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
L O C AT I O N S
I N T E R N AT I O N A L
O P E R AT I N G L O 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
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
O T H E R L O C AT I O N S
China Representative Offi ce
Century Financial Tower, 8F808
No 1 Suhua Road
Suzhou-SIP, Jiangsu 215021
ph: 86-512-676-25077
fax: 86-512-676-25070
www.glatfelter.com
© 2006 Glatfelter
®
2 0 0 5 A N N U A L R E P O R T
coreV A L U E
V A L U E S
O U R C O R E VA L U E S
Integrity
Respect for Coworkers
Environmental Responsibility
We are ethical and responsible in
all of our business endeavors, all
the time.
Financial Discipline
We are responsible for the
prudent management of the
resources entrusted to us and for
the generation of fi nancial value
for all constituents.
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 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.
Customer Focus
Social Responsibility
We are dedicated to understanding
and anticipating the needs of our
customers and helping them to
achieve their business objectives.
We recognize our responsibility
to contribute to the betterment
of the communities in which we
operate and the world in which
we live.
E X E C U T I V E O F F I C E R S
D I R E C T O R S
I N F O R M AT I O N
George H. Glatfelter II
Chairman and
Chief Executive Offi cer
Dante C. Parrini
Executive Vice President and
Chief Operating Offi cer
John C. van Roden, Jr.
Executive Vice President and
Chief Financial Offi cer
John P. Jacunski
Vice President and
Corporate Controller
Kathleen A. Dahlberg
Founder and President/CEO
Open Vision Partners
Nicholas DeBenedictis
Chairman and Chief Executive Offi cer
Aqua America Corporation
George H. Glatfelter II
Chairman and
Chief Executive Offi cer
J. Robert Hall
Chief Executive Offi cer
Ardale Enterprises, LLC
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
Jeffrey J. Norton
Vice President, General Counsel
and Secretary
Richard C. Ill
President and Chief Executive Offi cer
Triumph Group, Inc.
Werner A. Ruckenbrod
Vice President
Long Fiber & Overlay Papers
Ronald J. Naples
Chairman and Chief Executive Offi cer
Quaker Chemical Corporation
Mark A. Sullivan
Vice President
Global Supply Chain
William T. Yanavitch II
Vice President
Human Resources
and Administration
Richard L. Smoot
Retired Regional Chairman
PNC Bank, NA
Philadelphia/South Jersey Markets
Lee C. Stewart
Investment Banker
Daniel Stewart & Company
Annual Meeting of Shareholders
April 26, 2006
10:00am EST
York Expo Center
334 Carlisle Avenue
York, PA
Transfer Agent, Dividend
Disbursing Agent and Registrar
Mellon Investor Services, LLC
85 Challenger Road
Ridgefi eld Park, NJ 07660
ph: 800-756-3353
Information Sources
For the latest quarterly business
results or other information, visit
www.glatfelter.com or contact:
Investor Relations
P.H. Glatfelter Company
96 S. George Street
Suite 500
York, PA 17401
ph: 717-225-4711
E-mail: ir@glatfelter.com
Our Business
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.
Our Products
Specialty Papers
Book Publishing
• 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
Converting Papers
• Envelopes
• High-end retail shopping bags
• Drawing & art papers
• China markers
Lightweight Printing Papers
• Financial publications
• Pharmaceutical inserts
• Legal publications
Digital Imaging
• Point-of-purchase displays
• Photo reproductions
• Posters/Banners
• Boarding passes
• Concert tickets
• Engineered drawings
• Apparel tags
Casting and Specialty Release
• Refl ective signage
• Fleet graphics
• Simulated leather
• Iron-on transfers
• Vinyl fi lms & foams
• Gasketing
• Adhesive tape
Pressure Sensitive
• Postage stamps
• Stamp liners
• Peel & stick labels
Industrial Specialties
• Disposable surgical gowns & wipes
• Fluorescent board & tabs
• Playing cards
• Greeting cards
Long Fiber & Overlay Papers
Food and Beverage
• Tea bags
• Coffee pods/pads and fi lters
• Food casing papers
Composite Laminates
• Laminate countertops
• Laminate furniture
• Laminate fl ooring
Technical Specialties
• Stencil papers
• Wet-wipe tissues
• Adhesive tapes
• Battery pasting papers
• Cryogenics
• Vacuum bags
• Specialty non-wovens
Metallized Products
• Holographic labels & wrap
• Glue-applied beverage labels
• Gift wrap
Letter
Letter to Our Shareholders
George H. Glatfelter II
Chairman and Chief Executive Offi cer
Dear Fellow Shareholder:
If 2004 was the year of turnaround for Glatfelter, then
2005 will be characterized as the year in which our
strategy solidifi ed. During the year, we leveraged the
momentum of our recovery to develop a specialty
products business platform capable of achieving the
next stage of growth and value creation. With crisp
execution focused upon “the things that matter most,”
Glatfelter PEOPLE sustained our progress and built a
foundation of strength and fl exibility. We repositioned
the business for the attractive opportunities emerging in
the global paper industry. And along the way, despite a
tumultuous market backdrop of soaring input costs, too
much capacity and too little demand, we responded
with a solid fi nancial performance:
• Adjusted earnings were up 17% to $.35 per share
• Net sales rose 7% to $579 million
• New products represented 52% of sales
• Timberland was sold for $21 million
• Insurance recoveries totaled $20 million
• Net debt was reduced by $22 million
In addition, I am very pleased to report that over the
two-year period ending December 31, 2005, Glatfelter
generated total shareholder return of 21% representing
top-tier performance in the paper industry.
Our philosophy of concentrating on the few things that
matter most and executing them well drove this superior
performance. Despite a highly challenging market
environment, we directed the energies of the entire
enterprise on two Focus Points – the restructuring of our
North American operations and revenue growth from our
Long Fiber and Overlay Papers business.
During the year, the benefi ts of our North American
Restructuring Program continued to mount. Step-
change improvements in cost reduction and productivity
were achieved at the Spring Grove mill. Productivity
improvements progressed at the Neenah facility. And
we redoubled our efforts to enhance logistics and supply
chain practices as raw material costs climbed $8 million
over 2004. We continued to improve our integrated sales
and operations planning process to proactively anticipate
market dynamics. The effort helped avoid market-related
production downtime and improved inventory effi ciency.
By year-end, the North American Restructuring Program
generated almost $20 million in economic benefi t,
meeting our expectations.
The Specialty Papers business recorded another solid year
of growth with sales increasing by 13%. Both volume
and pricing strengthened as the year progressed. For the
fi fth year in a row, Engineered Products achieved double-
digit volume growth. The higher sales revenue was
supported by a proven new product development process.
New product development and service innovation
again accounted for over 50% of our revenues. We
also strengthened our balance sheet through insurance
recoveries related to the Fox River and by monetizing
assets with timberland sales. These actions will add
$24 million in after-tax proceeds and will enhance our
fi nancial fl exibility.
However, our performance was tempered by
disappointing results within the Long Fiber and Overlay
Papers business. Early in the year, we had projected
strong growth that simply never materialized. The
shortfall was caused by weak economic conditions in
Europe, a loss of market share in Composite Laminates
and slower than expected acceptance of new Technical
Specialties papers. Quite frankly, we faced greater
r to Our
minimized environmental liabilities. All of these efforts
fi nally bore fruit in the turnaround of 2004 and were
reconfi rmed by last year’s performance. While our
progress was rewarding, ongoing structural changes
within the industry threatened its sustainability. We
viewed this critical period as a strategic “infl ection
point” – a time when the business either climbs to new
heights or spirals into decline. Our Directors and Senior
Management Team recognized that standing still was not
an option. We have a responsibility to act and embrace
generational change for the benefi t of all stakeholders.
In response, we implemented the EURO Program, a
sweeping workforce effi ciency effort deployed at each
of our European facilities. Modeled after the North
American Restructuring Plan, EURO will generate
signifi cant improvements in our cost structure and
productivity. We expect this initiative will yield between
$7 million to $9 million in annualized economic benefi t
by 2008.
technical and commercial challenges than initially
anticipated and sales were slow in developing.
As we look toward 2006, we believe the present market
fundamentals will remain in place in the near term. We
expect strong demand and strengthening prices will
continue for our Specialty Papers products. But the
unrelenting rise in input costs will continue to pressure
margins. The execution of the EURO Program will begin
to address the challenges facing the Long Fiber and
Overlay Papers business unit. We are encouraged by signs
of improving demand in this business, particularly in the
Food and Beverage markets. However, sluggish economic
conditions and a supply-demand imbalance in the
Composite Laminates segment will continue to adversely
impact the unit’s performance.
Within Glatfelter, one of our strategic principles is to
continually seek to re-deploy assets to maximize value.
One of these initiatives involves actively managing our
timberlands in ways that create the greatest value for
shareholders. Over the last few years, Glatfelter sold
approximately 33,000 acres of woodlands for about $115
million. After an extensive study, we recently announced
our intent to sell an additional 40,000 acres of higher and
better use (HBU) timberlands over the next three to fi ve
years. The company will manage this sale in a thoughtful
and deliberate process that maximizes asset value. By
monetizing non-strategic timber resources, we can raise
an estimated $150 million to $200 million in pre-tax cash
to strengthen our balance sheet and increase fi nancial
fl exibility. Glatfelter intends to retain its remaining
40,000 acres of pure timberlands to supplement the fi ber
requirements of the Spring Grove facility.
As we evaluate our progress, it’s clear we set aggressive
goals and for the most part, achieved them. Yet during
2005, as we critically assessed the capabilities of the
business, we realized that the company had reached a
crossroads. Over the last fi ve years, we had successfully
transformed our business from an “old line” paper
company to a global supplier of Specialty Papers and
Engineered Products. With a disciplined approach and
motivated leadership, our organization instituted a new
business model, fi lled our mills with new specialty
products, cut costs and embedded best practices. We
rationalized underperforming assets, reduced debt and
Our leadership team looked through the infl ection
point and recognized that only by creating our own
opportunities could we realize step-change improvements
in shareholder value.
We identifi ed four 2006 Focus Point objectives that will
guide us on this journey. They are the things that will
matter most to us in the year ahead.
• We will maintain the health of the business and improve
the 2006-2007 earnings stream. This will include
continued implementation of the EURO Program
and enhanced business processes, such as sales and
operations planning and project management within the
Long Fiber and Overlay Papers business unit.
• We will maximize opportunities that play to the
company’s strengths. We must unlock the great
potential of our Food and Beverage business and
extend our global manufacturing footprint.
• We will actively pursue opportunities to strategically
grow our business. Glatfelter will cast a wider net
to uncover acquisition targets in core and adjacent
businesses that make sense for our shareholders.
• And fi nally, we must remain fl exible to address the
shifting context of our business environment. We
are committed to staying vigilant and fl exible for
opportunities that will build shareholder value.
Strong execution of these Focus Points will enable the
company to grow in a material way. However, history has
shown that although it is very easy to grow in the paper
industry, the ability to grow well and thereby generate
sustainable value has proven to be very diffi cult.
Recognizing that acquisitions are risky ventures, we
have developed a highly disciplined approach to growth.
This approach identifi es and evaluates potential assets
that, when combined with Glatfelter operations, will
support breakthroughs in value creation. The process is
based on a rigorous set of criteria that assesses a target’s
potential. We believe any acquisition must be accretive
to earnings, exceed its cost of capital and maintain the
r Shareh
have worked extremely hard over the years in their
attempt to overcome unrelenting increases in input costs.
In the end, the mountain was simply too steep to climb.
Economic realities drove our conclusion to close the
mill, not lack of faith in the dedication or commitment
of our Neenah employees.
strength and fl exibility of our balance sheet. In addition,
candidates for acquisition must have leading positions in
defensible market niches and be supported by a strong
management team.
As we entered 2006, Glatfelter identifi ed assets that
we believe meet or exceed all of these criteria. In late
February, the company announced the signing of a
defi nitive agreement to acquire NewPage Corporation’s
Carbonless Paper business for $80 million. The
transaction is an excellent opportunity to purchase
world-class production assets at an attractive price. It
represents a signifi cant milestone in fulfi lling our vision
of becoming the global supplier of choice in Specialty
Papers and Engineered Products. Based in Chillicothe and
Fremont, Ohio, these assets had 2005 revenues estimated
at $440 million. Their specialty products, state-of-the-art
papermaking technologies and knowledgeable employees
are an exceptional fi t with our company’s strengths and
capabilities. We anticipate the acquisition will achieve the
following benefi ts:
As CEO, I’ve come to realize that the most diffi cult
decisions are invariably the ones that most need to be
made. For instance, some might say it was good luck that
we happened across this acquisition opportunity. But we
believe we created our own luck by making the painful
decisions needed over the years to transform and reposition
the company. Glatfelter is now poised to enter a new stage
of growth and value creation. We accept the challenge this
opportunity provides. Yet, we understand that opportunity
does not guarantee performance, and the most diffi cult
work is still to come. Our organization is prepared and
ready; we have identifi ed the best path forward; and we
embrace the change that opportunity requires.
In closing, I would like to recognize the contributions of
John C. van Roden, Executive Vice President and Chief
Financial Offi cer, who will be retiring later in the year.
John joined Glatfelter in 2003 with the desire to conclude
his professional career with an organization in which he
could “make a difference.” Clearly he has accomplished
his objective. John has made many friends along the way
and I am proud to count myself as one of them. I know
that all shareholders will join me in thanking John for his
many contributions over the past few years and wishing
him the best in a well-earned retirement. As part of a
planned succession, John P. Jacunski, our present Vice
President and Controller, will step into the Chief Financial
Offi cer position on July 1, 2006.
Finally, this year of progress would not have been possible
without the support and commitment of our shareholders
and Glatfelter PEOPLE at each of our facilities. I thank
you for your patience and understanding over the years as
we have shaped our company for success. And I ask you
to share our excitement and enthusiasm as we embark on
Glatfelter’s next era of growth.
• A highly accretive projected earnings profi le –
$0.10 - $0.15 per share in 2006, excluding one-time
costs, and $0.45 - $0.50 per share in 2007
• Revenues are estimated to increase to approximately
$1 billion
• EBITDA improvement by over $35 million in 2007
• A highly attractive valuation at less than two times
expected EBITDA improvement
• The transaction price is lower than the $87 million
in assumed working capital
In addition, the transaction’s structure allows us to maintain
a strong balance sheet with little or no net increase in fi xed
assets, and the anticipated earnings improvement should
enhance our credit profi le. The capabilities of these new
assets will accelerate the growth of our specialty product
lines and will permit us to signifi cantly reduce cost, raise
productivity and enhance fl exibility in our North
American operations.
While a defi nitive agreement does not ensure the
NewPage transaction will be consummated, we are
optimistic the acquisition will close on or about
March 31, 2006. We are truly excited about this
acquisition and believe that it offers great opportunity
to realize step-change improvements in our North
American Specialty Papers business.
Our excitement about this acquisition is tempered,
however, by the decision to permanently close the
Neenah, Wisconsin facility. Glatfelter PEOPLE in Neenah
George H. Glatfelter II
Chairman & Chief Executive Offi cer
March 7, 2006
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
or
¥
n
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
Name of Exchange on Which Registered
Common Stock, par value $.01 per share
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes n
No ¥.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes n
No ¥.
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 n.
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. n
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of ""accelerated filer and large accelerated filer'' in Rule 12b-2 of the Exchange Act.
n Large Accelerated
¥ Accelerated
n Non-Accelerated.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act) Yes n
No ¥.
Based on the closing price as of June 30, 2005, the aggregate market value of Common Stock of the Registrant held
by non-affiliates was $502.9 million.
Common Stock outstanding on March 1, 2006 totaled 44,233,059 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this Annual Report on Form 10-K: Proxy
Statement to be dated on or about March 21, 2006 (Part III).
P. H. GLATFELTER COMPANY
ANNUAL REPORT ON FORM 10-K
For the Year Ended
DECEMBER 31, 2005
Table of Contents
Business
Risk Factors
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
Controls and Procedures
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
Exhibits, Financial Statement Schedules
PART I
Item 1
Item 1A.
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9A
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
SIGNATURES
CERTIFICATIONS
SCHEDULE II
Page
1
6
9
10
10
10
12
12
13
24
25
53
53
53
53
53
53
54
57
58
60
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 located in Spring Grove,
Pennsylvania, Neenah, Wisconsin, Gernsbach, Germany
and Sca er, 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.
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 the markets 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:
‚
‚
‚
‚
‚
Teabags and coffee filters;
Trade book publishing;
Specialized envelopes;
Playing cards;
Pressure-sensitive postage stamps;
‚ Metallized labels for beer bottles; and
‚ Digital imaging applications.
We market our products worldwide both through
wholesale paper merchants, brokers and agents and
directly to our customers.
Recent Developments
On February 21, 2006
we entered into a definitive asset purchase agreement
with NewPage Corporation and Chillicothe Paper Inc.,
a wholly owned subsidiary of NewPage Corporation (the
""Asset Purchase Agreement''), to acquire certain assets
and assume certain liabilities constituting NewPage
Corporation's carbonless and specialty papers business
for $80 million in cash. The business to be acquired
includes a 440,000 tons per year paper making facility in
Chillicothe, Ohio, together with its Fremont, Ohio-
based coating operations (collectively, ""Chillicothe'').
Estimated 2005 revenue for Chillicothe totaled
approximately $440 million and Chillicothe employees
total approximately 1,700. The transaction is expected to
close on or about March 31, 2006.
The Chillicothe acquisition enables us to transfer our
Neenah facility's specialty grades to Chillicothe's highly
efficient manufacturing environment and rationalize
assets that are no longer competitive. Accordingly, it is
anticipated the Neenah mill will be permanently shut
down by June 2006, contingent on the successful
completion of the Chillicothe transaction.
On March 8, 2006, we entered into two separate
transactions to acquire certain assets of J R Crompton
Limited, a global supplier of wet laid nonwoven products
based in Manchester, United Kingdom. Since
February 7, 2006, Crompton has been ordered to be in
Administration by The High Court of Justice Chancery
Division, Manchester District.
Under the terms of the first transaction, Glatfelter
acquired effective March 13, 2006, Crompton's Lydney
Mill, located in Gloucestershire, United Kingdom, for
GBP37.5 million (US $65.1 million). The facility
employs about 240 people and had 2005 revenues of
approximately GBP43 million (US $75 million).
The Lydney mill produces a broad portfolio of wet
laid nonwoven products, including tea and coffee filter
papers, clean room wipes, lens tissue and dye filter
paper, double-sided adhesive tape substrates, battery
grid pasting tissue.
located
Under the second transaction, we agreed to purchase
Crompton's Simpson Clough Mill,
in
Lancashire, United Kingdom, and other related assets
for GBP12.5 million (US $21.7 million), subject to
regulatory approval. The mill employs about 95 people
and
approximately
revenues
GBP16.2 million (US $28 million). The Simpson
Clough facility also manufactures a wide variety of wet
laid, nonwoven products.
2005
had
of
Our Business Units
We manage our business
as two distinct units: the Europe-based Long Fiber &
Overlay Papers business unit and the North America-
based Specialty Papers business unit. 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
2005
2004
2003
Net sales
Business unit composition
Specialty Papers
Long Fiber & Overlay
Papers
Tobacco(1)
Total
$579,121
$543,524
$533,193
65.8%
62.1%
67.2%
34.2
Ó
37.8
0.1
31.0
1.8
100.0%
100.0%
100.0%
(1) As of July 2004, we no longer produce products for the Tobacco
industry.
- 1 -
GLATFELTER
Net tons sold by each business unit for the past three
years were as follows:
Specialty Papers
Long Fiber & Overlay Papers
Tobacco
Total
2005
450,900
47,669
24
498,593
2004
421,504
48,528
390
470,422
2003
446,110
42,993
6,463
495,566
Specialty Papers
Our North America-based
Specialty Papers business unit focuses on papers for the
production of high-quality hardbound books and other
book publishing needs, for the envelope & converting
markets and highly technical customized products for
the digital imaging, casting and release, pressure
sensitive, and several niche technical specialty markets.
Specialty Papers' revenue composition by product
line consisted of the following for the years indicated:
Book publishing
Envelope & converting
Engineered products
Other
Total
2005
2004
2003
41.3%
24.1
34.1
0.5
41.8%
24.2
32.5
1.5
47.4%
20.6
30.1
1.9
100.0%
100.0%
100.0%
We believe we are the leading supplier of book
publishing papers in the United States. Specialty Papers
also produces paper that is converted into specialized
envelopes in a wide array of colors, finishes and
capabilities. The book publishing and envelope &
converting papers markets are generally more mature
and, therefore, have modest growth characteristics.
Specialty Papers' highly technical engineered
products include those designed for multiple end uses,
such as papers for pressure-sensitive postage stamps,
greeting and playing cards, digital imaging applications
and for release paper applications. Such products
comprise an array of distinct business niches that are in
a continuous state of evolution. Many of these products
are utilized in demanding, specialized customer and
end-user 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.
Long Fiber & Overlay Papers
Long 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
52.1%, 52.3% and 58.5% of this business unit's net sales
in the years ended 2005, 2004 and 2003, 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.
Additional financial information for each of our
business units during the past three years is included in
Item 7 Ì Management's Discussion and Analysis of
Financial Condition and Results of Operations and in
Item 8 Ì Financial Statements, Note 20.
Our Competitive Strengths
Since commencing
operations over 140 years ago, we believe that Glatfelter
has developed into one of the world's leading
manufacturers of specialty papers and engineered
products. We believe that the following competitive
strengths have contributed to our success:
‚
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 2005, approximately 75% 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.
‚
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
customers and to be adaptable in our product
development, manufacturing, sales and marketing
practices. We believe that this approach has led to the
development of excellent customer relationships,
defensible market positions, and increased pricing
stability relative to commodity paper producers.
- 2 -
GLATFELTER
Additionally, our customer-centric focus has been a key
driver to our success in new product development.
‚
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 revenue 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 52%,
60% and 47% of net sales in the years ended 2005, 2004
and 2003, respectively.
‚
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 81,000 acres of
timberlands and obtain approximately 25% of our
pulpwood requirements 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 Sca er.
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:
margins and generate better financial returns through
the optimization of our product portfolio. In 2005,
approximately 75% 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.
‚
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.
‚
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 was designed to improve operating results
improving workforce
factors,
by, among other
efficiencies and implementing improved supply chain
management processes. A major component of the
workforce efficiencies resulted from an approximately
20% workforce reduction agreed to by our union
members at our Spring Grove facility. In the fourth
quarter of 2005, we began the implementation of the
European Optimization and Restructuring Program (the
""EURO Program''), a comprehensive series of actions
designed to improve the performance of the Long
Fiber & Overlay business unit. The financial benefits are
estimated to be $7 million to $9 million annually by
2008.
‚
Maintain a strong balance sheet and preserve
financial flexibility. We are focused on prudent
financial management and the maintenance of a
conservative capital structure. We are committed to
maintaining a strong balance sheet and our flexibility to
pursue strategic opportunities that will benefit our
shareholders.
‚
Reposition our product portfolio. By
leveraging our leadership positions in several specialty
niche markets, we plan to accelerate growth, improve
‚
Timberland Strategy We recently completed
an extensive study to determine the optimum approach
for managing our timberlands in a way that creates the
- 3 -
GLATFELTER
that
greatest value for shareholders. The study considered
many factors including, among others, land valuations,
external and internal wood costs and future fiber
requirements. We concluded
the most
advantageous approach is to sell 40,000 acres of higher
and better use (""HBU'') properties in an orderly
fashion. In some cases, low cost, low risk opportunities
may exist to add value to some of these acres through
entitlements. It is estimated that the cost of fiber will
increase by approximately $0.03 to $0.06 per share
annually when all 40,000 HBU acres are sold but that
the benefit from the proceeds will far outweigh this
increased cost. For the present, we intend to retain the
pure timberland properties to mitigate the cost of
replacing internally generated wood with outside
sources. Execution of the Timberland Strategy is
expected to take approximately three to five years to
complete and is estimated to provide pre-tax cash
proceeds of approximately $150 million to $200 million,
assuming, among other factors, acceptable market
conditions and a carefully executed plan of disposition.
Raw Material and Energy
The following 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:
North America
Spring Grove
Pulpwood
Wood- and other pulps
Neenah
Wood- and other pulps
Pulp substitutes
International
Gernsbach
Wood- and other pulps
Abaca pulp
Synthetic fiber
Sca er
Wood pulp
Abaca pulp
Synthetic fiber
Philippines
Abaca fiber
Estimated
Annual Quantity
(short tons)
Percent of
PRM
Purchased
1,027,000
41,000
80%
100
69,500
42,200
32,900
8,250
2,000
1,800
2,160
1,200
17,980
100
100
100
Ó
100
100
Ó
100
100
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,
2005, we owned approximately 81,000 acres of
timberlands. 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 term of the agreement. The pulpwood
purchased under this agreement is to be harvested from
land we sold in March 2003.
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. The facility consumes
approximately 330,000 tons of coal annually. The
current supply agreement expires at the end of 2006 at
which time a recently negotiated contract is expected to
become effective. The new three year contract will
increase our annual cost of coal by approximately
$6 million.
The Spring Grove facility produces more electricity
than it requires. Excess electricity is sold to the local
power company under a long-term co-generation
contract expiring in 2010. Net energy sales were
$10.1 million in 2005 and $10.0 million in both 2004 and
2003.
Until the fourth quarter of 2003, our Neenah,
Wisconsin facility recycled high-grade wastepaper as its
primary raw material. Since the initiation of the
restructuring at the Neenah facility, the pulp
requirements for this facility are fulfilled with purchased
pulp and pulp substitutes.
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 Sca er. Events may arise from the relatively unstable
political and economic environment in which 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 Sca er facilities. Any
extended interruption of the Philippine operation could
- 4 -
GLATFELTER
have a material impact on our consolidated financial
position 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, if available, would likely be higher.
The Gernsbach and Sca er facilities both generate all
of the steam required for their operations. The
Gernsbach facility generated approximately 30% of its
2005 electricity needs and purchased the balance. The
Sca er facility purchased all of its 2005 electric power
requirements. Natural gas was used to produce
substantially all internally generated energy at the
Gernsbach and Sca er facilities during 2005.
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.
revenue
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,
in
including product customizations developed
partnership or close collaboration with our customers.
We invested approximately $4.9 million, $5.2 million
and $5.2 million in 2005, 2004 and 2003, respectively, on
product development. Revenue generated from products
developed, enhanced or improved within the five
previous years as a result of these activities represented
approximately 52%, 60% and 47% of net sales in the
years ended 2005, 2004 and 2003, respectively. In
determining
to product
development activities, we utilize 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 63% of our revenue
attributable to developed, enhanced or improved
products come from products that fit within category
(ii) and (iii), above.
attributable
Concentration of Customers
In 2005, 2004 and
2003, no single customer represented more than 10% of
our consolidated net sales.
is
Our
industry
Competition
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 for
technical expertise and 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.
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.
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. For a discussion of
environmental matters, see Item 8. Ì Financial
Statements and Supplementary Data Ì Note 19.
- 5 -
GLATFELTER
Employees
The following table summarizes our
workforce as of December 31, 2005:
Location
North America 1
Corporate/Spring Grove
Neenah
International
Gernsbach
Sca er
Philippines
Total
Employees
Non-
Union
380
45
425
191
56
29
276
701
Union
563
155
718
403
82
54
539
1,257
Total
943
200
1,143
594
138
83
815
1,958
(1) The completion of the previously discussed Chillicothe
transaction would include the addition of approximately 1,700
employees and would be partially offset by the elimination of
positions associated with the Neenah shutdown.
Different locals of the United Steelworkers of
America, 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. In connection with the North American
Restructuring Plan, the agreement was amended in July
2004, providing workplace flexibility, certain job
changes, and early retirement incentives.
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.
The agreement was amended in May of 2005 providing
continuation of a paper machine restart program, certain
job changes, a profit sharing program, modifications to
the medical plans, and early retirement incentives.
Various unions represent employees at our
Schoeller & Hoesch facility. New labor agreements
covering employees at the Gernsbach, Germany and
Sca er, France facilities were entered into effective
May 1, 2005 that provided for wage increase averaging
1.5% over a 22 month period ending March 2007.
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.
Available Information
Our investor relations
website address is 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 1A.
RISK FACTORS
Risks Related to Our Business
Our business and financial performance may be
adversely affected by downturns in the target markets
that we serve.
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. Downturns in our target markets could result
in decreased demand for our products. In particular, our
business may be adversely affected during periods of
economic weakness by the general softness in these
target markets. Our results could be adversely affected if
economic conditions weaken or, with respect to certain
markets, fail to improve. Also, there may be periods
during which demand for our products is insufficient to
enable us to operate our production facilities in an
economical manner. These conditions are beyond our
ability to control and have had, and may continue to
have, a significant impact on our sales and results of
operations.
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
- 6 -
GLATFELTER
paper industry, which have caused pulp and paper prices
to be volatile. The timing and magnitude of price
increases or decreases in the pulp and paper market have
generally varied by region and by product type. A
sustained period of weak demand or excess supply would
likely adversely affect pulp and paper prices. This could
have a material adverse affect on our operating and
financial results.
Our industry is highly competitive and increased
competition could reduce our sales and profitability.
We offer our products throughout the United States
and globally in approximately 80 countries. We compete
on the basis of the quality of our products, customer
service, product development activities, price and
distribution. 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 markets for our Engineered Products and
Long-Fiber & Overlay Papers we compete with specialty
divisions of large companies such as Ahlstrom,
International Paper, MeadWestvaco, Sappi and Stora
Enso, as well as other companies such as J R Crompton.
With respect to book publishing papers, we compete
with companies such as Domtar and Weyerhaeuser. In
the envelope sector, we compete with companies such as
Blue Ridge, International Paper and Weyerhaeuser.
Increased competition could force us to lower our prices
or to offer additional services at a higher cost to us,
which could reduce our gross margins and net income.
The greater financial resources of certain of our
competitors may enable them to commit larger amounts
of capital in response to changing market conditions.
Certain competitors may also have the ability to develop
product or service innovations that could put us at a
disadvantage.
Some of the factors that may adversely affect our
ability to compete in the markets in which we
participate include:
‚
‚
‚
‚
the entry of new competitors into the markets
we serve, including foreign producers;
the willingness of commodity-based paper
producers to enter our specialty markets when
they are unable to compete or when demand
softens in their traditional markets;
the aggressiveness of our competitors' pricing
strategies, which could force us to decrease
prices in order to maintain market share;
our failure to anticipate and respond to
changing customer preferences;
‚
‚
our inability to develop new, improved or
enhanced products; and
our inability to maintain the cost efficiency of
our facilities.
If we cannot effectively compete in the markets in
which we operate, our sales and operating results would
be adversely affected.
The cost of raw materials and energy used to
manufacture our products could increase.
We require access to sufficient and reasonably priced
quantities of pulpwood, wood and other pulps, pulp
substitutes, abaca fiber and certain other raw materials.
Although our manufacturing facility in Spring Grove is
a vertically integrated operation that uses wood acquired
from our own timberlands and others to make pulp, our
Neenah facility purchases wood and other pulps for use
in the manufacture of its products. In addition, our
Philippines facility purchases abaca fiber to make pulp,
which we use to manufacture our long fiber products in
Gernsbach, Germany and Scaer, France.
Coal is a principal source of fuel for our Spring
Grove facility. In the first quarter of 2006, we negotiated
a new three year coal supply contract that will increase
our annual cost of coal by approximately $6 million
beginning in 2007.
We may not be able to pass increased raw materials
prices on to our customers if the market or existing
agreements with our customers do not allow us to raise
the prices of our finished products. Moreover, if we elect
to pass-through increased raw materials costs, the
resulting increase in the selling prices for the products
we produce could reduce the volume of units we sell and
decrease our revenues. If price adjustments significantly
trail the increase in raw materials prices or if we cannot
effectively hedge against price increases, our operating
results will be adversely affected.
With the exception of our Neenah facility, our
production facilities generate all of the steam required
for their operations. The Neenah facility purchases
steam under a long-term agreement with a third party
supplier. The cost of this purchased steam is based on
the market price of coal, and we are required to
purchase an annual minimum amount. If coal prices
continue to increase, or if we are unsuccessful in any
actions to mitigate such price increases, our operating
results could be adversely impacted.
- 7 -
GLATFELTER
We are subject to substantial costs and potential
liability for environmental matters.
detailed discussion of these matters in Item 8 Ì
Financial Statements, Note 19.
anticipate
expenditures. We
We are subject to various environmental laws and
regulations that govern our operations, including
discharges into the environment, and the handling and
disposal of hazardous substances and wastes. We are
also subject to laws and regulations that impose liability
and clean-up responsibility for releases of hazardous
substances into the environment. To comply with
environmental laws and regulations, we have incurred,
and will continue to incur, substantial capital and
operating
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. Because environmental
regulations are not consistent worldwide, our ability to
compete in the world marketplace may be adversely
affected by capital and operating expenditures required
for environmental compliance. In addition, we may
incur obligations to remove or mitigate any adverse
effects on the environment, such as air and water
quality, resulting from mills we operate or have
operated. Potential obligations include compensation for
the restoration of natural resources, personal injury and
property damages.
In connection with the sale of our Ecusta Division in
2001, we are incurring landfill closure costs and may
incur additional costs for recognized environmental
concerns at the site of our former mill related to the
presence of mercury and certain other contamination on
and around the site; potentially hazardous conditions
existing in the sediment and water column of the site's
water treatment and aeration and sedimentation basin
(the ""ASB''); and contamination associated with two
additional landfills on the site that were not used by us.
We are also liable for the costs of clean-up related to
the presence of polychlorinated biphenyls, or PCBs, in
the lower Fox River on which our Neenah, Wisconsin
mill is located. We have financial reserves for
environmental matters but we cannot be certain that
those 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.
Our environmental issues are complicated and
should be reviewed in context; please see a more
We may not successfully execute our recently
announced acquisition and the related production
transition plans.
In February 2006, we entered into a definitive
agreement to acquire the Chillicothe, OH based
carbonless and specialty papers operations from
NewPage Corporation. Inherent risks in a proposed
business combination such as this include the inability
to successfully consummate the transaction, the inability
to successfully integrate the acquired production facility,
its procurement, marketing and sales requirements, as
well as information systems, finance and administration
functions. In addition, an integral component of this
proposed acquisition is the transfer of production from
our Neenah facility to the Chillicothe mill and the
permanent shutdown of the Neenah facility with
inherent execution risks.
Our inability to successfully execute the plans
discussed above may adversely impact our relationships
with customers, suppliers and employees. Accordingly,
our financial results may be adversely impacted.
We have operations
economically unstable location.
in a politically and
We own and operate a pulp mill in the Philippines
where the operating environment is unstable and subject
to political unrest. Our Philippine pulp mill produces
abaca pulp, a significant raw material used by our
Gernsbach, Germany and Scaer, France facilities in the
production of our long fiber-based products. Our
Philippine pulp mill is currently our sole provider of
abaca pulp. There are limited suitable alternative
sources of readily available abaca pulp in the world. In
the event of a disruption in supply from our Philippine
mill, there is no guarantee that we could obtain adequate
amounts of abaca pulp from alternative sources at a
reasonable price or at all. As a consequence, any civil
disturbance, unrest, political instability or other event
that causes a disruption in supply could limit the
availability of abaca pulp and would increase our cost of
obtaining abaca pulp. Such occurrences could adversely
impact our sales volumes, revenues and operating
results.
We may not be able to develop new products
acceptable to our customers.
Our business strategy is market focused and includes
investments in developing new products to meet the
changing needs of our customers and to maintain our
market share. Our success will depend in large part on
our ability to develop and introduce new and enhanced
- 8 -
GLATFELTER
products that keep pace with introductions by our
competitors and changing customer preferences. If we
fail to anticipate or respond adequately to these factors,
then we may lose opportunities for business with both
current and potential customers. The success of our new
product offerings will depend on several factors,
including our ability to,
‚
‚
‚
‚
‚
anticipate and properly identify our customers'
needs and industry trends;
price our products competitively;
develop and commercialize new products and
applications in a timely manner;
differentiate our products
competitors' products; and
from our
invest in research and development activities
efficiently.
Our inability to develop new products could
adversely impact our business and ultimately harm our
profitability.
Our international operations pose certain risks that
may adversely impact sales and earnings.
We have significant operations and assets located in
Germany, France and the Philippines. Our international
sales and operations are subject to a number of special
risks, in addition to the risks of our domestic sales and
operations, including differing protections of intellectual
property, trade barriers, labor unrest, exchange controls,
regional economic uncertainty, differing (and possibly
more stringent) labor regulation, risk of governmental
expropriation, domestic and foreign customs and tariffs,
differing regulatory environments, difficulty in managing
widespread operations and political instability and
unrest. These factors may adversely affect our future
profits. Also, in some foreign jurisdictions we may be
subject to laws limiting the right and ability of entities
organized or operating therein to pay dividends or remit
earnings to affiliated companies unless specified
conditions are met. Any such limitations would restrict
our flexibility in using funds generated in those
jurisdictions.
Foreign currency exchange rate fluctuations could
adversely affect our results of operations.
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. During the year
ended December 31, 2005, these operations generated
approximately 29% of our sales and 30% 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.
Our ability to maintain our products' price
competitiveness for our operations based in Germany
and France is reliant, in part, on the relative strength of
the currency in which the product is denominated
compared to the currency of the market into which it is
sold and the functional currency of our competitors.
Changes in the rate of exchange of foreign currencies in
relation to the U.S. dollar and other currencies may
adversely impact our ability to offer products in certain
markets at acceptable prices or our results of operations.
We may be unable to generate sufficient cash flow
to simultaneously fund our operations, finance capital
expenditures, satisfy obligations and make dividend
payments on our common stock.
Our business is capital intensive and requires
significant expenditures for equipment maintenance and
new or enhanced equipment, for environmental
compliance matters and to support our business
strategies and research and development efforts. We
expect to meet all of our near- and longer-term cash
needs from a combination of operating cash flow, cash
and cash equivalents, sale of timberlands, our existing
credit facility or other bank lines of credit and other
long-term debt. If we are unable to generate sufficient
cash flow from these sources, we could be unable to
meet our near and longer-term cash needs or make
dividend payments.
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 Sca er, France. In addition,
we own and operate a pulp mill in the Philippines.
Substantially all of the equipment used 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.
- 9 -
GLATFELTER
The following table summarizes the estimated
ITEM 3.
LEGAL PROCEEDINGS
production capacity of each of our facilities:
Estimated Annual Production Capacity (short tons)
North America
Spring Grove
Neenah
International
Gernsbach
Sca er
Philippines
310,000
66,000
125,000
44,600
11,400
6,100
11,400
Uncoated
Coated
Uncoated
Lightweight
Metallized
Lightweight
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 Sca er, France. S&H
also owns a pulpmill in the Philippines that supplies
substantially all of the abaca pulp requirements of the
S&H paper mills.
The Gernsbach facility includes five uncoated paper
machines with an aggregate annual lightweight capacity
of about 44,600 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
11,400 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%.
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
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 Ì Financial
Statements and Supplementary Data Ì Note 19.
ITEM 4.
VOTE OF SECURITY HOLDERS.
SUBMISSION OF MATTERS TO A
Not Applicable Ì no matters were submitted to a
vote of security holders during the fourth quarter of
2005.
EXECUTIVE OFFICERS
The following table sets forth certain information
with respect to our executive officers as of March 10,
2006.
Name
Age
Office with the Company
George H. Glatfelter II
54 Chairman and Chief Executive
Officer
Dante C. Parrini
41 Executive Vice President and Chief
Operating Officer
John C. van Roden, Jr.
56 Executive Vice President and Chief
Financial Officer
John P. Jacunski
40 Vice President and Corporate
Controller
Jeffrey J. Norton
47 Vice President, General Counsel
and Secretary
Werner A. Ruckenbrod
48 Vice President Long Fiber &
Overlay Papers
Mark A. Sullivan
51 Vice President Global Supply
Chain
William T. Yanavitch II
45 Vice President Human Resources
and Administration
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
the American Forest and Paper
Corporation;
- 10 -
GLATFELTER
Association; the National Council for Air and Stream
Improvements; and the Alliance for the Chesapeake
Bay.
promotion of Mr. Jacunski to Senior Vice President and
Chief Financial Officer upon the effective date of
Mr. van Roden's resignation.
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 Ì Sales and Marketing. From July 2000
to December 2000, he was Vice President Ì 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. In January 2006, Mr. van
Roden announced his resignation, effective June 30,
2006, as Chief Financial Officer of the Company. He
intends to remain with us through the end of 2006.
Mr. van Roden is a Director of Ascendant Capital
Partners, LLC., HB Fuller Company and Semco
Energy, Inc.
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. In January 2006, we announced the
Jeffrey J. Norton joined us in May 2005 and serves
as Vice President, General Counsel and Secretary. Prior
to joining Glatfelter, Mr. Norton was with Exelon
Corporation, a $15 billion energy corporation, for
14 years where he most recently was Assistant General
Counsel.
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
joined our company in December 2003, as Chief
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.
William T. Yanavitch II rejoined the Company in
May 2005 as Vice President Human Resources and
Administration. Mr. Yanavitch served as Vice President
Human Resources from July 2000 until his resignation
in January 2005 at which time he became Corporate
Human Resources Manager of Constellation Energy.
From October 1998 to July 2000, Mr. Yanavitch was
Director of Human Resources for the Ceramco and
Trubyte Divisions of Dentsply.
- 11 -
GLATFELTER
PART II
ITEM 5.
MARKET FOR THE REGISTRANT'S
COMMON STOCK AND RELATED
STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY
SECURITIES
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.
ITEM 6.
SELECTED FINANCIAL DATA
Summary of Selected Consolidated Financial Data
Quarter
High
Low
Dividend
2005
Fourth
Third
Second
First
2004
Fourth
Third
Second
First
$15.11
14.92
14.93
15.47
$15.49
14.23
14.09
12.93
$12.41
12.00
10.95
12.86
$11.34
11.50
10.45
10.44
$0.09
0.09
0.09
0.09
$0.09
0.09
0.09
0.09
As of March 1, 2006, we had 1,881 shareholders of
record. A number of the shareholders of record are
nominees.
As of or For the Year Ended December 31
In thousands, except per share
Net sales
Energy sales, net
Total revenue
Restructuring charges and unusual
items
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
2005
2004
2003
$ 579,121
$ 543,524
$ 533,193
10,078
589,199
9,953
553,477
10,040
543,233
2002
$540,347
9,814
550,161
2001(1)
$632,602
9,661
642,263
(1,564)
(20,375)
(24,995)
(2,241)
(60,908)
22,053
20,151
38,609
0.88
0.87
1,044,977
207,073
432,312
58,509
32,785
56,102
1.28
1.27
1,052,270
211,227
420,370
32,334
Ó
12,986
0.30
0.30
1,027,019
254,275
371,431
1,304
Ó
37,637
0.87
0.86
953,202
220,532
373,833
2,015
Ó
6,829
0.16
0.16
966,604
277,755
353,469
0.36
0.36
0.53
0.70
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.
2. The above Summary of Selected Consolidated Financial Data, and the comparability thereof, includes the impact of certain charges and
gains from asset dispositions and insurance recoveries. For a discussion of these items that affect the comparability of this information, see
Item 8 Ì Financial Statements and Supplemental Data Notes 5 to 7 and Note 9.
- 12 -
GLATFELTER
ITEM 7.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
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 to identify
forward-looking statements. Forward-looking statements
reflect management's current expectations and are
inherently uncertain. Our actual results may differ
significantly from such expectations. The following
discussion
statements
regarding expectations of, among others, net sales, costs
of products
income,
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:
sold, non-cash pension
forward-looking
includes
i.
ii.
variations in demand for, or pricing of, our
products;
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;
iii. our ability to develop new, high value-added
Specialty Papers and Long Fiber & Overlay Papers;
iv.
v.
the impact of competition, changes in industry
the
paper production capacity,
construction of new mills, the closing of mills and
incremental changes due to capital expenditures or
productivity increases;
including
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
vi.
vii.
environmental matters at our former Ecusta
Division mill;
the gain or loss of significant customers and/or on-
going viability of such customers;
risks associated with our international operations,
including
political
environments and
in currency
exchange rates;
economic
fluctuations
local
and
viii. geopolitical events, including war and terrorism;
ix.
enactment of adverse state, federal or foreign tax or
other legislation or changes in government policy or
regulation;
x.
adverse results in litigation;
xi. disruptions in production and/or increased costs
due to labor disputes;
xii. our ability to successfully implement the EURO
Program;
xiii. our ability to successfully execute our timberland
strategy to realize the value of our timberlands;
xiv. our ability to execute the planned shutdown of the
Neenah facility in an orderly manner; and
xv. our ability to finance, consummate and integrate
acquisitions.
We
Introduction
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.
Overview
The comparison of our financial
results for 2005 compared to 2004 reflects the following
significant items:
1) Demand for products in our North America-based
Specialty Papers business unit improved and selling
prices strengthened beginning in the second quarter
of 2004 benefiting the year over year comparison;
2) The results of our Long Fiber & Overlay Papers
business unit, based in Europe, declined in the
comparison primarily due to increased competition
and the related adverse affect on selling prices
together with softer demand in the composite
laminates and food and beverage markets;
3) Input costs, primarily fiber and energy related,
increased significantly in the comparison putting
pressures on our margins;
- 13 -
GLATFELTER
4) Selling, general & administrative expenses increased
primarily due to a charge to increase our reserve for
costs associated with environmental matters at the
former Ecusta facility located in North Carolina,
increased legal costs and variable compensation;
5) The North America Restructuring Program, an
initiative focused on improving profitability by
enhancing our product mix, increasing workforce
productivity, and reducing costs by enhancing supply
chain management strategies, was implemented
beginning in the second half of 2004. The financial
benefits of this program met our expectations of
approximately $15 million to $20 million, annually;
and
6) The results for each year include significant gains
from sales of timberlands and from insurance
recoveries. Cash proceeds were used, in part, to
reduce debt.
Recent Developments
On February 21, 2006
we entered into a definitive asset purchase agreement
with NewPage Corporation and Chillicothe Paper Inc.,
a wholly owned subsidiary of NewPage Corporation (the
""Asset Purchase Agreement''), to acquire certain assets
and assume certain liabilities constituting NewPage
Corporation's carbonless and specialty papers business
for $80 million in cash. The business to be acquired
includes a 440,000 tons per year paper making facility in
Chillicothe, Ohio, together with its Fremont, Ohio-
based coating operations (collectively, ""Chillicothe'').
Estimated 2005 revenue for Chillicothe totaled
approximately $440 million and Chillicothe employees
total approximately 1,700. The transaction is expected to
close on or about March 31, 2006.
The Chillicothe acquisition enables us to transfer our
Neenah facility's specialty grades to Chillicothe's highly
efficient manufacturing environment and rationalize
assets that are no longer competitive. Accordingly, it is
anticipated the Neenah mill will be permanently shut
down by June 2006, contingent on the successful
completion of the Chillicothe transaction.
In connection with the planned closure of the
Neenah facility, we expect to record related charges
estimated to total $60 million to $65 million. The
charges are primarily related to asset writedowns and/or
accelerated depreciation, employee termination and
related benefits, and contract termination costs.
On March 8, 2006, we entered into two separate
transactions to acquire certain assets of J R Crompton
Limited, a global supplier of wet laid nonwoven products
based in Manchester, United Kingdom. Since
February 7, 2006, Crompton has been ordered to be in
Administration by The High Court of Justice Chancery
Division, Manchester District.
Under the terms of the first transaction, Glatfelter
acquired effective March 13, 2006, Crompton's Lydney
Mill, located in Gloucestershire, United Kingdom, for
GBP37.5 million (US $65.1 million). The facility
employs about 240 people and had 2005 revenues of
approximately GBP43 million (US $75 million).
The Lydney mill produces a broad portfolio of wet
laid nonwoven products, including tea and coffee filter
papers, clean room wipes, lens tissue, dye filter paper,
double-sided adhesive tape substrates and battery grid
pasting tissue.
located
Under the second transaction we agreed to purchase
Crompton's Simpson Clough Mill,
in
Lancashire, United Kingdom, and other related assets
for GBP12.5 million (US $21.7 million), subject to
regulatory approval. The mill employs about 95 people
and
approximately
revenues
GBP16.2 million (US $28 million). The Simpson
Clough facility also manufactures a wide variety of wet
laid, nonwoven products.
2005
had
of
RESULTS OF OPERATIONS
2005 versus 2004
The following table sets forth summarized results of
operations:
In thousands, except per share
2005
2004
Year Ended December 31
Net sales
Gross profit
Operating income
Net income
Earnings per diluted share
$579,121
$543,524
97,176
70,183
38,609
0.87
92,414
103,394
56,102
1.27
The consolidated results of operations for the years
ended December 31, 2005 and 2004 include the
following significant items:
In thousands, except per share
After-tax
Income (loss)
Diluted EPS
2005
Gains on sale of timberlands
Insurance recoveries
Restructuring charges
2004
Gains on sale of timberlands and
corporate aircraft
Insurance recoveries
Restructuring charges
$11,258
12,719
(1,017)
$34,151
21,310
(12,723)
$0.26
0.29
(0.02)
$0.78
0.48
(0.29)
The above items increased earnings from continuing
operations by $23.0 million, or $0.52 per diluted share in
- 14 -
GLATFELTER
2005, and by $42.7 million, or $0.97 per diluted share, in
2004.
Specialty Papers business unit; and the Europe-based
Long Fiber & Overlay Papers business unit.
Business Units
We manage our business in two
distinct business units: the North America-based
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
Dollars in thousands
Net sales
Energy sales, net
Total revenue
Cost of products sold
Gross profit (loss)
SG&A
Pension income
Restructuring charges
Gains on dispositions of plant, equipment
and timberlands
Gain on insurance recoveries
Specialty Papers
2004
2005
Long Fiber & Overlay
Other and Unallocated
Total
2005
2004
2005
2004
2005
2004
$380,923
$337,436
$198,137
$205,232
$
10,078
391,001
340,629
50,372
39,876
9,953
347,389
312,136
35,253
36,617
Ó
Ó
198,137
166,153
31,984
21,282
205,232
163,843
41,389
23,067
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
61
Ó
61
84
(23)
8,149
$
856
$579,121
$543,524
Ó
10,078
9,953
856
1,021
(165)
1,660
589,199
506,866
82,333
69,307
553,477
477,000
76,477
61,344
(16,517)
(17,342)
(16,517)
(17,342)
1,564
20,375
1,564
20,375
(22,053)
(20,151)
(58,509)
(32,785)
(22,053)
(20,151)
(58,509)
(32,785)
Total operating income (loss)
10,496
(1,364)
10,702
18,322
48,985
86,436
70,183
103,394
Nonoperating income (expense)
Ó
Ó
Ó
Ó
(10,043)
(12,631)
(10,043)
(12,631)
Income from continuing operations before
income taxes
Supplementary Data
Net tons sold
Depreciation expense
$ 10,496
$ (1,364)
$ 10,702
$ 18,322
$ 38,942
$ 73,805
$ 60,140
$ 90,763
450,900
421,504
47,669
48,528
$ 35,781
$ 37,186
$ 14,866
$ 14,412
24
Ó
390
Ó
498,593
470,422
$ 50,647
$ 51,598
Results of individual business units are presented
based on our management accounting practices and
management structure. There is no comprehensive,
authoritative body of guidance for management
accounting equivalent to 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
to measure
uses assumptions and allocations
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 business unit results 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 and the profitability of business
units. 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
Year Ended December 31
In thousands
Net sales
Energy sales Ó net
Total revenues
2005
$579,121
10,078
589,199
Costs of products sold
492,023
2004
$543,524
9,953
553,477
461,063
Change
$35,597
125
35,722
30,960
Gross profit
$ 97,176
$ 92,414
$ 4,762
Gross profit as a
percent of Net sales
16.8%
17.0%
The following table sets forth the contribution to
consolidated net sales by each business unit:
Business Unit
Specialty Papers
Long-Fiber & Overlay Papers
Tobacco Papers
Total
Year Ended December 31
2004
2005
65.8%
34.2
Ó
100.0%
62.1%
37.8
0.1
100.0%
- 15 -
GLATFELTER
Net sales totaled $579.1 million in 2005, an increase
of $35.6 million, or 6.6%, compared to a year ago. This
growth was primarily driven by strengthened product
pricing and a 7.0% increase in volumes shipped in the
Specialty Papers business unit compared with the same
period of 2004. Higher pricing for Specialty Papers'
products increased revenue by $17.6 million compared
to 2004. Long Fiber & Overlay Papers' volumes shipped
declined approximately 1.8% and lower selling prices, on
a constant currency basis, decreased revenue by
$7.4 million. Costs of products sold increased
$31.0 million in the comparison. In addition to the effect
of increased shipping volumes, higher raw material and
energy prices increased costs of products sold by
approximately $11.1 million.
Lower labor costs realized from the 2004 North
American Restructuring Program were substantially
offset by higher spending on supplies and maintenance
and by the impact of significant market related
downtime in the Long Fiber & Overlay Papers business
unit.
Non-Cash Pension Income
Non-cash pension
income results from the considerably over-funded status
of our pension 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. The following summarizes non-
cash pension income for each period:
In thousands
Recorded as:
Year Ended December 31
2004
2005
Change
Costs of products sold
$14,844
$15,937
$(1,093)
SG&A expense
Total
1,673
$16,517
1,405
268
$17,342
$ (825)
The following summarizes SG&A expenses,
restructuring charges, gains from asset dispositions and
other nonrecurring items:
In thousands
SG&A expenses
Restructuring charges
Gains on dispositions of
plant, equipment and
timberlands
Gains from insurance
Year Ended December 31
2004
2005
$67,633
1,564
$59,939
20,375
Change
$
7,694
(18,811)
(22,053)
(58,509)
36,456
recoveries
(20,151)
(32,785)
12,634
Selling, General and Administrative (""SG&A'')
expenses increased $7.7 million in the comparison
primarily due to a $2.7 million charge to increase our
reserve for costs associated with environmental matters
at the former Ecusta facility located in North Carolina,
$2.1 million of additional variable compensation and
$2.0 million of higher litigation related costs.
Restructuring Charges
In 2005 we announced
the EURO Program, a comprehensive series of
initiatives designed to improve the performance of our
Long Fiber & Overlay Papers business unit. In the
fourth quarter of 2005 we recorded restructuring charges
totaling $1.6 million associated with the related work
force efficiency plans at the Gernsbach, Germany
facility. This charge reflects severance, early retirement
and related costs for the 55 effected employees. We
expect to incur cash out lays in this amount over the
next 24 month period.
The restructuring charge incurred in 2004 related to
the North American Restructuring Program and certain
actions related to the Neenah facility. These actions are
discussed in detail in this Item 7 under the caption
""Results of Operations 2004 versus 2003 Ì
Restructuring Charges.''
Gain on Sales of Plant, Equipment and
Timberlands
During 2005 and 2004, we completed
sales of timberlands and, in 2004, the corporate aircraft.
The following table summarizes these transactions.
Dollars in thousands
Acres
Proceeds
Gain
2005
Timberlands
Other
Total
2004
Timberlands
Corporate Aircraft
Other
Total
2,488
$21,000
$20,327
n/a
1,778
1,726
$22,778
$22,053
4,482
$56,586
$55,355
n/a
n/a
2,861
724
2,554
600
$60,171
$58,509
All property sales were sold for cash.
Insurance Recoveries
During 2005 and 2004,
we reached successful resolution of certain claims under
insurance policies
the Fox River
related
environmental matter. Insurance recoveries included in
the results of operations totaled $20.2 and $32.8 million
in 2005 and 2004, respectively, and were received in
cash. Any additional insurance recoveries are expected
to be insignificant.
to
Income Taxes
The Company's effective tax
rates for 2005 and 2004 were 35.8% and 38.2%,
respectively. The lower effective tax rate in 2005 was
primarily due to decreased amounts of timberland sales
in 2005, which are taxed at higher effective rates, and
the effect of tax credits and the related impact on
valuation allowances relative to the level of pre-tax
income.
- 16 -
GLATFELTER
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. During
the year ended December 31, 2005, these operations
generated approximately 29% of our sales and 30% 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.
RESULTS OF OPERATIONS
2004 versus 2003
The following table sets forth summarized results of
operations:
In thousands, except per share
2004
2003
Year Ended December 31
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
$543,524
$533,193
92,414
103,394
56,102
Ó
56,102
1.27
1.27
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
After-tax
Income (loss)
Diluted EPS
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
$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
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
Dollars 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
Specialty Papers
Long Fiber & Overlay
Other and Unallocated
Total
2004
2003
2004
2003
2004
$337,436
9,953
347,389
312,136
35,253
36,617
Ó
$357,989
10,040
368,029
325,897
42,132
44,494
Ó
$205,232
Ó
205,232
163,843
41,389
23,067
Ó
$165,389
Ó
165,389
130,838
34,551
16,669
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
$
856
Ó
856
1,021
$
2003
9,815
Ó
9,815
15,448
(165)
1,660
(17,342)
(5,633)
125
(17,149)
Ó
20,375
Ó
6,511
6,983
11,501
2004
2003
$543,524
9,953
$533,193
10,040
553,477
477,000
76,477
61,344
(17,342)
Ó
20,375
Ó
543,233
472,183
71,050
61,288
(17,149)
6,511
6,983
11,501
(58,509)
(32,785)
86,436
(12,631)
(32,334)
Ó
18,730
(13,834)
(58,509)
(32,785)
103,394
(12,631)
(32,334)
Ó
34,250
(13,834)
Total operating income (loss)
Nonoperating income (expense)
(1,364)
(2,362)
Ó
Ó
18,322
Ó
17,882
Ó
Income (loss) from continuing
operations before income taxes
$ (1,364)
$ (2,362)
$ 18,322
$ 17,882
$ 73,805
$
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
Ó
6,463
Ó
470,422
$ 51,598
495,566
$ 56,029
- 17 -
GLATFELTER
Sales and Costs of Products Sold
Year Ended
December 31
In thousands
2004
2003
Change
Net sales
Energy sales Ì net
Total revenues
Costs of products sold
Gross profit
$543,524
9,953
$533,193
10,040
$10,331
(87)
553,477
461,063
543,233
463,687
10,244
(2,624)
$ 92,414
$ 79,546
$12,868
Gross profit as a percent of Net
sales
17.0%
14.9%
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 strengthened throughout the
remainder of the year. Comparing the full year 2004 to
2003, average selling prices for the Specialty Papers
business unit declined slightly.
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 effect of foreign currency
translation adjustments. Although
the weaker
U.S. dollar favorably impacted translated net sales of
international operations, it 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
67.2%
31.0
1.8
100.0% 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 thousands
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
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. 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
$15,007
2,142
$ 930
(737)
$17,342
$17,149
$ 193
The following summarizes SG&A expenses,
restructuring charges, gains from asset dispositions and
other nonrecurring items:
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
2003
Change
$ 59,939
20,375
$ 59,146
6,983
$
793
13,392
(58,509)
Ó
$(32,785)
(32,334)
11,501
Ó
(26,175)
(11,501)
$(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 implementing the North
American Restructuring Program. Lower variable
compensation expenses and the impact of cost reduction
initiatives substantially offset these costs.
Restructuring Charges
We undertook two major
restructuring initiatives beginning in the fourth quarter
- 18 -
GLATFELTER
of 2003. The following table summarizes restructuring
charges incurred in connection with these initiatives:
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
$
Ó
Ó
3,188
3,188
6,511
6,983
13,494
$20,375
$13,494
North American Restructuring Program
The
North American Restructuring Program was 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 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
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 in the
consolidated income statements as components of costs
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 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
2003
2004
$3,000
$
Ó
Ó
188
Ó
Ó
5,974
1,874
4,878
768
$3,188
$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
2003
2004
$1,625
$
Ó
3,188
2,105
(4,065)
(480)
$ 748
$1,625
As of December 31, 2004, the amounts accrued
related to the Neenah restructuring represent only those
- 19 -
GLATFELTER
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
Acres
Proceeds
Gain
2004
Timberlands
Corporate Aircraft
Other
Total
2003
Timberlands
Other
Total
4,482
$56,586
$55,355
n/a
n/a
2,861
724
2,554
600
$60,171
$58,509
25,500
$37,850
$31,234
n/a
2,892
1,100
$40,742
$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.
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 these liabilities that
became due and sought reimbursement from the buyers,
which, to date, they have refused.
For
Interest Expense
the year ended
December 31, 2004, interest expense declined
$0.9 million to $13.4 million, largely due to lower debt
levels. Average outstanding debt declined $25.4 million
in the year-to-year comparison.
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 to timberland sales and foreign source
income, both of which are taxed at higher effective
rates.
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:
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
beginning in July 2004. All such amounts have since
been collected. 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 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.
Revenue included in determining results 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.
- 20 -
GLATFELTER
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth our outstanding long-
Our business is capital 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
Year Ended
December 31
2005
2004
Cash and cash equivalents at beginning of
period
$ 39,951
$ 15,566
Cash provided by (used for) Operating
activities
Investing activities
Financing activities
Effect of exchange rate changes on cash
Net cash provided
42,868
(8,029)
(15,158)
(2,190)
17,491
39,584
42,109
(59,753)
2,445
24,385
Cash and cash equivalents at end of
period
$ 57,442
$ 39,951
The change in cash generated from operations in the
comparison was primarily due to a $13.6 million
increase in insurance recoveries, net of amounts
escrowed to fund environmental remediation activities,
and a $4.8 million increase in gross profit. These
amounts were offset by $14.2 million of higher income
tax payments, largely due to sales of timberland.
The changes in investing cash flows reflect cash
proceeds from dispositions of property, equipment and
timberlands totaling $22.5 million in 2005 compared to
$60.2 million in 2004. Further, capital expenditures
totaled $31.0 million and $18.6 million in the year-to-
year comparison. We currently expect capital
expenditures in the full year 2006 to approximate
$30 million to $35 million.
During both 2005 and 2004, cash dividends paid on
common stock totaled $15.8 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.
term indebtedness:
In thousands
Year Ended
December 31
2005
2004
Revolving credit facility, due June 2006
67/8% Notes, due July 2007
Note payable Ì SunTrust, due March 2008
Other notes, various
$ 19,650
150,000
34,000
Ó
$ 23,277
150,000
34,000
446
Total long-term debt
Less current portion
203,650
(19,650)
207,723
(446)
Long-term debt, excluding current portion
$184,000
$207,277
The significant terms of the debt obligations are set
in Item 8. Ì Financial Statements and
forth
Supplementary Data, Note 16.
to
respect
We are subject to loss contingencies resulting from
regulation by various federal, state, local and foreign
the
governmental authorities with
environmental impact of mills we operate, or have
operated. 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. See Item 8 Ì Financial Statements Ì
Note 19 for a summary of significant environmental
matters.
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 Ì Financial Statements and
Supplementary Data Ì 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.
As
Off-Balance-Sheet Arrangements
of
December 31, 2005 and 2004, 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 Ì Financial Statements and
Supplementary Data.
- 21 -
GLATFELTER
Contractual Obligations
The following table sets forth contractual obligations as of December 31, 2005.
In thousands
Long-term debt(1)
Operating leases(2)
Purchase obligations(3)
Other long term obligations(4)
Total
Payments Due During the Year
Ended December 31,
2009 to
2007 to
2010
2008
2011 and
beyond
Total
2006
$227,711
$31,801
$195,910
$
Ó
$
Ó
15,521
125,440
79,077
2,191
30,342
23,713
3,124
25,363
13,566
1,418
20,327
11,998
8,788
49,408
29,800
$447,749
$88,047
$237,963
$33,743
$87,996
(1) Represents principal and interest 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 and a, $34 million note maturing in March 2008 and bearing a fixed rate of interest of 3.82%. In addition, at
December 31, 2005, $20 million, bearing a variable interest rate (4.41% as of December 31, 2005), 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, 2005 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 $16 million
related to cross currency swap maturing in June 2006.
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 the most
significant and subjective estimates used in the
preparation of our consolidated financial statements.
Inventory Reserves
We maintain reserves 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.
We
Assets
evaluate
Long-lived
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 thereof, requires various assumptions,
including, but not limited to, discount rates, expected
rates of return on plan assets and future compensation
growth rates. Accounting for our retiree medical plans,
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
- 22 -
GLATFELTER
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 remediation actions
continue and/or further legal or technical information
develops. Such undiscounted liabilities are exclusive of
any insurance or other claims against third parties.
Recoveries of environmental remediation costs from
other parties, including insurance carriers, are recorded
as assets when their receipt is assured beyond a
reasonable doubt.
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 temporary differences
and tax planning strategies. If we 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 temporary differences
become taxable or deductible, we could be required to
increase the valuation allowance against our deferred tax
assets, which may result in a substantial increase in our
effective tax rate and a material adverse impact on our
reported results.
Other significant accounting policies, not involving
the same level of uncertainties as those discussed above,
are nevertheless important to an understanding of the
Consolidated Financial Statements. Refer to Item 8 Ì
Financial Statements and Supplementary Data Ì Notes
to Consolidated Financial Statements for additional
accounting policies.
- 23 -
GLATFELTER
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Dollars in thousands
2006
2007
2008
2009
2010
Carrying Value
Fair Value
Year Ended December 31
At December 31, 2005
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 Ì EURIBOR
Variable rate payable
Receive variable Ì US$
LIBOR
Variable rate receivable
$184,000
19,650
$115,250
9,825
$8,500
Ó
6.31%
4.41
5.97%
4.41
3.82%
Ó
4 34,993
3.24%
$ 33,562
5.16%
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
$184,000
19,650
$187,002
19,650
(16,371)
(16,371)
Our market risk exposure primarily results from
changes in interest rates and currency exchange rates.
At December 31, 2005, we had long-term debt
outstanding of $203.7 million, of which $19.7 million or
9.7% 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,
2005, the interest rate paid was 4.41%. A hypothetical
100 basis point increase or decrease in the interest rate
on variable rate debt would increase or decrease annual
interest expense by $0.4 million.
At December 31, 2005, 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 473 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.
The cross currency swap is recorded at fair value on
the Consolidated Balance Sheet under the caption
""Other long-term liabilities.'' Changes in fair value are
recognized in earnings as ""Other income (expense)'' in
the Consolidated Statements of Income. Changes in fair
value of the cross-currency swap transaction are
substantially offset by changes in the value of
U.S. dollar-denominated inter-company obligations
when they are re-measured in Euros, the functional
currency of S&H (see Item 8 Ì Financial Statements
and Supplementary Data Ì 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 the year ended December 31,
2005, approximately 71% of our net sales were shipped
from the United States, 24% from Germany, and 5%
from other international locations.
- 24 -
GLATFELTER
ITEM 8.
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Company's assets that could have a material effect on
our financial statements.
MANAGEMENT'S REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Management of P. H. Glatfelter Company (the
""Company'') is responsible for establishing 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, 2005, management conducted
an assessment of the effectiveness of the Company's
internal control over financial reporting based on the
framework established in Internal Control Ì Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on this assessment, management has determined
that the Company's internal control over financial
reporting as of December 31, 2005 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.
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
Management's assessment of the effectiveness of the
Company's internal control over financial reporting as of
December 31, 2005, 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, 2005.
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 inadequate because of
changes in conditions or deterioration in the degree of
compliance with policies or procedures.
- 25 -
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's 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, 2005, based on criteria
established in Internal Control Ì 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 control over
financial 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.
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 assessment, testing and evaluating the
design and operating effectiveness of internal control,
and performing such other procedures as we considered
necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
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 statements in accordance with
generally accepted 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 prevention
or timely detection of unauthorized 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, 2005, is fairly
stated, in all material respects, based on the criteria
established in Internal Control Ì 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, 2005, based on the criteria established in
Internal Control Ì Integrated Framework issued by the
Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with the
standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial
statements and financial statement schedule as of and
for the year ended December 31, 2005, of the Company
and our report dated March 13, 2006, expressed an
unqualified opinion on those financial statements and
financial statement schedule.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 13, 2006
- 26 -
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, 2005
and 2004, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of
the three years in the period ended December 31, 2005.
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, 2005 and 2004, and the
results of their operations and their cash flows for each
of the three years in the period ended December 31,
2005, 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.
We have also audited, in accordance with 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, 2005, based on the criteria established in
Internal Control Ì Integrated Framework issued by the
Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 13,
2006,
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.
expressed
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 13, 2006
- 27 -
GLATFELTER
P. H. GLATFELTER COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share amounts
Net sales
Energy sales Ì 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 Ì net
2005
Year Ended December 31
2004
2003
$579,121
10,078
$543,524
9,953
589,199
492,023
97,176
67,633
1,564
Ó
(22,053)
(20,151)
26,993
70,183
(13,083)
2,012
1,028
553,477
461,063
92,414
59,939
20,375
Ó
(58,509)
(32,785)
(10,980)
103,394
(13,385)
2,012
(1,258)
$533,193
10,040
543,233
463,687
79,546
59,146
6,983
11,501
(32,334)
Ó
45,296
34,250
(14,269)
1,820
(1,385)
Total other nonoperating expense
(10,043)
(12,631)
(13,834)
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
60,140
21,531
38,609
Ó
Ó
Ó
90,763
34,661
56,102
Ó
Ó
Ó
20,416
7,430
12,986
(513)
(188)
(325)
Net income
$ 38,609
$ 56,102
$ 12,661
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
$
$
$
$
0.88
Ó
0.88
0.87
Ó
0.87
$
$
$
$
1.28
Ó
1.28
1.27
Ó
1.27
$
$
$
$
0.30
(0.01)
0.29
0.30
(0.01)
0.29
The accompanying notes are an integral part of the consolidated financial statements.
- 28 -
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: 2005 Ì $931; 2004 Ì
$2,364)
Inventories
Prepaid expenses and other current assets
Total current assets
Plant, equipment and timberlands Ì 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 Ì 120,000,000 shares; issued Ì
54,361,980 shares (including shares in treasury: 2005 Ó10,229,734 Ì 2004 Ì
10,412,222)
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
2005
2004
$
57,442
$
39,951
62,524
81,248
22,343
223,557
478,828
342,592
60,900
78,836
18,765
198,452
520,412
333,406
$1,044,977
$1,052,270
$
19,650
3,423
31,132
3,972
7,575
74,126
139,878
184,000
206,269
82,518
612,665
Ó
$
446
3,503
30,174
3,955
7,715
58,214
104,007
207,277
212,074
108,542
631,900
Ó
544
43,450
547,810
(2,295)
(5,343)
584,166
(151,854)
544
41,828
525,056
(1,275)
8,768
574,921
(154,551)
432,312
420,370
$1,044,977
$1,052,270
The accompanying notes are an integral part of the consolidated financial statements.
- 29 -
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
Liabilities
Net cash provided by continuing operations
Net cash 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 (used) provided by investing activities of continuing operations
Net cash used by investing activities of discontinued operations
Net cash (used) provided by investing activities
Financing activities
Net repayments 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
2005
Year Ended December 31
2004
2003
$ 38,609
Ó
38,609
$ 56,102
Ó
56,102
$ 12,661
(325)
12,986
50,647
(16,517)
1,564
3,020
(22,053)
630
(5,876)
(6,195)
3,995
(4,956)
42,868
Ó
42,868
(31,024)
22,450
545
(8,029)
Ó
(8,029)
(733)
Ó
(15,839)
1,414
(15,158)
(2,190)
17,491
39,951
51,598
(17,342)
16,483
17,364
(58,509)
655
470
(4,276)
(12,721)
(10,240)
39,584
Ó
39,584
(18,587)
60,171
525
42,109
Ó
42,109
(44,888)
Ó
(15,782)
917
(59,753)
2,445
24,385
15,566
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
Cash and cash equivalents at the end of period
$ 57,442
$ 39,951
$ 15,566
Supplemental cash flow information
Cash paid (received) for
Interest expense
Income taxes
$ 12,378
17,443
$ 11,713
3,256
$ 13,767
(1,575)
The accompanying notes are an integral part of the consolidated financial statements.
- 30 -
GLATFELTER
P. H. GLATFELTER COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2005, 2004 and 2003
In thousands, except shares outstanding
Balance at January 1, 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
Delivery of treasury shares
Performance shares
401(k) plans
Director compensation
Employee stock options exercised Ì net
Common
Stock
Capital in
Excess of
Par Value
Retained
Earnings
Deferred
Compen-
sation
Accumulated
Other
Compre-
hensive
Income
(Loss)
Treasury
Stock
Total
Shareholders'
Equity
544
$40,798
$495,278
$ (3,708)
$(159,079)
373,833
12,661
(23,183)
13
(13)
(207)
(21)
(101)
6,398
6,398
12,661
6,398
19,059
13
(23,183)
111
981
76
541
124
1,188
97
642
Balance at December 31, 2003
544
40,469
484,756
Ó
2,690
(157,028)
371,431
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 Ì net
56,102
6,078
6,078
(15,802)
(1,275)
38
1,725
(57)
(170)
(12)
(165)
56,102
6,078
38
(15,802)
450
218
845
93
917
62,180
275
1,015
105
1,082
Balance at December 31, 2004
$544
$41,828
$525,056
$(1,275)
$
8,768
$(154,551)
$420,370
Comprehensive income
Net income
Other comprehensive income
Foreign currency translation adjustments
Additional minimum pension liability, net of
tax benefits of $2,831
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
401(k) plans
Director compensation
Employee stock options exercised Ì net
38,609
38,609
(9,619)
(4,492)
(14,111)
(14,111)
24,498
76
(15,855)
874
833
102
1,414
917
123
1,657
(15,855)
(1,020)
76
1,894
(84)
(21)
(243)
Balance at December 31, 2005
$544
$43,450
$547,810
$(2,295)
$ (5,343)
$(151,854)
$432,312
The accompanying notes are an integral part of the consolidated financial statements.
- 31 -
GLATFELTER
P. H. GLATFELTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
P. H. Glatfelter Company and
subsidiaries
(""Glatfelter'') is a manufacturer of specialty papers and
engineered products. Headquartered
in York,
Pennsylvania, our manufacturing facilities are located in
Spring Grove, Pennsylvania; Neenah, Wisconsin;
Gernsbach, Germany; Sca er, 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.
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. Inventories at
our foreign operations are valued using a method that
approximates average cost.
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
lives established by statute or
methods over
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 Ì 45 Years
7 Ì 35 Years
4 Ì 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 of pre-merchantable timber are transferred
to merchantable timber over a 10-year period,
whereupon it is eligible for depletion.
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.
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, 2005 and 2004, investments
in debt securities classified as held-to-maturity totaled
$9.0 million and $9.3 million, respectively. The non-
current portion is included in ""Other assets'' on the
consolidated balance sheets.
- 32 -
GLATFELTER
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 impairment loss is
recognized. An impairment loss, if any, is recognized for
the amount by which the carrying value of the asset
exceeds its fair value.
Asset Retirement Obligations Ì In accordance with
Financial Accounting Standards Board Interpretation
No. 47, Accounting for Conditional Asset Retirement
Obligations, an interpretation of FASB Statement
No. 143 (""FIN No. 47''), we accrue asset retirement
obligations, if any, in the period in which obligations
relating to future asset retirements are incurred. Under
these standards, costs are to be accrued at estimated fair
value, and a related long-lived asset is capitalized. Over
time, the liability is accreted to its settlement value and
the capitalized cost is depreciated over the useful life of
the related asset for which the obligation exists. Upon
settlement of the liability, we recognize a gain or loss for
any difference between the settlement amount and the
liability recorded. Asset retirement obligations with
indeterminate settlement dates are not recorded until
such dates can be
reasonably estimated. At
December 31, 2005, we do not have any obligations
required to be accrued under FIN No. 47.
Income Taxes
Income taxes are determined
using asset and the liability method of accounting for
income taxes in accordance with Statement of Financial
Accounting Standard No. 109 (""SFAS No. 109'').
Under SFAS No. 109, tax expense includes US and
international income taxes plus the provision for US
taxes on undistributed earnings of international
subsidiaries not deemed to be permanently invested. Tax
credits and other incentives reduce tax expense in the
year the credits are claimed. Certain items of income
and expense are not reported in tax returns and financial
statements in the same year. The tax effect of such
temporary differences is reported in deferred income
taxes. Deferred tax assets are recognized if it is more
likely than not that the assets will be realized in future
years. The Company establishes a valuation allowance
for deferred tax assets for which realization is not likely.
The Company accounts for income tax contingencies
in accordance with SFAS No. 5, ""Accounting for
Contingencies.''
Treasury Stock
Common stock purchased for
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
transactions designated as hedges of net foreign
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 $7.3 million, $8.3 million and $7.7 million for the
years ended December 31, 2005, 2004 and 2003,
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.
to
related
legislation and
Environmental Liabilities
Accruals for 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 on existing
technologies. Costs
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.
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
- 33 -
GLATFELTER
SFAS No. 123, ""Accounting for Stock-Based
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.
Pro Forma Information
No compensation
expense has been recognized for the issuance of non-
qualified stock options. No stock options were granted in
2005. The weighted-average grant-date fair value of
options granted during 2004 and 2003, was $3.31 and
$2.48, respectively.
The fair value of each option on the date of grant
was estimated using the Black-Scholes option-pricing
following weighted-average
model using
assumptions:
the
Risk-free interest rate
Expected dividend yield
Expected volatility
Expected life
2004
2003
4.50%
3.47%
3.17
35.0
5.74
38.9
6.5 yrs
6.5 yrs
The following table sets forth pro forma information
as if compensation expense for all stock-based
compensation had been determined consistent with the
fair value method of SFAS No. 123.
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
Basic earnings per share
Reported
Pro forma
Diluted earnings per share
Reported
Pro forma
Year Ended December 31
2004
2005
2003
$38,609
$56,102
$12,661
757
16
346
(786)
(339)
(1,808)
$38,580
$55,779
$11,199
$
0.88
0.88
0.87
0.87
$
1.28
1.27
1.27
1.27
$
0.29
0.26
0.29
0.26
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 of
long-term debt:
2005
2004
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Long-term debt
$203,650
$206,652
$207,723
$215,402
3. RECENT PRONOUNCEMENTS
In December 2004, SFAS No. 123(R), ""Share-
Based Payment'' was issued. This standard requires
employee stock options and 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 required to be adopted by the
company, beginning January 1, 2006. The adoption of
this standard will not have a material impact on our
results of operations or financial position.
In November 2004, SFAS No. 151, ""Inventory
Costs-an amendment to ARB No. 43, Chapter 4,''
(""SFAS No. 151'') was issued. This standard, which is
effective for fiscal years beginning after June 15, 2005,
clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted
material (spoilage). We do not expect SFAS No. 151
will have a material impact on 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 paid
two annual
installments, in July 2005 and 2004. This subsidiary is
in
- 34 -
GLATFELTER
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.
Revenue included in determining results from
discontinued operations totaled $2.6 million for 2003.
This operation was previously reported in the Specialty
Papers business unit.
5. RESTRUCTURING CHARGES
European Restructuring and Optimization Program
(""EURO Program'')
During the fourth quarter of
2005, we began to implement this restructuring
program, a comprehensive series of initiatives designed
to improve the performance of our Long Fiber &
Overlay Papers business unit. In the fourth quarter of
2005, we recorded restructuring charges totaling
$1.6 million associated with the related work force
efficiency plans at the Gernsbach, Germany facility.
This change reflects severance, early retirement and
related costs for the 55 affected employees. We expect
to incur cash out lays in this amount over the next
24 month period.
North American Restructuring Program
The
North American Restructuring Program, which was
initiated in the second quarter of 2004, was 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 was 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
Year Ended
December 31
2004
2005
$ 60
$
Ó
(60)
17,187
(644)
(11,255)
(5,228)
Ending balance
$
Ó
$
60
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.
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 initiative resulted in the
elimination of approximately 190 positions and the
modification of a long-term steam supply contract. 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. There were no charges in
2005 related to Neenah Restructuring.
The following table sets forth information with
respect to Neenah restructuring charges:
In thousands
Year Ended
December 31
2004
2003
Contract modification fee
$3,000
$
Ó
Depreciation on abandoned equipment
Severance and benefit continuation
Pension and other retirement benefits
Other
Total
Ó
188
Ó
Ó
5,974
1,874
4,878
768
$3,188
$13,494
As of December 31, 2005 and 2004, the Neenah
totaled $0.5 million and
reserve
restructuring
- 35 -
GLATFELTER
$0.7 million, respectively. All such amounts primarily
relate to accrued workers' compensation 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.
7. GAIN ON DISPOSITIONS OF PLANT,
EQUIPMENT AND TIMBERLANDS
During 2005, 2004 and 2003, we completed sales of
timberlands and, in 2004, the corporate aircraft. The
following table summarizes these transactions.
Dollars in thousands
Acres
Proceeds
Gain/(loss)
2005
Timberlands
Other
Total
2004
Timberlands
Corporate Aircraft
Other
Total
2003
Timberlands
Other
Total
2,488
n/a
4,482
n/a
n/a
25,500
n/a
$21,000
1,778
$22,778
$56,586
2,861
724
$60,171
$37,850
2,892
$40,742
$20,327
1,726
$22,053
$55,355
2,554
600
$58,509
$31,234
1,100
$32,334
All property sales completed in 2005 and 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.
8. EARNINGS PER SHARE
The following table sets forth the details of basic and
diluted earnings per share (EPS):
In thousands, except per share
2005
2004
2003
Income from continuing operations
$38,609
$56,102
$12,986
Loss from discontinued operations
Ó
Ó
(325)
Net income
$38,609
$56,102
$12,661
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
44,013
43,856
43,731
330
167
29
44,343
44,023
43,760
Income from continuing operations
$
0.88
$
1.28
$
0.30
Loss from discontinued operations
Ó
Ó
(0.01)
Net income
Diluted EPS
$
0.88
$
1.28
$
0.29
Income from continuing operations
$
0.87
$
1.27
$
0.30
Loss from discontinued operations
Ó
Ó
(0.01)
Net income
$
0.87
$
1.27
$
0.29
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
2005
758
2004
1,664
2003
1,846
9. GAIN ON INSURANCE RECOVERIES
During 2005 and 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 totaled $20.2 and $32.8 million in 2005 and
2004, respectively, and were received in cash.
10.
INCOME TAXES
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 enacted tax laws
and rates.
- 36 -
GLATFELTER
The provision for income taxes from continuing
The sources of deferred income taxes were as follows
operations consisted of the following:
at December 31:
In thousands
Current taxes
Federal
State
Foreign
Deferred taxes
Federal
State
Foreign
Year Ended December 31
2003
2004
2005
$14,881
$ 8,982
$ (723)
3,145
485
5,262
3,053
27
347
18,511
17,297
(349)
3,239
14,292
(1,905)
1,686
3,020
101
2,971
17,364
1,562
2,950
3,267
7,779
Total provision for income taxes
from continuing operations
$21,531
$34,661
$7,430
The following are domestic and foreign components
of pretax income from continuing operations:
In thousands
United States
Foreign
Year Ended December 31
2003
2004
2005
$55,865
$78,627
$16,968
4,275
12,136
3,448
Total pretax income
$60,140
$90,763
$20,416
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:
Year Ended
December 31
2004
2003
2005
Federal income tax provision at statutory
rate
35.0% 35.0% 35.0%
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
1.3
Ó
(2.2)
(0.8)
2.2
0.3
3.9
Ó
3.7
(19.6)
(4.1)
(7.3)
3.4
Ó
Ó
29.7
(2.7)
(2.4)
Total provision for income taxes from
continuing operations
35.8% 38.2% 36.4%
Post-
retirement
benefits
Property
Pension
Installment
Sale
Inventories
Other
Tax carry
forwards
Subtotal
Valuation
2005
2004
In
thousands
Current
Asset
(Liability)
Non-
current
Asset
(Liability)
Current
Asset
(Liability)
Reserves
$ 6,082
$
Compensation
1,134
8,817
2,832
$6,291
1,070
1,992
Ó
(430)
Ó
(45)
2,285
10,683
(117,492)
(98,261)
(10,897)
Ó
(4,315)
1,992
Ó
(478)
Ó
368
176
Non-
current
Asset
(Liability)
$
10,106
2,274
10,591
(124,651)
(94,373)
(12,521)
Ó
(2,688)
Ó
20,467
(1,519)
25,858
11,018
(188,166)
7,900
(185,404)
allowance
(26)
(18,103)
Ó
(20,037)
Total
$10,992
$(206,269)
$7,900
$(205,441)
Current and non-current deferred tax assets and
liabilities are included in the following balance sheet
captions:
In thousands
Prepaid expenses and other current assets
Other current liabilities
Other non-current assets
Deferred income taxes
Year Ended
December 31
2005
2004
$ 11,209
217
Ó
$
8,910
1,010
6,633
206,269
212,074
At December 31, 2005, the Company had state and
foreign tax net operating loss (""NOL'') carryforwards of
$70.7 million and $10.0 million, respectively. These
NOL carryforwards are available to offset future taxable
income, if any. The state NOL carryforwards expire
between 2007 and 2025; the foreign NOL carryforwards
do not expire.
In addition, the Company had federal charitable
contribution carryforwards of $7.5 million, which expire
in 2008, federal foreign tax credit carryforwards of
$0.3 million, which expire in 2013, and various state tax
credit carryforwards totaling $1.3 million, which expire
between 2006 and 2020.
The Company has established a valuation allowance
of $18.1 million against the net deferred tax assets,
primarily due to the uncertainty regarding the ability to
utilize state tax carryforwards and certain deferred
foreign tax credits.
- 37 -
GLATFELTER
The Company operates within multiple taxing
jurisdictions and in the normal course of business is
examined in various jurisdictions. Tax accruals related
to the estimated outcome of these examinations are
recorded in accordance with SFAS No. 5. The reversal
of accruals is recorded when examinations are
completed, statues of limitations close or tax laws
change. A net expense of $1.3 million was recorded in
2005, $0.3 million was recorded in 2004, and a net
benefit of $1.7 million was recorded in 2003 related to
domestic and foreign examination audits and risks. Tax
credits and other incentives reduce tax expense in the
year the credits are claimed. In 2005, the Company
recorded tax credits of $1.8 million related to R&D
credits, fuels tax credit and the newly enacted electricity
production tax credit. In 2004 and 2003 similar tax
credit were recorded of $0.8 million and $1.5 million
respectively.
reinvested
to be permanently
At December 31, 2005 and 2004, unremitted
earnings of subsidiaries outside the United States
deemed
totaled
$57.9 million and $55.9 million, respectively. Because
the unremitted earnings of subsidiaries are deemed to be
permanently reinvested as of December 31, 2005, no
deferred tax liability has been recognized in the
Company's financial statements. Consistent with the
Company's policy of permanent reinvestment, the
Company did not repatriate under the provisions of the
American Jobs Creation Act of 2004.
11. STOCK-BASED COMPENSATION
On April 25, 2005 the common shareholders
approved the P. H. Glatfelter 2005 Long Term Incentive
Plan (""2005 Plan'') to authorize, among other things,
the issuance of up to 1,500,000 shares of Glatfelter
common stock to eligible participants. The 2005 Plan,
which replaced the 1992 Long Term Incentive Plan,
provides for the issuance of restricted stock units,
restricted stock awards, non-qualified stock options,
performance shares, incentive stock options and
performance units. As of December 31, 2005,
1,469,118 shares of common stock were available for
future issuance under the 2005 Plan.
Restricted Stock Units
During 2005 and 2004,
150,782 and 157,280 non-vested RSUs, net of
forfeitures, were awarded, respectively, primarily 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 $0.9 million and
$0.5 million during 2005 and 2004, respectively.
During
Restricted Stock Performance Awards
2003, 2,660 shares of restricted stock performance
shares were awarded. Such awards are subject to
forfeiture, in whole or in part, if the recipient ceases to
be an employee within a specified time period. Vesting
of the awards was contingent on achieving certain
specified total shareholder return measures related to a
peer group as of December 31, 2005. This target was
met and shares were issued in 2006.
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
Compensation Expense
2005
2004
2003
$ 705
(443)
533
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
Exercisable at end of year
2005
Weighted-
Average
Exercise Price
$14.65
Ì
12.67
17.30
14.06
$14.07
Shares
2,098,612
Ì
(111,542)
(433,861)
1,553,209
1,547,422
2004
Weighted-
Average
Exercise Price
$14.71
11.18
12.61
15.51
14.65
$15.17
Shares
2,304,339
51,250
(72,850)
(184,127)
2,098,612
1,956,439
2003
Weighted-
Average
Exercise Price
$15.00
11.75
12.60
16.47
14.71
$15.45
Shares
2,828,529
40,990
(43,287)
(521,893)
2,304,339
1,410,614
- 38 -
GLATFELTER
The following table summarizes information about stock options outstanding at December 31, 2005:
$10.78 to $12.41
12.95 to 14.44
15.44 to 17.16
17.54 to 18.78
Options Outstanding
Options Exercisable
Weighted-
Average
Remaining
Contractual Life
Weighted-
Average
Exercise Price
Number
Outstanding
Weighted-
Average
Exercise Price
4.0
5.4
5.6
2.3
4.8
$12.09
13.29
15.55
18.26
362,250
640,812
394,800
149,560
1,547,422
$11.48
13.29
15.55
18.26
Shares
368,037
640,812
394,800
149,560
1,553,209
In December 2003, 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.
12. RETIREMENT PLANS AND OTHER POST-
RETIREMENT BENEFITS
We have both funded and, with respect to our
international operations, unfunded noncontributory
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 of service. Plan provisions and funding meet the
requirements of the Employee Retirement Income
Security Act of 1974. We use a December 31-
measurement date for all of our defined benefit plans.
We also provide certain health care benefits to
eligible retired employees. These benefits include 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.
In millions
Change in Benefit Obligation
Pension Benefits
2004
2005
Other Benefits
2004
2005
Balance at beginning of year
$295.2
$267.2
$ 46.7
$ 39.7
Service Cost
Interest Cost
Plan amendments
Actuarial loss
Benefits paid
3.7
16.3
Ó
21.6
3.9
16.1
0.2
15.9
1.1
2.7
(1.4)
3.4
1.0
2.4
2.0
(20.5)
(18.4)
(4.2)
(3.6)
Impact of curtailments
Impact of special termination
benefits
Ó
Ó
(0.5)
10.8
Ó
Ó
5.1
0.1
Balance at end of year
$316.3
$295.2
$ 48.3
$ 46.7
Change in Plan Assets
Fair value of plan assets at
beginning of year
$465.6
$445.7
$
Actual return on plan assets
Employer contributions
24.2
2.3
35.8
2.5
Ó
Ó
4.2
$
Ó
Ó
3.6
Benefits paid
(20.5)
(18.4)
(4.2)
(3.6)
Fair value of plan assets at
end of year
$471.6
$465.6
$
Ó
$
Ó
Reconciliation of Funded
Status
Funded Status
Unrecognized transition
assets
Unrecognized prior service
cost
Unrecognized loss
$155.3
$170.4
$(48.3)
$(46.7)
Ó
Ó
Ó
Ó
19.6
70.4
21.7
33.4
(7.5)
23.2
(6.8)
21.1
Net amount recognized
$245.3
$225.5
$(32.6)
$(32.4)
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, 2005 and
2004.
- 39 -
GLATFELTER
Amounts recognized in the consolidated balance
sheet consist of the following as of December 31:
In millions
Prepaid benefit cost
Accrued benefit liability
Intangible asset
Other comprehensive income,
pre-tax
Pension Benefits
2004
2005
Other Benefits
2004
2005
$264.7
(28.6)
1.9
$245.4
(19.9)
Ó
$
Ó
(32.6)
Ó
$
Ó
(32.4)
Ó
7.3
Ó
Ó
Ó
Net amount recognized
$245.3
$225.5
$(32.6)
$(32.4)
The accumulated benefit obligation for all defined
benefit pension plans was $297.7 million and $283.2. at
December 31, 2005 and 2004, respectively.
in
The weighted-average assumptions used
computing the benefit obligations above were as follows:
Pension
Benefits
Other
Benefits
2005
2004
2005
2004
Discount rate Ó benefit obligation
Future compensation growth rate
5.50% 5.75% 5.50% 5.75%
4.0
4.0
Ó
Ó
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
2005
2004
$30.3
28.6
Ó
$23.1
21.8
Ó
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 loss
Net periodic benefit (income) cost
Special termination benefits
Curtailment and settlement
Year Ended December 31
2003
2004
2005
$
3.7
16.3
(39.4)
Ó
2.3
0.5
(16.6)
Ó
Ó
$ 3.9
16.1
(39.4)
(0.8)
2.4
0.4
(17.4)
Ó
11.4
$
3.7
16.3
(38.7)
(1.3)
2.8
0.0
(17.2)
5.4
Ó
Total net periodic benefit (income) cost
$(16.6)
$ (6.0)
$(11.8)
Other Benefits
Service cost
Interest cost
Amortization of prior service cost
Recognized actuarial loss
Net periodic benefit (income) cost
Special termination benefits
Plan amendments
$
$
1.1
2.7
(0.7)
1.3
$ 1.0
2.4
(0.7)
1.2
3.9
5.2
Ó
4.4
Ó
Ó
4.4
1.0
2.5
(0.8)
1.1
3.8
(0.5)
(0.7)
Total net periodic benefit cost
$
$ 9.1
$
2.6
The weighted-average assumptions used in computing
the net periodic benefit (income) cost information
above were as follows:
In millions
Pension Benefits
Discount rate Ó benefit expense
Future compensation growth rate
Expected long-term rate of return on plan
assets
Other Benefits
Discount rate Ó benefit expense
Future compensation growth rate
Expected long-term rate of return on plan
assets
Year Ended
December 31
2004
2003
2005
5.75% 6.25% 6.75%
4.0
4.0
4.0
8.5
8.5
8.5
5.75% 6.25% 6.75%
Ó
Ó
Ó
Ó
Ó
Ó
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 2005.
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
2005
2004
11.0%
11.5%
5.0
2013
5.0
2014
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
Effect on:
One percentage
point
increase
decrease
Post-retirement benefit obligation
$4,267
$(3,774)
Total of service and interest cost
components
407
(353)
Plan Assets Glatfelter's pension plan weighted-
average allocations at December 31, 2005 and 2004, by
asset category, are as follows:
Asset Category Equity securities
Debt securities
Cash and real estate
Total
2005
2004
70%
66%
30
Ó
30
4
100%
100%
Our objective is to achieve an above-market rate of
return on our pension plan assets. Based upon this
- 40 -
GLATFELTER
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:
to certain limitations, in the form of shares of Glatfelter
common stock. The expense associated with our 401(k)
match was $0.6 million, $0.7 million and $0.7 million in
2005, 2004 and 2003, respectively.
Minimum
Target
Maximum
Equity
Fixed Income & Other
60%
20
70%
30
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,
2005 or 2004. 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 2006.
Contributions and benefit payments expected to be
made in 2006 under our non-qualified pension plans and
other benefit plans are summarized below:
In thousands
Nonqualified pension plans
Other benefit plans
$2,145
5,079
The following table sets forth benefit payments,
which reflect expected future service, as appropriate,
expected to be paid:
In thousands
2006
2007
2008
2009
2010
2011 through 2015
Pension Benefits
Qualified Non-Qualified
Plans
$18,048
17,842
17,534
17,265
17,345
93,617
Plans
$2,145
2,079
2,061
2,052
1,725
8,893
Other
Benefits
$ 5,079
4,826
4,334
4,119
3,801
18,296
Payments expected to be made pursuant to the
qualified plans will be made from our pension plan
assets.
Defined Contribution Plans
We maintain
401(k) plans for certain hourly and salaried employees.
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
Defined Contribution Plans
We maintain
401(k) plans for certain hourly and salaried employees.
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 $0.6 million, $0.7 million and $0.7 million in
2005, 2004 and 2003, respectively.
13.
INVENTORIES
Inventories, net of reserves were as follows:
In thousands
Raw materials
In-process and finished
Supplies
Total
2005
2004
$16,392
$14,974
39,930
24,926
39,327
24,535
$81,248
$78,836
If we had valued all inventories using the average-
cost method, inventories would have been $12.7 million
and $12.6 million higher than reported at December 31,
2005 and 2004, respectively. During 2005 and 2003 we
liquidated certain LIFO inventories, the effect of which
did not have a significant impact on net income.
At December 31, 2005 the recorded value of the
above inventories exceeded the tax basis by $0.2 million.
At December 31, 2004, the recorded values were less
than the tax basis by $0.8 million.
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
2005
2004
$132,962
$137,668
888,660
902,835
82,098
85,891
(641,070)
(611,852)
462,650
514,542
13,940
2,238
3,219
2,651
Plant, equipment and timberlands Ì net
$478,828
$520,412
- 41 -
GLATFELTER
15. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
In thousands
Accrued payroll and benefits
Other accrued compensation and retirement
benefits
Income taxes payable
Cross currency rate swap
Other accrued expenses
Total
December 31
2005
2004
$18,828
$19,525
6,320
15,480
16,370
17,128
8,838
14,307
Ó
15,544
$74,126
$58,214
16. LONG-TERM DEBT
Long-term debt is summarized as follows:
In thousands
December 31
2005
2004
Revolving credit facility, due June 2006
67/8% Notes, due July 2007
$ 19,650
150,000
$ 23,277
150,000
Note payable Ì SunTrust, due March 2008
34,000
34,000
Other notes, various
Total long-term debt
Less current portion
Ó
446
203,650
207,723
(19,650)
(446)
Long-term debt, excluding current portion
$184,000
$207,277
During 2002, we entered into an unsecured
$125 million multi-currency revolving credit facility
(the ""Facility'') with a syndicate of four major banks.
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, 2005.
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.
On March 21, 2003, we sold approximately
25,500 acres of
received as
consideration a $37.9 million 10-year interest bearing
timberlands and
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, 2005 and 2004, we had
$4.3 million and $4.0 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 $(16.4) and
$(29.6) million at December 31, 2005 and 2004,
respectively, under the captions ""Other current
liabilities'' and
liabilities'',
respectively. 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
related
remeasurement of the U.S. dollar denominated inter-
company obligations.
long-term
""Other
the
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.
- 42 -
GLATFELTER
18. SHAREHOLDERS' EQUITY
The following table summarizes outstanding shares
of common stock:
In thousands
Year Ended December 31
2003
2004
2005
Shares outstanding at beginning of year
43,950
43,782
43,644
Treasury shares issued for:
Restricted stock performance awards
401(k) plan
Director compensation
Employee stock options exercised
62
9
111
19
69
7
73
8
80
7
43
Shares outstanding at end of year
44,132
43,950
43,782
19. COMMITMENTS, CONTINGENCIES AND
LEGAL PROCEEDINGS
Contractual Commitments The following table
summarizes the minimum annual rentals due on
noncancelable operating leases and other 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.
In thousands
2006
2007
2008
2009
2010
Leases
Other
$2,191
$21,740
1,886
1,238
794
624
12,632
12,668
12,488
7,840
At December 31, 2005, required minimum annual
rentals due under operating leases and other similar
contractual obligations aggregated $15.5 million and
$125.4 million, respectively.
Ecusta Division Matters
We have reserves for
various matters associated with our former Ecusta
Division. Activity in these reserves during the periods
indicated is summarized below.
Ecusta
Environmental Workers'
In thousands
Matters
Comp
Other
Total
Balance, Jan. 1, 2003
Accruals
Payments
Balance, Dec. 31, 2003
Accruals
Payments
Balance, Dec. 31, 2004
Accruals
Payments
$
Ó
7,600
Ó
7,600
Ó
(1,209)
6,391
2,700
(986)
$2,200
$1,393 $ 3,593
Ó
Ó
Ó
Ó
7,600
Ó
2,200
Ó
(56)
1,393
1,907
11,193
1,907
Ó
(1,265)
2,144
3,300
11,835
Ó
(231)
Ó
Ó
2,700
(1,217)
Balance, Dec. 31, 2005
$ 8,105
$1,913
$3,300 $13,318
With respect to the reserves set forth above as of
December 31, 2005, $1.5 million is recorded under the
caption ""other current liabilities'' and $11.8 million is
recorded under the caption ""other long-term liabilities''
in the accompanying condensed consolidated balance
sheets.
The following discussion provides more details on
each of these matters.
Background Information
In August 2001,
pursuant to an acquisition agreement (the ""Acquisition
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.
Ecusta Environmental Matters
Beginning in
April 2003, government authorities, including the North
Carolina Department of Environment and Natural
Resources (""NCDENR''), initiated discussions with us
and the New Buyers regarding, among other
environmental issues, certain potential landfill closure
liabilities 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 three landfills. Accordingly, we
- 43 -
GLATFELTER
established reserves approximating $7.6 million. In
March 2004 and September 2005, the NCDENR issued
us separate orders requiring the closure of two of the
three landfills at issue. We have substantially completed
the closure of these two landfills.
In October 2004, one of the New Buyers entered
into a Brownfields Agreement with the NCDENR
relating to the Ecusta mill, pursuant to which the New
Buyer was to be held responsible for certain specified
environmental concerns.
In September 2005, NCDENR sought our
participation, pursuant to a proposed consent order, in
the evaluation and potential
remediation of
environmentally hazardous conditions at the former
Ecusta mill site. In January 2006, NCDENR modified
its proposed consent order to include us and the owner
(the ""Prior Owner'') from whom our predecessor,
Ecusta Corporation, purchased the Ecusta mill.
NCDENR and the United States Environmental
Protection Agency (""USEPA'') have indicated that if
neither party enters into the proposed consent order
EPA will likely list the mill site on the National
Priorities List and pursue assessment and remediation of
the site under the Comprehensive Environmental
Responsibility, Compensation and Liability Act (more
commonly known as ""Superfund''). In addition to
calling for the assessment, closure, and post-closure
monitoring and maintenance of the third landfill for
which we had previously been held responsible, the
proposed consent order asserts concerns regarding:
i. mercury and certain other contamination on
and around the site;
ii. potentially hazardous conditions existing in the
sediment and water column of the site's water
treatment and aeration and sedimentation basin
(the ""ASB''); and
iii. contamination associated with two additional
landfills on the site that were not used by us.
With respect to the concerns set forth above
(collectively, the ""NCDENR matters'') we believe the
Prior Owner has primary liability for the mercury
contamination; that the New Buyers, as owner and
operator of the ASB, have primary liability for
addressing any issues associated with the ASB,
including closure, and that the New Buyers, in a May
2004 agreement, expressly agreed to indemnify and hold
us harmless from certain environmental liabilities, which
include most, if not all, of the NCDENR matters. We
continue to have discussions with NCDENR concerning
our potential responsibilities and appropriate remedial
actions, if any, which may be necessary.
In addition, it is possible the New Buyers may not
have sufficient cash flow to continue meeting certain
obligations to NCDENR and us. Specifically, the New
Buyers are obligated (i) to treat leachate and
stormwater runoff from the landfills, which we are
currently required to manage, and (ii) to remediate
groundwater contamination in the vicinity of a former
caustic building at the site. If the New Buyers should
default on these obligations, it is possible that
NCDENR will require us to make appropriate
arrangements for the treatment and disposal of the
landfill waste streams and to be responsible for the
remediation of certain contamination on and around the
site (collectively, the ""New Buyers Matters'').
As a result of NCDENR's September 2005
communication with us and our assessment of the range
of likely outcomes of the NCDENR Matters and the
New Buyers Matters, our results of operations for 2005
includes a $2.7 million charge to increase our reserve for
estimated costs associated with
the Ecusta
environmental matters. The addition to the reserve
includes estimated operating costs associated with
continuing certain water treatment facilities at the site
which are necessary to treat leachate discharges from
certain of the landfills, the closure for which we had
previously reserved, estimated costs to perform an
assessment of certain risks posed by the presence of
mercury, further characterization of sediment in the
ASB and treatment of other contamination.
The reserves relating to additional environmental
assessment activities were premised, in part, on the
belief that it might be mutually beneficial to us and
NCDENR if we were to agree to perform the
assessment activities, without accepting responsibility
for any subsequently required remediation. We believe
that outcome may still be possible. However, it is
currently unclear whether NCDENR and EPA will
accept such an arrangement. It is equally uncertain what
action will be taken by EPA and NCDENR in the
absence of a consent order (and against whom) and
what remediation, if any, will be required if and when
additional assessments are performed.
In addition, it is unclear how liability for any
required assessment or remediation will be apportioned
among the Prior Owner, Glatfelter, the Buyers and the
the 2005 charge does not
New Buyers. Therefore,
include costs associated with further remediation
activities that we may be required to perform.
Whether we will be required to remediate, the extent
of contamination, if any, and the ultimate costs to
remedy, are not reasonably estimable based on
information currently available to us. Accordingly, no
- 44 -
GLATFELTER
amounts for such actions have been included in our
reserve discussed above. If we are required to complete
additional remedial actions, further charges would be
required, and such amounts could be material.
We are evaluating potential legal claims we may
have in pursuing any other parties, including previous
owners, of the site for their obligations and/or cost
recoveries. We are also evaluating options for ensuring
that the New Buyers fulfill their obligations with respect
to the New Buyers Matters. We are uncertain as to what
additional Ecusta-related claims, including, among
others, environmental matters, government oversight
and/or government past costs, if any, may be asserted
against us.
Workers' Compensation
In addition to reserves
for environmental matters at the site, prior to 2003, we
had established reserves related to potential worker's
compensation claims which at that time were estimated
to total approximately $2.2 million. In the fourth quarter
of 2005, the North Carolina courts issued a ruling that
held us liable for worker's compensation claims of
certain employees that were injured during their
employment at the Ecusta facility prior to our sales of
the Division. Since this ruling, we have made payments
as indicated in the reserve analysis presented earlier in
this Note 19.
We continue to believe the Buyers are responsible
for the Environmental Matters and the Workers'
the
Compensation claims under provisions of
Acquisition Agreement, and believe we have a strong
legal basis claim for indemnification. We are pursuing
appropriate avenues to enforce the provisions of the
Acquisition Agreement.
Other
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 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. 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.
respect
reported with
Fox River Ì Neenah, Wisconsin We have
previously
to potential
environmental claims arising out of the presence of
polychlorinated biphenyls (""PCBs'') in sediments in the
lower Fox River and in the Bay of Green Bay,
downstream of our Neenah, Wisconsin facility. We
acquired the Neenah facility in 1979 as part of the
acquisition of the Bergstrom Paper Company. In part,
this facility 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 from the
facility containing PCBs from wastepaper may have
occurred from 1954 to the late 1970s. Any PCBs that
the Neenah facility discharged into the Fox River
resulted from the presence of NCR»-brand carbonless
copy paper in the wastepaper that was received from
others and recycled.
As described below, various state and federal
governmental agencies have formally notified 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
- 45 -
GLATFELTER
Inc., Georgia Pacific Corp. (formerly Fort Howard
Corp. and Fort James), WTM I Company (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.
The areas of the lower Fox River and in the Bay of
Green Bay in which 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 (""OU3Ó5''), 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 that may arise
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. Based
on the remediation activities completed to date, contract
proposals received for the remaining remediation work,
and the potential availability of alternative remedies
under the ROD, we believe the total remediation of
OU1 will cost between $61 million and $137 million.
On July 1, 2003, WTM I Company entered into an
Administrative Order on Consent (""AOC'') with EPA
and the Wisconsin DNR regarding the implementation
of the Remedial Design for OU1.
In the first quarter of 2004, the United States
District Court for the Eastern District of Wisconsin
approved a consent decree regarding OU1 (""the OU1
Consent Decree''). Under terms of the OU1 Consent
Decree, Glatfelter and WTM I Company 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.
The remaining amount that the parties agreed to pay
under the Consent Decree includes payments for NRD,
and NRD assessment and other past costs incurred by
the governments. In addition, EPA agreed to take steps
to place $10 million from another source into escrow for
the OU1 cleanup.
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 site. The response work
is being managed and/or performed by Glatfelter and
WTM I, with governmental oversight, and funded by
the amounts placed in escrow. Beginning in mid 2004,
Glatfelter and WTM I have performed activities to
remediate OU1, including, among others, construction
of de-watering and water-treatment facilities, dredging
of portions of OU1, dewatering of the dredged materials,
and hauling of the dewatered sediment to an authorized
disposal facility. Since the start of these activities, to
date approximately 105,000 cubic yards of contaminated
sediment has been dredged.
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 to extend the remediation effort.
Should the OU1 Consent Decree be terminated due to
insufficient funds, 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 or all PRPs for the site, including
Glatfelter. Based on information currently available to
us, and subject to government approval of the use of
alternative remedies, we believe the required remedial
actions can be completed with the amount of monies
committed under the Consent Decree. If the Consent
Decree is terminated due to the insufficiency of the
escrow funds, Glatfelter and WTM I each remain
potentially responsible for the costs necessary to
complete the remedial action.
- 46 -
GLATFELTER
As of December 31, 2005, our portion of the escrow
account totaled approximately $15.6 million, of which
$7.2 million is recorded in the accompanying
Consolidated Balance Sheet under the caption ""Prepaid
expenses and other current assets'' and $8.4 million is
included under the caption ""Other assets.'' As of
December 31, 2005, our reserve for environmental
liabilities, substantially all of which is for OU1
remediation activities, totaled $16.8 million.
OUs 3 Ì 5 On July 28, 2003, the EPA and the
Wisconsin DNR issued a ROD (the ""Second ROD'')
for the cleanup of OU3 Ì 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
to
$486.6 million. The most significant component of the
estimated costs is attributable to large-scale sediment
removal by dredging.
from approximately $227.0 million
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
thereby
accomplishing a first step towards remediation.
for OUs 3-5,
We do not believe that we have more than a de
minimis share of any equitable distribution of
responsibility for OU3Ó5 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 NRDs
for injured natural resources that allegedly fall under
their trusteeship 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 Fox River site.
Other Information
The Wisconsin DNR and
FWS have each 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 (a) the studies
themselves disclose that they are not accurate and
(b) the volumetric estimates contained in the studies
are based on assumptions that are unsupported by
existing evidence. We believe that our volumetric
contribution is significantly lower than the estimates set
forth in these studies. Further, we do not believe that a
volumetric allocation would constitute an equitable
distribution of
the
the potential
contamination. Other factors, such as the location of
contamination, the location of discharge and a party's
role in causing discharge must be considered in order for
the allocation to be equitable.
liability
for
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 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
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.
those discharges
to
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
- 47 -
GLATFELTER
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 the extent
of the exposure that 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 Fox River 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.
In millions
Recorded as:
Environmental liabilities
Other long-term liabilities
Total
December 31,
2004
2005
$ 7.6
$ 7.7
9.2
13.9
$16.8
$21.6
The classification of our environmental liabilities is
based on the development of the underlying Fox River
OU1 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 associated with the Fox River matter to
our results of operations during 2005, 2004 or 2003.
Other than with respect to the OU1 Consent Decree,
the amount and timing of future expenditures for
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,
timing of any
the extent and
technological advances for pollution abatement, the
response actions that may be required, the availability of
qualified remediation contractors, equipment, and
landfill space, and the number and financial resources of
any other PRPs.
Range of Reasonably Possible Outcomes
Based
on currently available information, including actual
remediation costs incurred to date, we believe that the
remediation of OU1 can be satisfactorily completed for
the amounts provided under the OU1 Consent Decree.
Our assessment is dependent, in part, on government
approval of the use of alternative remedies in OU1, on
the successful negotiation of acceptable contracts to
complete remediation activities, and an effective
implementation of the chosen technologies by the
remediation contractor.
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
liability,
CERCLA
uncertainty persists regarding our exposure with respect
to the remainder of the Fox River site.
joint and several
imposes
Based on our analysis of currently available
information and experience regarding the cleanup of
hazardous substances, we believe that it is reasonably
possible that our costs associated with the lower Fox
River and the Bay of Green Bay may exceed our original
reserves by amounts that may prove to be insignificant
or that could range, in the aggregate, up to
approximately $125 million, over a period that is
undeterminable but that 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 work 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 Fox River site 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.
In estimating both our current reserves for
environmental remediation and other environmental
liabilities and the possible range of additional costs, we
have assumed that we will not 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
- 48 -
GLATFELTER
into account, generally based on their financial condition
and probable contribution. Our evaluation of the other
PRPs' financial condition included the review of
publicly available financial information. Furthermore,
we believe certain of these PRPs have corporate or
contractual relationships with additional entities that
may shift to those entities some or all of the monetary
obligations arising from the Fox River site. 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 consequently, in our opinion, bear a higher
level of responsibility.
In addition, our assessment is based upon the
magnitude, nature and location of the various discharges
of PCBs to the river and the relationship of those
discharges to identified contamination. We 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 Fox River
site.
Over the past two years we have collected
approximately $53.0 million of proceeds under insurance
policies covering the Fox River matter. Any additional
recoveries are expected to be insignificant.
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 Fox River site, 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.
In addition to the specific matters discussed above,
we are subject to loss contingencies resulting from
regulation by various federal, state, local and foreign
governments 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 the adverse effects, if
any, 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.
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.
- 49 -
GLATFELTER
20. SEGMENT AND GEOGRAPHIC INFORMATION
The following table sets forth profitability and other information by business unit for the year ended December 31:
In thousands
Net sales
Energy sales, net
Total revenue
Specialty Papers
2004
2005
2003
Long Fiber & Overlay
2004
2005
2003
Other and Unallocated
2004
2005
2003
Total
2004
2005
2003
$380,923 $337,436 $357,989 $198,137 $205,232 $165,389 $
61
$
856
$
9,815 $579,121 $543,524 $533,193
Cost of products sold
340,629
312,136
325,897
166,153
163,843
130,838
10,078
9,953
10,040
Ó
Ó
Ó
391,001
347,389
368,029
198,137
205,232
165,389
Ó
61
84
Ó
856
1,021
Ó
10,078
9,953
10,040
9,815
589,199
553,477
543,233
15,448
506,866
477,000
472,183
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
50,372
39,876
35,253
36,617
42,132
44,494
31,984
21,282
41,389
23,067
34,551
16,669
(23)
(165)
(5,633)
8,149
1,660
125
82,333
69,307
76,477
61,344
71,050
61,288
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
Ó
(16,517)
(17,342) (17,149)
(16,517)
(17,342) (17,149)
Ó
Ó
1,564
20,375
6,511
6,983
Ó
Ó
11,501
Ó
1,564
20,375
6,511
6,983
Ó
11,501
(22,053)
(58,509) (32,334)
(22,053)
(58,509) (32,334)
(20,151)
(32,785)
Ó
(20,151)
(32,785)
Ó
Total operating income (loss)
10,496
(1,364)
(2,362)
10,702
18,322
17,882
48,985
Nonoperating income (expense)
Ó
Ó
Ó
Ó
Ó
Ó
(10,043)
86,436
18,730
70,183
(12,631) (13,834) (10,043)
103,394
34,250
(12,631) (13,834)
Income from continuing
operations before income taxes
$ 10,496 $ (1,364) $ (2,362) $ 10,702 $ 18,322 $ 17,882 $ 38,942 $ 73,805 $
4,896 $ 60,140 $ 90,763 $ 20,416
Supplemental Data
Plant, equipment and timberlands,
net
$335,745 $351,086 $377,182 $143,083 $169,326 $165,778
Depreciation expense
35,781
37,186
44,216
14,866
14,412
11,813
Ó
Ó
Ó
Ó
Ó
Ó
$478,828 $520,412 $542,960
50,647
51,598
56,029
Results of individual business units are presented
based on our management accounting practices and
management structure. There is no comprehensive,
authoritative body of guidance for management
accounting equivalent to 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
through wholesale paper merchants. No individual
customer accounted for more than 10% of our
consolidated net sales in 2005, 2004 or 2003.
- 50 -
GLATFELTER
Our net sales to external customers and location of net plant, equipment and timberlands are summarized below. Net
sales are attributed to countries based upon origin of shipment.
In thousands
United States
Germany
Other
Total
2005
Plant,
Equipment and
Timberlands Ì Net
$335,745
123,685
19,398
$478,828
2004
Plant,
Equipment and
Timberlands Ó Net
$351,086
149,513
19,813
$520,412
Net sales
$353,284
156,337
33,903
$543,524
Net sales
$399,705
143,227
36,189
$579,121
Net sales
$367,903
138,630
26,660
$533,193
21. QUARTERLY RESULTS (UNAUDITED)
In thousands, except per share
2005
2004
2005
2004
2005
2004
Net sales
Gross Profit
Net Income
2003
Plant,
Equipment and
Timberlands Ó Net
$377,182
147,651
18,127
$542,960
Diluted Earnings
Per Share
2005
2004
First
Second
Third
Fourth
$143,896
145,283
146,780
143,162
$132,078
129,029
143,075
139,342
$28,594
19,833
25,616
23,133
$20,499
16,042
27,042
28,831
$6,290
1,709
3,663
26,947
$36,258
(1,629)
2,199
19,274
$0.14
0.04
0.08
0.61
$0.83
(0.04)
0.05
0.44
The information set forth above includes the following, on an after-tax basis:
In thousands
First
Second
Third
Fourth
Restructuring Charges
and Unusual Items
2005
2004
Gains on Sales of
Plant, Equipment and
Timberlands, and
Other Asset Sales
2005
2004
$
Ó
Ó
Ó
(1,017)
$
Ó
(524)
(10,249)
(1,950)
$
Ó
Ó
259
11,517
$19,559
Ó
947
13,558
Insurance Recoveries
2004
2005
$
Ó
1,430
Ó
11,289
$15,221
181
5,908
Ó
22. SUBSEQUENT EVENTS
On February 21, 2006 we entered into a definitive
asset purchase agreement with NewPage Corporation
and Chillicothe Paper Inc., a wholly owned subsidiary of
NewPage Corporation (the
""Asset Purchase
Agreement''), to acquire certain assets and assume
certain liabilities constituting NewPage Corporation's
carbonless and specialty papers business for $80 million
in cash. The business to be acquired includes a 440,000
tons per year paper making facility in Chillicothe, Ohio,
together with its Fremont, Ohio-based coating
operations (collectively, ""Chillicothe''). Estimated 2005
totaled approximately
revenue
$440 million and Chillicothe employees
total
approximately 1,700.
for Chillicothe
The transaction is subject to certain customary
purchase price adjustments and closing conditions, all as
provided for in the Asset Purchase Agreement. The
Company expects the transaction to close on or about
March 31, 2006.
The Chillicothe acquisition enables us to transfer our
Neenah facility's specialty grades to Chillicothe's highly
efficient manufacturing environment and rationalize
assets that are no longer competitive. As part of the
planned restructuring program in connection with this
acquisition, we intend to move production from the
Neenah mill to the Chillicothe facility. It is anticipated
the Neenah mill will be permanently shut down by June
2006, contingent on the successful completion of the
Chillicothe transaction.
In connection with the planned closure of the
Neenah facility, we expect to record related charges
estimated to total $60 million to $65 million. The
charges are primarily related to asset writedowns and/or
accelerated depreciation, employee termination and
related benefits, and contract termination costs.
On February 17, 2006, as part of our Timberland
Strategy, we entered into an agreement to sell 282 acres
of our Delaware timberlands for $7.1 million in cash.
The transaction is expected to close in the fourth quarter
of 2006.
- 51 -
GLATFELTER
On March 8, 2006, we entered into two separate
transactions to acquire certain assets of J R Crompton
Limited, a global supplier of wet laid nonwoven products
based in Manchester, United Kingdom. Since
February 7, 2006, Crompton has been ordered to be in
Administration by The High Court of Justice Chancery
Division, Manchester District.
Under the terms of the first transaction, Glatfelter
acquired effective March 13, 2006, Crompton's Lydney
Mill, located in Gloucestershire, United Kingdom, for
GBP37.5 million (US $65.1 million). The facility
employs about 240 people and had 2005 revenues of
approximately GBP43 million (US $75 million).
The Lydney mill produces a broad portfolio of wet
laid nonwoven products, including tea and coffee filter
papers, clean room wipes, lens tissue, dye filter paper,
double-sided adhesive tape substrates, and battery grid
pasting tissue.
located
Under the second transaction we agreed to purchase
Crompton's Simpson Clough Mill,
in
Lancashire, United Kingdom, and other related assets
for GBP12.5 million (US $21.7 million), subject to
regulatory approval. The mill employs about 95 people
and
approximately
revenues
GBP16.2 million (US $28 million). The Simpson
Clough facility also manufactures a wide variety of wet
laid, nonwoven products.
2005
had
of
- 52 -
GLATFELTER
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, 2005, have concluded that, as of the
evaluation date, our disclosure controls and procedures
were effective.
Internal Control Over Financial Reporting.
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 in Item 8. Ì Financial Statements
and Supplementary Data.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over
financial reporting during the three months ended
December 31, 2005, that have materially affected or are
reasonably likely to materially affect our internal control
over financial reporting. In the course of completing our
evaluation of internal control over financial reporting we
implemented certain changes and enhancements to our
controls.
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 21, 2006. Our board of directors has
determined that, based on the relevant experience of the
members of the Audit Committee, the members are
audit committee financial experts as this term is set
forth in the applicable regulations of the SEC.
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.
We have adopted a Code of Business Ethics for the
CEO and Senior Financial Officers in compliance with
applicable rules of the Securities and Exchange
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, free of
charge, at www.glatfelter.com.
ITEM 11.
EXECUTIVE COMPENSATION
The information required under this Item is
incorporated herein by reference to our Proxy
Statement, to be dated on or about March 21, 2006.
ITEM 12.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required under this Item is
incorporated herein by reference to our Proxy
Statement, to be dated on or about March 21, 2006.
ITEM 13.
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
The information required under this Item is
incorporated herein by reference to our Proxy
Statement, to be dated on or about March 21, 2006.
ITEM 14.
PRINCIPAL ACCOUNTING FEES
AND SERVICES
The information required under this Item is
incorporated herein by reference to our Proxy
Statement, to be dated on or about March 21, 2006.
Our Chief Executive Officer has submitted to the
New York Stock Exchange a certificate certifying that
he is not aware of any violations by the Company of the
NYSE corporate governance listing standards.
- 53 -
GLATFELTER
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) 1.
Our Consolidated Financial Statements as follows are included in Part II, Item 8:
i.
ii.
iii.
iv.
Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2005, 2004 and
2003
v. Notes to Consolidated Financial Statements for the Years Ended December 31, 2005, 2004 and 2003
2.
Financial Statement Schedules (Consolidated) are included in Part IV:
i.
Schedule II -Valuation and Qualifying Accounts Ì For Each of the Three Years in the Period
Ended December 31, 2005
(b) Exhibit Index
Exhibit Number
Description of Documents
2 (a)
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.
2 (b)
Asset Purchase Agreement, dated February 21, 2006, among NewPage Corporation,
Chillicothe Paper Inc. and P.H. Glatfelter Company
Exhibit
2
2.1
Incorporated by
Reference to
(Filing)
August 24, 2001
Form 8-K
February 21, 2006
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
iii. Statement of Reduction of Authorized Shares dated September 23, 1981
iv. Statement of Reduction of Authorized Shares dated August 2, 1982
v. Statement of Reduction of Authorized Shares dated July 29, 1983
vi. Articles of Amendment dated April 25, 1984
vii. Statement of Reduction of Authorized Shares dated October 15, 1984
viii. Statement of Reduction of Authorized Shares dated December 24, 1985
ix. Articles of Amendment dated April 23, 1986
x. Statement of Reduction of Authorized Shares dated July 11, 1986
xi. Statement of Reduction of Authorized Shares dated March 25, 1988
xii. Statement of Reduction of Authorized Shares dated November 9, 1988
xiii. 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
(b)
(c)
Articles of Incorporation, as amended through January 26, 1994 (restated for the
purpose of filing on EDGAR)
By-Laws as amended through April 27, 2005, filed herewith.
4 (a)
Indenture, dated as of July 22, 1997, between P. H. Glatfelter Company and The Bank
of New York, relating to the 67/8 Notes due 2007.
(b)
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 67/8
Notes due 2007.
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)
4.1
4.3
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
Form S-4, Reg.
No. 333-36395
Form S-4, Reg.
No. 333-36395
10 (a)
P. H. Glatfelter Company Management Incentive Plan, adopted as of January 1, 1994,
10(a)
2000 Form 10-K**
as amended and restated December 19, 2000 and effective January 1, 2001.**
(b)
P. H. Glatfelter Company 2005 Management Incentive Plan, adopted as of April 27,
10.4
2005.**
April 27, 2005
Form 8-K
- 54 -
GLATFELTER
Exhibit Number
Description of Documents
Incorporated by
Reference to
(Filing)
Exhibit
(c)
(d)
(e)
(f)
(g)
P. H. Glatfelter Company Supplemental Executive Retirement Plan, as amended and
10(c)
2000 Form 10-K**
restated effective April 23, 1998 and further amended December 20, 2000.**
Description of Executive Salary Continuation Plan.**
P. H. Glatfelter Company Supplemental Management Pension Plan, effective as of
10(g)
10(f)
1990 Form 10-K**
1998 Form 10-K**
April 23, 1998.**
P. H. Glatfelter Company 1992 Key Employee Long-Term Incentive Plan, as amended
10(g)
2000 Form 10-K**
December 20, 2000.**
P. H. Glatfelter Company 2005 Long-Term Incentive Plan, adopted as of April 27,
2005.**
(g)
(A) Form of Top Management Restricted Stock Unit Award Certificate.**
(g)
(B) Form of Non-Employee Director Restricted Stock Unit Award Certificate**
10.1
10.2
10.3
April 27, 2005
Form 8-K
April 27, 2005
Form 8-K
April 27, 2005
Form 8-K
(h)
(i)
(j)
(j)
(k)
(l)
P. H. Glatfelter Company Deferred Compensation Plan for Directors, effective as of
10(h)
1998 Form 10-K**
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, 2005, filed herewith.**
Form of Change in Control Employment Agreement by and between P. H. Glatfelter
Company and certain employees, dated as of December 31, 2005, filed herewith.**
(A) Schedule of Change in Control Employment Agreements, filed herewith.**
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.
10(i)
1996 Form 10-K
10.1
June 30, 2002
Form 10-Q
(m)
Increase in Commitments and Lender Addition Agreement
(n)
(o)
Contract for the Purchase and Bargain Sale of Property (exhibits omitted)
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.
10.1
10(o)
10.3
(p)
Consent Decree for Remedial Design and Remedial Action at Operable Unit 1 of the
10.2
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.)
Compensatory Arrangements with Certain Executive Officers, filed herewith.**
Summary of Non-Employee Director Compensation, (effective January 1, 2005).**
10.1
September 30,
2002 Form 10Q
2002 Form 10-K
March 31, 2003
Form 10-Q
October 1, 2003
Form 8-K/A Ì
No. 1
December 15,
2004 Form 8-K
Manager Service Contract between the Registrant (through a wholly owned subsidiary)
10(w)
2004 Form 10-K
and Werner Ruckenbrod.**
Retirement Pension Agreement between the Registrant (through a wholly owned
10(x)
2004 Form 10-K
subsidiary) and Werner Ruckenbrok, filed herewith.**
Arbitration Agreement between the Registrant (through a wholly owned subsidiary) and
10(y)
2004 Form 10-K
Werner Ruckenbrod, filed herewith.**
Code of Business Ethics for the CEO and Senior Financial Officers of Glatfelter.
14
2003 Form 10-K
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.
- 55 -
GLATFELTER
(q)
(r)
(s)
(t)
(u)
14
21
23
31.1
31.2
Exhibit Number
Description of Documents
Incorporated by
Reference to
(Filing)
Exhibit
32.1
32.2
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
- 56 -
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 13, 2006
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 13, 2006
/s/ George H. Glatfelter II
Principal Executive Officer and Director
George H. Glatfelter II
Chairman and Chief Executive Officer
March 13, 2006
/s/ John C. van Roden, Jr.
Principal Financial Officer
John C. van Roden, Jr.
Executive Vice President and
Chief Financial Officer
March 13, 2006
/s/ John P. Jacunski
Controller
John P. Jacunski
Vice President and Corporate Controller
March 13, 2006
/s/ Kathleen A. Dahlberg
Kathleen A. Dahlberg
March 13, 2006
/s/ Nicholas DeBenedictis
Nicholas DeBenedictis
March 13, 2006
/s/ Richard C. Ill
March 13, 2006
Richard C. Ill
/s/ J. Robert Hall
J. Robert Hall
March 13, 2006
/s/ Ronald J. Naples
Ronald J. Naples
March 13, 2006
/s/ Richard L. Smoot
Richard L. Smoot
March 13, 2006
/s/ Lee C. Stewart
Lee C. Stewart
Director
Director
Director
Director
Director
Director
Director
- 57 -
GLATFELTER
CERTIFICATION PURSUANT TO SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002
I, George H. Glatfelter II, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2005 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 13, 2006
By: /s/ George H. Glatfelter II
George H. Glatfelter II
Chairman and Chief Executive
Officer
- 58 -
GLATFELTER
CERTIFICATION PURSUANT TO SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002
I, John C. van Roden, Jr., certify that:
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2005 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 13, 2006
By: /s/ John C. van Roden, Jr.
John C. van Roden, Jr.
Executive Vice President and
Chief Financial Officer
- 59 -
GLATFELTER
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE
For Each of the Three Years in the Period Ended December 31, 2005
Valuation and Qualifying Accounts
Allowance For
Schedule II
In thousands
Balance, beginning of year
Other(a)
Provision
Write-offs, recoveries and
discounts allowed
2005
$ 2,364
(89)
382
Doubtful Accounts
2004
$ 3,115
24
868
2003
$2,211
168
1,098
Sales Discounts and Deductions
2004
2003
2005
$ 2,217
(249)
2,788
$ 2,038
162
3,964
$ 1,662
266
1,604
(1,726)
(1,643)
(362)
(2,711)
(3,947)
(1,494)
Balance, end of year
$
931
$ 2,364
$3,115
$ 2,045
$ 2,217
$ 2,038
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.
- 60 -
GLATFELTER
coreV A L U E
V A L U E S
O U R C O R E VA L U E S
Integrity
Respect for Coworkers
Environmental Responsibility
We are ethical and responsible in
all of our business endeavors, all
the time.
Financial Discipline
We are responsible for the
prudent management of the
resources entrusted to us and for
the generation of fi nancial value
for all constituents.
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 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.
Customer Focus
Social Responsibility
We are dedicated to understanding
and anticipating the needs of our
customers and helping them to
achieve their business objectives.
We recognize our responsibility
to contribute to the betterment
of the communities in which we
operate and the world in which
we live.
E X E C U T I V E O F F I C E R S
D I R E C T O R S
I N F O R M AT I O N
George H. Glatfelter II
Chairman and
Chief Executive Offi cer
Dante C. Parrini
Executive Vice President and
Chief Operating Offi cer
John C. van Roden, Jr.
Executive Vice President and
Chief Financial Offi cer
John P. Jacunski
Vice President and
Corporate Controller
Kathleen A. Dahlberg
Founder and President/CEO
Open Vision Partners
Nicholas DeBenedictis
Chairman and Chief Executive Offi cer
Aqua America Corporation
George H. Glatfelter II
Chairman and
Chief Executive Offi cer
J. Robert Hall
Chief Executive Offi cer
Ardale Enterprises, LLC
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
Jeffrey J. Norton
Vice President, General Counsel
and Secretary
Richard C. Ill
President and Chief Executive Offi cer
Triumph Group, Inc.
Werner A. Ruckenbrod
Vice President
Long Fiber & Overlay Papers
Ronald J. Naples
Chairman and Chief Executive Offi cer
Quaker Chemical Corporation
Mark A. Sullivan
Vice President
Global Supply Chain
William T. Yanavitch II
Vice President
Human Resources
and Administration
Richard L. Smoot
Retired Regional Chairman
PNC Bank, NA
Philadelphia/South Jersey Markets
Lee C. Stewart
Investment Banker
Daniel Stewart & Company
Annual Meeting of Shareholders
April 26, 2006
10:00am EST
York Expo Center
334 Carlisle Avenue
York, PA
Transfer Agent, Dividend
Disbursing Agent and Registrar
Mellon Investor Services, LLC
85 Challenger Road
Ridgefi eld Park, NJ 07660
ph: 800-756-3353
Information Sources
For the latest quarterly business
results or other information, visit
www.glatfelter.com or contact:
Investor Relations
P.H. Glatfelter Company
96 S. George Street
Suite 500
York, PA 17401
ph: 717-225-4711
E-mail: ir@glatfelter.com
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
L O C AT I O N S
I N T E R N AT I O N A L
O P E R AT I N G L O 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
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
O T H E R L O C AT I O N S
China Representative Offi ce
Century Financial Tower, 8F808
No 1 Suhua Road
Suzhou-SIP, Jiangsu 215021
ph: 86-512-676-25077
fax: 86-512-676-25070
www.glatfelter.com
© 2006 Glatfelter
®
2 0 0 5 A N N U A L R E P O R T