| GLATFELTER P H CO 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 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 |
| - 7 - GLATFEKTER _________________________________________________________________ [57]Table of Contents 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 dlra6 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 |
| We are subject to substantial costs and potential liability for environmental matters |
| 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 expenditures |
| 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 |
| 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 detailed discussion of these matters in Item 8 – Financial Statements, Note 19 |
| 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 |
| - 8 - GLATFELTER _________________________________________________________________ [58]Table of Contents 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 in a politically and economically unstable location |
| 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 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 from our competitors’ products; and • 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 29prca of our sales and 30prca of operating expenses |
| The translation of the results from these international operations into US 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 US 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 - 9 - GLATFELTER _________________________________________________________________ [59]Table of Contents 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 |