to be dated on or about March 30, 2005.
required under
Item
this
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
The
information
is
incorporated herein by reference to our Proxy Statement,
to be dated on or about March 30, 2005.
required under
Item
this
- 47 -
GLATFELTER
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)
1.
Our Consolidated Financial Statements as follows are included in Part II, Item 8:
i. Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002
ii. Consolidated Balance Sheets as of December 31, 2004 and 2003
iii. Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and
2002
iv. Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2004,
2003 and 2002
v. Notes to Consolidated Financial Statements for the Years Ended December 31, 2004, 2003
and 2002
2.
Financial Statement Schedules (Consolidated) are included in Part IV:
i. Schedule II -Valuation and Qualifying Accounts - For Each of the Three Years in the Period
Ended December 31, 2004
(b) Exhibit Index
Exhibit Number
Description of Documents
(2)
Amended and Restated Acquisition Agreement dated as of August 9, 2001
by and among Purico (IOM) Limited, RF & Son Inc., RFS US Inc. and
RFS Ecusta Inc., as Buyers, and P. H. Glatfelter Company and
Mollanvick, Inc., as Sellers.
Exhibit
2
Incorporated by
Reference to
(Filing)
August 24, 2001 Form
8-K
(3)
(a)
Articles of Amendment dated April 27, 1977, including restated Articles of
3(a)
1993 Form 10-K
Incorporation, as amended by:
i. Articles of Merger dated January 30, 1979
ii.
Statement of Reduction of Authorized Shares dated May 12,
1980
Statement of Reduction of Authorized Shares dated
September 23, 1981
Statement of Reduction of Authorized Shares dated August 2,
1982
Statement of Reduction of Authorized Shares dated July 29, 1983
iii.
iv.
v.
vi. Articles of Amendment dated April 25, 1984
vii.
Statement of Reduction of Authorized Shares dated October 15,
1984
Statement of Reduction of Authorized Shares dated
December 24, 1985
viii.
ix. Articles of Amendment dated April 23, 1986
x.
xi.
xii.
xiii.
Statement of Reduction of Authorized Shares dated July 11, 1986
Statement of Reduction of Authorized Shares dated March 25,
1988
Statement of Reduction of Authorized Shares dated November 9,
1988
Statement of Reduction of Authorized Shares dated April 24,
1989
xiv. Articles of Amendment dated November 29, 1990
xv. Articles of Amendment dated June 26, 1991
xvi. Articles of Amendment dated August 7, 1992
xvii. Articles of Amendment dated July 30, 1993
xviii. Articles of Amendment dated January 26, 1994
Articles of Incorporation, as amended through January 26, 1994 (restated
for the purpose of filing on EDGAR)
By-Laws as amended through March 9, 2005, filed herewith.
(b)
(c)
- 48 -
GLATFELTER
3(a)
3(a)
3(a)
3(a)
3(a)
3(a)
3(b)
3(b)
(3)
3(b)
3(b)
3(b)
3(b)
3(b)
3(b)
3(b)
3(b)
3(b)
3(c)
1993 Form 10-K
1993 Form 10-K
1993 Form 10-K
1993 Form 10-K
1993 Form 10-K
1994 Form 10-K
1984 Form 10-K
1985 Form 10-K
March 31, 1986
Form 10-Q
1986 Form 10-K
1987 Form 10-K
1988 Form 10-K
1989 Form 10-K
1990 Form 10-K
1991 Form 10-K
1992 Form 10-K
1993 Form 10-K
1993 Form 10-K
1993 Form 10-K
4
(a)
(b)
10
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
(p)
(q)
(r)
(s)
(t)
Indenture, dated as of July 22, 1997, between P. H. Glatfelter Company and
4.1
The Bank of New York, relating to the 6-7/8 Notes due 2007.
Registration Rights Agreement, dated as of July 22, 1997, among P. H.
Glatfelter Company, Bear, Stearns & Co. Inc. and BT Securities
Corporation, relating to the 6-7/8 Notes due 2007.
P. H. Glatfelter Company Management Incentive Plan, adopted as of
January 1, 1994, as amended and restated December 19, 2000 and
effective January 1, 2001.
P. H. Glatfelter Company Supplemental Executive Retirement Plan, as
amended and restated effective April 23, 1998 and further amended
December 20, 2000.
4.3
Form S-4, Reg. No.
333-36395
Form S-4, Reg. No.
333-36395
10(a)
2000 Form 10-K**
10(c)
2000 Form 10-K**
Description of Executive Salary Continuation Plan.
P. H. Glatfelter Company Supplemental Management Pension Plan,
10(g)
10(f)
1990 Form 10-K**
1998 Form 10-K**
effective as of April 23, 1998.
P. H. Glatfelter Company 1992 Key Employee Long-Term Incentive Plan,
10(g)
2000 Form 10-K **
as amended December 20, 2000.
P. H. Glatfelter Company Deferred Compensation Plan for Directors,
10(h)
1998 Form 10-K**
10(i)
2000 Form 10-K **
10.1
June 30, 2003
Form 10-Q **
10(h)
1996 Form 10-k
10(i)
1996 Form 10-K
10.1
10.1
10(s)
10.3
10.2
June 30, 2002
Form 10-Q
September 30, 2002
Form 10Q
2001 Form 10-K
2002 Form 10-K
March 31, 2003
Form 10-Q**
January 31, 2005
Form 8-K
March 31, 2003
Form 10-Q
October 1, 2003
Form 8-K/A – No. 1
10(u)
2003 Form 10-K**
effective as of April 22, 1998.
Change in Control Employment Agreement by and between P. H. Glatfelter
Company and George H. Glatfelter II, dated as of December 31, 2000.
Form of Change in Control Employment Agreement by and between P. H.
Glatfelter Company and certain employees, dated as of December 31,
2000.
(A)
Schedule of Change in Control Employment Agreements, filed herewith.**
Loan Agreement, dated February 24, 1997, between P. H. Glatfelter
Company, as borrower, and GWS Valuch, Inc., as lender.
Agreement between the State of Wisconsin and Certain Companies
Concerning the Fox River, dated as of January 31, 1997, among P. H.
Glatfelter Company, Fort Howard Corporation, NCR Corporation,
Appleton Papers Inc., Riverside Paper Corporation, U.S. Paper Mills,
Wisconsin Tissue Mills Inc. and the State of Wisconsin.
Credit Agreement, dated as of June 24, 2002, among P. H. Glatfelter
Company, various subsidiary borrowers, Deutsche Bank AG New York
Branch, as Agent, and various lending institutions with Deutsche Bank
Securities Inc., as Lead Arranger and Book Runner.
Increase in Commitments and Lender Addition Agreement.
Supply and Service Agreement dated as of August 1, 2001 by and among
Purico GmbH, Purico (IOM) Limited and Papierfabrik Schoeller &
Hoesch GmbH & Co.
Contract for the Purchase and Bargain Sale of Property (exhibits omitted)
Employment agreement between the Registrant and John C. van Roden, Jr.,
10(m)
10.1
Chief Financial Officer.
Severance Agreement and General Release between Mr. C. Matthew Smith
10.1
and the Registrant dated January 31, 2005.
Term Loan Agreement, dated as of March 21, 2003, among GPW
Timberlands, LLC, (a wholly owned subsidiary of the Registrant) and
Suntrust Bank, as Administrative Agent.
Consent Decree for Remedial Design and Remedial Action at Operable
Unit 1 of the Lower Fox River and Green Bay site by and among the
United States of America and the State of Wisconsin v. P. H. Glatfelter
Company and WTMI Company (f/k/a Wisconsin Tissue Mills, Inc.)
Employment agreement between the Registrant and John Jacunski, Vice
President and Corporate Controller.
Compensatory Arrangements with Certain Executive Officers, filed
herewith.**
- 49 -
GLATFELTER
(u)
(v)
(w)
(x)
(y)
Summary of Non-Employee Director Compensation, (effective
January 1, 2005).
Contract for the Purchase and Sale of Property, dated September 21, 2004,
among Glatfelter Pulp Wood Company, The Conservation Fund and
Stewart Title Guaranty Company.
Manager Service Contract between the Registrant (through a wholly owned
subsidiary) and Werner Ruckenbrod, filed herewith.**
Retirement Pension Agreement between the Registrant (through a wholly
owned subsidiary) and Werner Ruckenbrok, filed herewith.**
Arbitration Agreement between the Registrant (through a wholly owned
subsidiary) and Werner Ruckenbrod, filed herewith.**
10.1
10.1
December 15, 2004
Form 8-K
September 21, 2004
Form 8-K
Code of Business Ethics for the CEO and Senior Financial Officers of
14
2003 Form 10-K
Glatfelter.
Subsidiaries of the Registrant, filed herewith.
Consent of Independent Registered Public Accounting Firm, filed herewith.
Certification of George H. Glatfelter II, Chairman and Chief Executive
Officer of Glatfelter, pursuant to Section 302 (a) of the Sarbanes-Oxley
Act Of 2002, filed herewith.
Certification of John C. van Roden, Jr., Executive Vice President and Chief
Financial Officer of Glatfelter, pursuant to Section 302 (a) of the
Sarbanes-Oxley Act Of 2002, filed herewith.
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, filed herewith.
Certification of John C. van Roden, Jr., Executive 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, filed herewith.
** Management contract or compensatory plan
14
21
23
31.1
31.2
32.1
32.2
- 50 -
GLATFELTER
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 24, 2005
P. H. GLATFELTER COMPANY
(Registrant)
By /s/ George H. Glatfelter II
George H. Glatfelter II
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant in the capacities and on the dates indicated:
Date
Signature
Capacity
March 24, 2005
March 24, 2005
March 24, 2005
March 24, 2005
March 24, 2005
March 24, 2005
March 24, 2005
March 24, 2005
March 24, 2005
March 24, 2005
March 24, 2005
/s/ George H. Glatfelter II
George H. Glatfelter II
Chairman and Chief Executive Officer
/s/ John C. van Roden, Jr.
John C. van Roden, Jr.
Executive Vice President and
Chief Financial Officer
Principal Executive Officer and Director
Principal Financial Officer
/s/ John P. Jacunski
John P. Jacunski
Vice President and Corporate Controller
Controller
Director
Director
Director
Director
Director
Director
Director
Director
/s/ Kathleen A. Dahlberg
Kathleen A. Dahlberg
/s/ Nicholas DeBenedictis
Nicholas DeBenedictis
/s/ Richard C. Ill
Richard C. Ill
/s/ J. Robert Hall
J. Robert Hall
/s/ M. A. Johnson II
M. A. Johnson II
/s/ Ronald J. Naples
Ronald J. Naples
/s/ Richard L. Smoot
Richard L. Smoot
/s/ Lee C. Stewart
Lee C. Stewart
- 51 -
GLATFELTER
CERTIFICATION PURSUANT TO SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002
I, George H. Glatfelter II, Chairman and Chief Executive Officer of P. H. Glatfelter Company, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2004 of P.H. Glatfelter
Company (“Glatfelter”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this 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-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Glatfelter and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, 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 report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of Glatfelter's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in Glatfelter's internal control over financial reporting that occurred
during Glatfelter’s most recent fiscal quarter (the fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, Glatfelter's internal control over
financial reporting; and
5. Glatfelter’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to Glatfelter’s auditors and the audit committee of the Glatfelter’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect Glatfelter’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in Glatfelter’s internal control over financial reporting.
Date: March 24, 2005
By:
/s/ George H. Glatfelter II
George H. Glatfelter II
Chairman and Chief Executive
Officer
- 52 -
GLATFELTER
CERTIFICATION PURSUANT TO SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002
I, John C. van Roden, Jr., Executive Vice President and Chief Financial Officer of P. H. Glatfelter Company, certify
that:
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2004 of P.H. Glatfelter
Company (“Glatfelter”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this 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-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Glatfelter and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, 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 report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of Glatfelter's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in Glatfelter's internal control over financial reporting that occurred
during Glatfelter’s most recent fiscal quarter (the fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, Glatfelter's internal control over
financial reporting; and
5. Glatfelter’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to Glatfelter’s auditors and the audit committee of the Glatfelter’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect Glatfelter’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in Glatfelter’s internal control over financial reporting.
Date: March 24, 2005
By:
/s/ John C. van Roden, Jr.
John C. van Roden, Jr.
Executive Vice President and
Chief Financial Officer
- 53 -
GLATFELTER
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE
For Each of the Three Years in the Period Ended December 31, 2004
Valuation and Qualifying Accounts
Allowances for
Schedule II
Balance, beginning of year
Other (a)
Provision
Write-offs, recoveries and
discounts allowed
Balance, end of year
2004
$3,115
24
868
(1,643)
$2,364
Doubtful Accounts
2003
$2,211
168
1,098
2002
$1,551
157
732
Sales Discounts and Deductions
2003
$1,662
266
1,604
2002
$1,624
199
12,172
2004
$2,038
162
3,964
(362)
$3,115
(229)
$2,211
(3,947)
$2,217
(1,494)
$2,038
(12,333)
$1,662
The provision for doubtful accounts is included in administrative expense and the provision for sales discounts and
deductions is deducted from sales. The related allowances are deducted from accounts receivable.
(a) Relates primarily to changes in currency exchange rates
- 54 -
GLATFELTER