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Glatfelter Corp - Quarter Report: 2010 June (Form 10-Q)

e10vq
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD from                      to                     
For the quarterly period ended June 30, 2010
Commission file number 1-3560
P. H. Glatfelter Company
(Exact name of registrant as specified in its charter)
     
Pennsylvania   23-0628360
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer Identification No.)
     
96 South George Street, Suite 500
York, Pennsylvania 17401
  (717) 225-4711
(Address of principal executive offices)   (Registrant’s telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes þ No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o.
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.
Large accelerated filer o Accelerated filer þ
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o  No þ.
As of July 31, 2010, P. H. Glatfelter Company had 45,823,776 shares of common stock outstanding.
 
 

 


 

P. H. GLATFELTER COMPANY
REPORT ON FORM 10-Q
For the QUARTERLY PERIOD ENDED
JUNE 30, 2010
Table of Contents
             
        Page
PART I — FINANCIAL INFORMATION        
   
 
       
   Item 1          
        2  
        3  
        4  
        5  
   
 
       
   Item 2       23  
   
 
       
   Item 3       31  
   
 
       
   Item 4       31  
   
 
       
PART II — OTHER INFORMATION        
   
 
       
   Item 6       32  
   
 
       
SIGNATURES     33  
 EX-10.1
 EX-10.2
 EX-10.3.(A)
 EX-10.3.(B)
 EX-10.3.(C)
 EX-10.3.(D)
 EX-10.4
 EX-10.4.(A)
 EX-10.5
 EX-10.6.(A)
 EX-10.6.(B)
 EX-10.6.(C)
 EX-10.6.(D)
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

 


Table of Contents

PART I
Item 1 — Financial Statements
P. H. GLATFELTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)
                                 
    Three months ended     Six months ended  
    June 30     June 30  
In thousands, except per share   2010     2009     2010     2009  
 
Net sales
  $ 362,781     $ 278,979     $ 700,056     $ 570,531  
Energy and related sales — net
    1,915       2,131       5,522       4,062  
     
Total revenues
    364,696       281,110       705,578       574,593  
Costs of products sold
    329,236       222,109       625,902       472,278  
     
Gross profit
    35,460       59,001       79,676       102,315  
 
Selling, general and administrative expenses
    28,847       26,548       63,517       51,061  
(Gains) losses on dispositions of plant, equipment and timberlands, net
    (168 )     27       (168 )     (672 )
     
Operating income
    6,781       32,426       16,327       51,926  
Non-operating income (expense)
                               
Interest expense
    (6,817 )     (5,144 )     (12,480 )     (10,270 )
Interest income
    168       557       338       1,265  
Other — net
    366       (135 )     (3,617 )     (118 )
     
Total other income (expense)
    (6,283 )     (4,722 )     (15,759 )     (9,123 )
     
Income before income taxes
    498       27,704       568       42,803  
Income tax provision
    395       7,834       839       11,395  
     
Net income (loss)
  $ 103     $ 19,870     $ (271 )   $ 31,408  
     
 
Earnings (loss) per share
  $ 0.00     $ 0.44     $ (0.01 )   $ 0.69  
Basic
    0.00       0.43       (0.01 )     0.69  
Diluted
                               
 
Cash dividends declared per common share
  $ 0.09     $ 0.09     $ 0.18     $ 0.18  
 
Weighted average shares outstanding
                               
Basic
    45,908       45,658       45,872       45,624  
Diluted
    46,313       45,698       45,872       45,654  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
GLATFELTER

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P. H. GLATFELTER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)
                 
    June 30     December 31  
In thousands   2010     2009  
 
Assets
               
Current assets
               
Cash and cash equivalents
  $ 42,627     $ 135,420  
Accounts receivable net
    154,661       119,319  
Inventories
    188,364       168,370  
Prepaid expenses and other current assets
    52,457       96,947  
     
Total current assets
    438,109       520,056  
 
               
Plant, equipment and timberlands — net
    604,116       470,632  
 
               
Other assets
    222,909       199,606  
     
Total assets
  $ 1,265,134     $ 1,190,294  
     
 
               
Liabilities and Shareholders’ Equity
               
Current liabilities
               
Current portion of long-term debt
  $     $ 13,759  
Short-term debt
    5,875       3,888  
Accounts payable
    101,007       63,604  
Dividends payable
    4,190       4,170  
Environmental liabilities
    432       440  
Other current liabilities
    94,374       100,249  
     
Total current liabilities
    205,878       186,110  
 
               
Long-term debt
    331,896       236,936  
 
               
Deferred income taxes
    90,096       96,668  
 
               
Other long-term liabilities
    161,859       159,876  
     
Total liabilities
    789,729       679,590  
 
               
Commitments and contingencies
           
 
               
Shareholders’ equity
               
Common stock
    544       544  
Capital in excess of par value
    48,181       46,746  
Retained earnings
    703,187       711,765  
Accumulated other comprehensive loss
    (149,607 )     (119,885 )
     
 
    602,305       639,170  
Less cost of common stock in treasury
    (126,900 )     (128,466 )
     
Total shareholders’ equity
    475,405       510,704  
     
Total liabilities and shareholders’ equity
  $ 1,265,134     $ 1,190,294  
     
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
GLATFELTER

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P. H. GLATFELTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)
                 
    Six months ended  
    June 30  
In thousands   2010     2009  
 
Operating activities
               
Net income
  $ (271 )   $ 31,408  
Adjustments to reconcile to net cash provided by operations:
               
Depreciation, depletion and amortization
    32,166       29,050  
Pension expense, net of unfunded benefits paid
    4,397       3,359  
Deferred income tax provision (benefit)
    (5,776 )     (11,393 )
Gains on dispositions of plant, equipment and timberlands, net
    (168 )     (672 )
Share-based compensation
    2,963       2,294  
Change in operating assets and liabilities
               
Accounts receivable
    (17,522 )     7,007  
Inventories
    (343 )     18,391  
Prepaid and other current assets
    49,388       33  
Accounts payable
    27,988       (2,230 )
Environmental matters
    24       (7,217 )
Accruals and other current liabilities
    (12,559 )     (6,769 )
Other
    2,388       1,606  
     
Net cash provided by operating activities
    82,675       64,867  
 
               
Investing activities
               
Expenditures for purchases of plant, equipment and timberlands
    (15,445 )     (11,475 )
Proceeds from disposals of plant, equipment and timberlands, net
    182       728  
Proceeds from timberland installment sale note receivable
          37,850  
Acquisition of Concert Industries Corp., net of cash acquired
    (229,080 )      
     
Net cash (used) provided by investing activities
    (244,343 )     27,103  
 
               
Financing activities
               
Proceeds from $100 million 7⅛% note offering, net of original issue discount
    95,000        
Payments of note offering and credit facility costs
    (4,530 )      
Net borrowings of revolving credit facility
          4,606  
Net borrowings (repayments) of short term debt
    2,016       (2,191 )
Principal repayments — 2011 Term Loan
    (14,000 )     (8,000 )
Payments of dividends
    (8,360 )     (8,272 )
Proceeds from stock options exercised and other
    110        
     
Net cash provided (used) by financing activities
    70,236       (47,857 )
 
               
Effect of exchange rate changes on cash
    (1,361 )     1,857  
     
Net decrease in cash and cash equivalents
    (92,793 )     45,970  
Cash and cash equivalents at the beginning of period
    135,420       32,234  
     
Cash and cash equivalents at the end of period
  $ 42,627     $ 78,204  
     
 
               
Supplemental cash flow information
               
Cash paid (received) for
               
Interest
  $ 11,530     $ 9,266  
Income taxes
    (45,509 )     13,046  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
GLATFELTER

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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)
1.   ORGANIZATION
     P. H. Glatfelter Company and subsidiaries (“Glatfelter”) is a manufacturer of specialty papers and fiber-based engineered products. Headquartered in York, Pennsylvania, our manufacturing facilities are located in Spring Grove, Pennsylvania; Chillicothe and Freemont, Ohio; Gatineau, Quebec, Canada; Gloucestershire (Lydney), England; Caerphilly, Wales; Gernsbach and Falkenhagen, Germany; Scaër, France; and the Philippines. Our products are marketed throughout the United States and in over 85 other countries, either through wholesale paper merchants, brokers and agents or directly to customers.
2.   ACCOUNTING POLICIES
     Basis of Presentation The unaudited condensed consolidated financial statements (“financial statements”) include the accounts of Glatfelter and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
     We prepared these financial statements in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”). In our opinion, the financial statements reflect all normal, recurring adjustments needed to present fairly our results for the interim periods. When preparing these financial statements, we have assumed that you have read the audited consolidated financial statements included in our 2009 Annual Report on Form 10-K (“2009 Form 10-K”).
     Accounting Estimates The preparation of financial statements in conformity with GAAP 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 financial statements are reasonable, based upon currently available facts and known circumstances, but recognizes that actual results may differ from those estimates and assumptions.
3.   ACQUISITION
     On February 12, 2010, we completed the acquisition of all of the issued and outstanding stock of Concert Industries Corp. (“Concert”), a leading supplier of airlaid non-woven fabric-like material, for cash totaling $231.9 million based on the currency exchange rates on the closing date, and net of a post-closing working capital adjustment. Concert, with approximately 590 employees, has operations located in Gatineau, Quebec, Canada and Falkenhagen, Brandenburg, Germany. Annual revenues totaled $203.0 million in 2009.
     Concert manufactures highly absorbent cellulose based airlaid non-woven materials used in products such as feminine hygiene and adult incontinence products, pre-moistened cleaning wipes, food pads, napkins and tablecloths, and baby wipes. The acquisition of Concert affords us the opportunity to grow with the industry leaders in feminine hygiene and adult incontinence products. We believe that our acquisition of Concert provides us with an industry-leading global business that sells highly specialized, engineered fiber-based products to niche markets with substantial barriers to entry.
     The share purchase agreement provides for, among other terms, i) an adjustment to the purchase price based on final working capital as of the closing balance sheet, which has yet to be fully agreed to; and ii) indemnification provisions for claims that may arise, including among others, uncertain tax positions and other third party claims.
     During the second quarter of 2010, we and the sellers reached agreement on certain working capital related adjustments that reduced the purchase price by $3.9 million. In addition, as a result of further evaluation of asset appraisals, contingencies and other factors, in accordance with FASB ASC 805, Business Combinations, we have determined that certain retrospective adjustments to the February 12, 2010 provisional allocation of the purchase price to assets acquired and liabilities assumed were required.
     The following summarizes the impact of the adjustments recorded in the second quarter of 2010 and retrospectively reflected in the financial statements. This provisional purchase price


GLATFELTER

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the allocation is based on information currently available to management:
                         
In thousands   As previously presented   Adjustment   Adjusted
 
Assets
                       
Cash
  $ 2,792     $     $ 2,792  
Accounts receivable
    24,703             24,703  
Inventory
    28,034             28,034  
Prepaid and other current assets
    5,941       (1,327 )     4,614  
Plant and equipment
    177,253       5,987       183,240  
Intangible assets
    3,138             3,138  
Deferred tax assets
    20,738       (3,436 )     17,302  
     
Total
    262,599       1,224       263,823  
Liabilities
                       
Accounts payable and accrued expenses
    25,322       591       25,913  
Deferred tax liabilities
    1,267       1,923       3,190  
Other long term liabilities
    212       2,636       2,848  
     
Total
    26,801       5,150       31,951  
     
Total purchase price
  $ 235,798     $ (3,926 )   $ 231,872  
 
     The adjustments set forth above did not impact previously reported results of operations, earnings per share, or cash flows for the three months ended March 31, 2010.
     We are in the process of finalizing potential additional working capital adjustments and final valuations of assets acquired, including plant and equipment and intangible assets, certain contingencies and the impact on taxes of any final adjustments to such valuations, all necessary to account for the Concert transaction in accordance with the acquisition method of accounting set forth in FASB ASC 805. Accordingly, the provisional purchase price allocation set forth above is based on all information available to us at the present time and is subject to change, and such changes could be material.
     For purposes of allocating the total purchase price, assets acquired and liabilities assumed are recorded at their estimated fair market value. The allocation set forth above is based on management’s estimate of the fair value using valuation techniques such as discounted cash flow models, appraisals and similar methodologies. The amount allocated to intangible assets represents the estimated value of customer sales contracts and relationships. Deferred tax assets reflect the estimated value of future tax deductions acquired in the transaction.
     Acquired property plant and equipment are being depreciated on a straight-line basis with estimated remaining lives ranging from 5 years to 40 years. Intangible assets are being amortized on a straight-line basis over an estimated remaining life of 11 to 20 years reflecting the expected future value.
     During the first six months of 2010, we incurred legal, professional and advisory costs directly related to the Concert acquisition totaling $7.1 million. All such costs are presented under the caption “Selling, general and administrative expenses” in the accompanying condensed consolidated statements of income. Deferred financing fees incurred in connection with issuing debt related to the acquisition totaled $3.0 million through June 30, 2010. The unamortized fees are recorded in the accompanying consolidated balance sheet under the caption “Other assets”.
     In addition, in connection with the Concert acquisition, we entered into a series of forward foreign currency contracts to hedge the acquisition’s Canadian dollar purchase price. All contracts were settled for cash during the first quarter of 2010 and resulted in a $3.4 million loss, net of realized currency translation gains, which is presented under the caption “Other-net” in the accompanying condensed consolidated statements of income for the six months ended June 30, 2010.
     Our results of operations for the first six months of 2010 include the results of Concert prospectively since the acquisition was completed on February 12, 2010. All such results are reported herein as the Advanced Airlaid Materials business unit, a new reportable segment. Net sales and operating income of Concert included in our consolidated results of operations totaled $52.0 million and $1.9 million, respectively, for the second quarter of 2010. Net sales and operating income were $80.1 million and $2.2 million, respectively, for the first six months of 2010.


GLATFELTER

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     The table below summarizes pro forma financial information as if the acquisition and related financing transaction occurred as of January 1, 2009:
                   
    Three months ended
    June 30
In thousands, except per share   2010     2009
       
Pro forma
                 
Net sales
  $ 362,781       $ 328,235  
Net income
    1,018         21,070  
Earnings per share
    0.02         0.46  
       
                   
    Six months ended
    June 30
In thousands, except per share   2010     2009
       
Pro forma
                 
Net sales
  $ 725,705       $ 667,175  
Net income
    10,849         33,475  
Earnings per share
    0.23         0.73  
       
     For purposes of presenting the above pro forma financial information, non-recurring legal, professional and transaction costs directly related to the acquisition have been eliminated. This unaudited pro forma financial information above is not necessarily indicative of what the operating results would have been had the acquisition been completed at the beginning of the respective period nor is it indicative of future results.
4.   GAINS (LOSSES) ON DISPOSITIONS OF PLANT, EQUIPMENT AND TIMBERLANDS
     Sales of timberlands in the first six months of 2010 and 2009 are summarized in the following table:
                         
Dollars in thousands   Acres   Proceeds   Gain (loss)
 
2010
                       
Timberlands
    71     $ 182     $ 168  
 
                       
2009
                       
Timberlands
    189     $ 728     $ 699  
Other
    n/a             (27 )
     
 
          $ 728     $ 672  
 
5.   EARNINGS PER SHARE
     The following table sets forth the details of basic and diluted earnings (loss) per share (EPS):
                   
    Three months ended  
    June 30  
In thousands, except per share   2010   2009  
   
Net income (loss)
  $ 103     $ 19,870    
     
Weighted average common shares outstanding used in basic EPS
    45,908       45,658    
Common shares issuable upon exercise of dilutive stock options and restricted stock awards
    405       40    
     
Weighted average common shares outstanding and common share equivalents used in diluted EPS
    46,313       45,698    
     
 
                 
Earnings (loss) per share
                 
Basic
  $ 0.00     $ 0.44    
Diluted
    0.00       0.43    
   
                 
    Six months ended
    June 30
In thousands, except per share   2010   2009
 
Net income (loss)
  $ (271 )   $ 31,408  
     
Weighted average common shares outstanding used in basic EPS
    45,872       45,624  
Common shares issuable upon exercise of dilutive stock options and restricted stock awards
          30  
     
Weighted average common shares outstanding and common share equivalents used in diluted EPS
    45,872       45,654  
     
 
               
Earnings (loss) per share
               
Basic
  $ (0.01 )   $ 0.69  
Diluted
    (0.01 )     0.69  
 
     The following table sets forth the number of potential common shares that have been excluded from the computation of diluted earnings per share for the indicated period due to their anti-dilutive nature.
                 
    2010   2009
 
Three months ended June 30
    1,519,175       2,287,620  
Six months ended June 30
    1,441,850       2,287,620  
 
6.   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.


GLATFELTER

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     As of June 30, 2010 and December 31, 2009, we had $42.8 million, including acquisition accounting adjustments, and $40.1 million, respectively, of gross unrecognized tax benefits. As of June 30, 2010, if such benefits were to be recognized, approximately $38.9 million would be recorded as a component of income tax expense, thereby affecting our effective tax rate.
     We, or one of our subsidiaries, file income tax returns with the United States Internal Revenue Service, as well as various state and foreign authorities. The following table summarizes tax years that remain subject to examination by major jurisdiction:
                 
    Open Tax Year
    Examination in   Examination not yet
Jurisdiction   progress   initiated
 
 
United States
               
Federal
    N/A       2007 — 2009  
State
    2004       2004 — 2009  
Canada (1)
    N/A       2005 — 2009  
Germany (1)
    2003 — 2007       2007 — 2009  
France
    N/A       2006 — 2009  
United Kingdom
    N/A       2006 — 2009  
Philippines
    2007 — 2009       N/A  
 
(1) — includes provincial or similar local jurisdictions, as applicable
     The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Management performs a comprehensive review of its global tax positions on a quarterly basis and accrues amounts for uncertain tax positions. Based on these reviews and the result of discussions and resolutions of matters with certain tax authorities and the closure of tax years subject to tax audit, reserves are adjusted as necessary. However, future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are determined or resolved or as such statutes are closed. Due to potential for resolution of federal, state, and foreign examinations, and the expiration of various statutes of limitation, it is reasonably possible our gross unrecognized tax benefits balance may change within the next twelve months by as much as $11.4 million. Substantially all of this range relates to tax positions taken in the Germany and the United Kingdom.
     We recognize interest and penalties related to uncertain tax positions as income tax expense. Interest expense recognized in the second quarter of 2010 totaled $0.4 million and $0.3 million in the second quarter of 2009. The comparable amounts for the first six months of 2010 and 2009 were $0.6 million and $0.6 million, respectively As of June 30, 2010, accrued interest payable was $4.6 million, including acquisition accounting adjustments, and as of December 31, 2009, accrued interest payable was $3.8 million. We did not record any penalties associated with uncertain tax positions during the second quarters of 2010 or 2009.
7.   STOCK-BASED COMPENSATION
     The P. H. Glatfelter Amended and Restated Long Term Incentive Plan (the “LTIP”) provides for the issuance of up to 5,500,000 shares of Glatfelter common stock to eligible participants in the form of restricted stock units, restricted stock awards, non-qualified stock options, performance shares, incentive stock options and performance units.
     Restricted Stock Units (“RSU”) Awards of RSUs are made under our LTIP. The RSUs vest based solely on the passage of time on a graded scale over a three, four, and five-year period. The following table summarizes RSU activity during the first six months of the indicated periods:
                 
Units   2010   2009
 
Beginning balance
    564,037       486,988  
Granted
    198,259       205,360  
Forfeited
    (8,820 )     (4,800 )
Restriction lapsed/shares delivered
    (31,323 )     (5,747 )
     
Ending balance
    722,153       681,801  
 
     The following table sets forth RSU compensation expense for the periods indicated:
                 
    June 30
In thousands   2010   2009
 
Three months ended
  $ 432     $ 387  
Six months ended
    837       727  
 


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     Stock Only Stock Appreciation Rights (SOSARs) Under terms of the SOSAR, the recipients receive the right to a payment in the form of shares of common stock equal to the difference, if any, in the fair market value of one share of common stock at the time of exercising the SOSAR and the strike price. The SOSARs vest ratably over a three year period and have a term of ten years.
     The following table sets forth information related to outstanding SOSARS.
                                 
    2010   2009
            Wtd Avg           Wtd Avg
            Exercise           Exercise
SOSARS   Shares   Price   Shares   Price
 
Outstanding at Jan. 1,
    1,762,020     $ 11.84       718,810     $ 14.63  
Granted
    423,450       13.95       1,043,210       9.91  
Exercised
                         
Canceled/forfeited
    (64,420 )                    
 
                               
Outstanding at Jun 30,
    2,121,050     $ 12.27       1,762,020     $ 11.84  
 
                               
SOSAR Grants
                               
Weighted average grant date fair value per share
  $ 4.72             $ 2.83          
Aggregate grant date fair value
(in thousands)
  $ 1,998             $ 2,957          
Black-Scholes Assumptions
                               
Dividend yield
    2.58 %             3.63 %        
Risk free rate of return
    2.54               2.26          
Volatility
    42.31               40.59          
Expected life
  6 yrs             6 yrs          
 
     The following table sets forth SOSAR compensation expense for the periods indicated:
                 
    June 30
In thousands   2010   2009
 
Three months ended
  $ 576     $ 458  
Six months ended
    1,185       697  
 
8.   RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS
     The following table provides information with respect to the net periodic costs of our pension and post retirement medical benefit plans.
                 
    Three months ended
    June 30
In thousands   2010   2009
 
Pension Benefits
               
Service cost
  $ 2,270     $ 2,067  
Interest cost
    6,045       5,973  
Expected return on plan assets
    (10,083 )     (9,936 )
Amortization of prior service cost
    614       537  
Amortization of unrecognized loss
    3,505       3,382  
     
Net periodic benefit cost
  $ 2,351     $ 2,023  
     
 
               
Other Benefits
               
Service cost
  $ 698     $ 653  
Interest cost
    805       882  
Expected return on plan assets
    (134 )     (122 )
Amortization of prior service cost
    (306 )     (309 )
Amortization of unrecognized loss
    316       509  
     
Net periodic benefit cost
  $ 1,379     $ 1,613  
 
                 
    Six months ended
    June 30
In thousands   2010   2009
 
Pension Benefits
               
Service cost
  $ 4,692     $ 4,317  
Interest cost
    12,053       11,721  
Expected return on plan assets
    (20,143 )     (19,780 )
Amortization of prior service cost
    1,231       1,074  
Amortization of unrecognized loss
    6,904       6,373  
     
Net periodic benefit cost
  $ 4,737     $ 3,705  
     
 
               
Other Benefits
               
Service cost
  $ 1,459     $ 1,309  
Interest cost
    1,685       1,756  
Expected return on plan assets
    (269 )     (244 )
Amortization of prior service cost
    (612 )     (617 )
Amortization of unrecognized loss
    769       1,037  
     
Net periodic benefit cost
  $ 3,032     $ 3,241  
 
                 
    June 30,   Dec. 31,
In millions   2010   2009
 
Pension Plan Assets
               
Fair value of plan assets at end of period
  $ 460.3     $ 485.7  
 


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9.   COMPREHENSIVE INCOME
     The following table sets forth comprehensive income and its components:
                 
    Three months ended  
    June 30  
In thousands   2010     2009  
 
Net income (loss)
  $ 103     $ 19,870  
Foreign currency translation adjustments
    (15,276 )     19,522  
Amortization of unrecognized retirement obligations, net of tax
    2,488       2,320  
     
Comprehensive income (loss)
  $ (12,685 )   $ 41,712  
 
                 
    Six months ended  
    June 30  
In thousands   2010     2009  
 
Net income (loss)
  $ (271 )   $ 31,408  
Foreign currency translation adjustments
    (34,809 )     8,053  
Amortization of unrecognized retirement obligations, net of tax
    5,087       4,612  
     
Comprehensive income (loss)
  $ (29,993 )   $ 44,073  
 
10.   INVENTORIES
     Inventories, net of reserves, were as follows:
                 
    June 30,   Dec. 31,
In thousands   2010   2009
 
Raw materials
  $ 51,518     $ 44,150  
In-process and finished
    84,793       78,340  
Supplies
    52,053       45,880  
     
Total
  $ 188,364     $ 168,370  
 
11.   LONG-TERM DEBT
     Long-term debt is summarized as follows:
                 
    June 30,   Dec. 31,
In thousands   2010   2009
 
Revolving credit facility, due April 2011
  $     $  
Term Loan, due April 2011
          14,000  
7⅛% Notes, due May 2016
    200,000       200,000  
7⅛% Notes, due May 2016 - net of original issue discount
    95,201        
Term Loan, due January 2013
    36,695       36,695  
     
Total long-term debt
    331,896       250,695  
Less current portion
          (13,759 )
     
Long-term debt, net of current portion
  $ 331,896     $ 236,936  
 
     On April 28, 2006 we completed an offering of $200.0 million aggregate principal amount of our 7⅛% Senior Notes due 2016 (“7⅛% Notes”). Net proceeds from this offering totaled approximately $196.4 million, after deducting the commissions and other fees and expenses relating to the offering. The proceeds were primarily used to redeem $150.0 million aggregate principal amount of our then outstanding 6⅞% notes due July 2007, plus the payment of applicable redemption premium and accrued interest.
     On February 5, 2010, we issued an additional $100 million in aggregate principal amount of 7⅛% Notes due 2016 (together with the April 28, 2006 offering, the “Senior Notes”). The notes were issued at 95.0% of the principal amount. Net proceeds from this offering, which were used to fund, in part, the Concert acquisition, totaled $92.2 million, after deducting offering fees and expenses. The original issue discount is being accreted as a charge to income on the effective interest method.
     Interest on the Senior Notes accrues at the rate of 7⅛% per annum and is payable semiannually in arrears on May 1 and November 1.
     On April 29, 2010, we entered into a new four-year, $225 million, multi-currency, revolving credit agreement with a consortium of banks. The new agreement replaced our existing bank credit agreement and matures May 31, 2014.
     For all US dollar denominated borrowings under the new agreement, the interest rate is either, at our option, (a) the bank’s base rate plus an applicable margin (the base rate is the greater of the bank’s prime rate, the federal funds rate plus 50 basis points, or the daily LIBOR rate plus 100 basis points); or (b) daily LIBOR rate plus an applicable margin ranging from 175 basis points to 275 basis points according to our corporate credit rating determined by S&P and Moody’s. For non-US dollar denominated borrowings, interest is based on (b) above.
     The credit agreement contains a number of customary covenants for financings of this type that, among other things, restrict our ability to dispose of or create liens on assets, incur additional indebtedness, repay other indebtedness, limits certain intercompany financing arrangements, make acquisitions and engage in mergers or consolidations. We are also required to comply with specified financial tests and ratios, each as defined in the credit agreement, including: i) maximum net debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio; and ii) a consolidated EBITDA to interest expense ratio. A breach of these requirements would give rise to certain remedies under the credit agreement, among which are the termination of the agreement and accelerated repayment of the outstanding borrowings plus accrued and unpaid interest under the credit facility.
     The Senior Notes contain cross default provisions that could result in all such notes becoming due and payable in the event of a failure to repay debt outstanding under the credit agreement at maturity or a default under the credit agreement that accelerates the debt outstanding thereunder. As of June 30, 2010, we were not aware of any violations of our debt covenants.


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     In November 2007, we sold approximately 26,000 acres of timberland. In connection with that transaction, we formed GPW Virginia Timberlands LLC (“GPW Virginia”) as an indirect, wholly owned and bankruptcy-remote subsidiary of ours. GPW Virginia received as consideration for the timberland sold in that transaction a $43.2 million, interest-bearing note that matures in 2027 from the buyer, Glawson Investments Corp. (“Glawson”), a Georgia corporation, and GIC Investments LLC, a Delaware limited liability company owned by Glawson. The Glawson note receivable is fully secured by a letter of credit issued by The Royal Bank of Scotland plc. In January 2008, GPW Virginia monetized the Glawson note receivable by entering into a $36.7 million term loan agreement (the “2008 Term Loan”) with a financial institution. The 2008 Term Loan is secured by all of the assets of GPW Virginia, including the Glawson note receivable, the related letter of credit and additional notes with an aggregate principal amount of $9.2 million that we issued in favor of GPW Virginia (the “Company Note”). The 2008 Term Loan bears interest at a six month reserve adjusted LIBOR rate plus a margin rate of 1.20% per annum. Interest on the 2008 Term Loan is payable semiannually. The principal amount of the 2008 Term Loan is due on January 15, 2013, but GPW Virginia may prepay the 2008 Term Loan at any time, in whole or in part, without premium or penalty. During the first six months of 2010, GPW Virginia received aggregate interest payments of $0.5 million under the Glawson note receivable and the Company Note and, in turn, made interest payments of $0.3 million under the 2008 Term Loan.
     Under terms of the above transaction, minimum credit ratings must be maintained by the letter of credit issuing bank. An “event of default” is deemed to have occurred under the debt instrument governing the Note Payable unless actions are taken to cure such default within 60 days from the date such credit rating falls below the specified minimum. Potential remedial actions include: (i) amending the terms of the applicable debt instrument; (ii) a replacement of the letter of credit with an appropriately rated institution; or (iii) repaying the Note Payable.
     P. H. Glatfelter Company guarantees debt obligations of all its subsidiaries. All such obligations are recorded in these consolidated financial statements.
     As of June 30, 2010 and December 31, 2009, we had $6.7 million and $5.7 million, respectively, of letters of credit issued to us by certain financial institutions. Such letters of credit reduce amounts available under our revolving credit facility. The letters of credit outstanding as of June 30, 2010, primarily provide financial assurances for the benefit of certain state workers
compensation insurance agencies in conjunction with our self-insurance program. We bear the credit risk on this amount to the extent that we do not comply with the provisions of certain agreements. No amounts are outstanding under the letters of credit.
12.   ASSET RETIREMENT OBLIGATION
     During 2008, we recorded $11.5 million, net present value, of asset retirement obligations related to the legal requirement to close several lagoons at the Spring Grove, PA facility. Historically, lagoons were used to dispose of residual waste material. Closure of the lagoons will be accomplished by filling the lagoons, installing a non-permeable liner which will be covered with soil to construct the required cap over the lagoons. The amount referred to above, in addition to an upward revision in 2009, was accrued with a corresponding increase in the carrying value of the property, equipment and timberlands caption on the consolidated balance sheet. The amount capitalized is being depreciated as a charge to operations on the straight-line basis in relation to the expected closure period. Following is a summary of activity recorded during the first six months of 2010 and 2009:
                 
In thousands   2010   2009
 
Balance at January 1,
  $ 11,292     $ 11,606  
Accretion
    311       161  
Payments
    (511 )     (20 )
     
Balance at June 30,
  $ 11,092     $ 11,747  
 
     Of the total liability at June 30, 2010, $2.4 million is recorded in the accompanying consolidated balance sheet, under the caption “Other current liabilities” and $8.7 million is recorded under the caption “Other long-term liabilities.”
13.   FAIR VALUE OF FINANCIAL INSTRUMENTS
     The amounts reported on the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable and short-term debt approximate fair value. The following table sets forth carrying value and fair value of long-term debt:
                                   
    June 30, 2010     December 31, 2009
    Carrying   Fair     Carrying   Fair
In thousands   Value   Value     Value   Value
           
Fixed-rate bonds
  $ 295,201     $ 291,750       $ 200,000     $ 196,750  
Variable rate debt
    36,695       38,245         50,695       51,209  
           
Total
  $ 331,896     $ 329,995       $ 250,695     $ 247,959  
       
     As of June 30, 2010, we had $300.0 million of 7⅛% fixed rate debt, $100.0 million of which is recorded net of unamortized original issue discount and $200.0 million of which is publicly registered, but is thinly traded, and therefore, market prices are not readily available.


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Accordingly, the values set forth above are based on debt instruments with similar characteristics, or Level 2. The fair value of the remaining debt instruments was estimated using discounted cash flow models based on interest rates obtained from readily available, independent sources, or Level 3.
14.   COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
     Fox River — Neenah, Wisconsin
     Background We have significant uncertainties associated with 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 Wisconsin (“Site”). As part of the 1979 acquisition of the Bergstrom Paper Company we acquired a facility located at the Site (the “Neenah Facility”). In part, the Neenah 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 to the lower Fox River from the Neenah Facility which may have contained PCBs from wastepaper may have occurred from 1954 to the late 1970s. Any PCBs that our Neenah Facility discharged into the lower Fox River resulted from the presence of PCBs in NCR®-brand carbonless copy paper in the wastepaper that was recycled at the Neenah Facility. We closed the Neenah Facility in June 2006.
     The United States, the State of Wisconsin and various state and federal governmental agencies (collectively, the “Governments”), as well as private parties, have found PCBs in sediments in the bed of the Fox River, apparently from a number of sources at municipal and industrial facilities along the upstream and downstream portions of the Site. The Governments have identified manufacturing and recycling of NCR®-brand carbonless copy paper as the principal source of that contamination.
     The United States Environmental Protection Agency (“EPA”) has divided the lower Fox River and the Bay of Green Bay site into five “operable units” numbered from the most upstream (“OU1”) to the most downstream (“OU5”). OU1 is the reach from primarily Lake Winnebago to the dam at Appleton, and is comprised of Little Lake Butte des Morts. Our Neenah Facility discharged its wastewater into OU1. OU2 extends from the dam at Appleton to the dam at Little Rapids, OU3 from the dam at Little Rapids to the dam at De Pere, OU4 from the dam at De Pere to the mouth of the river, and OU5 from the mouth into the lower portion of Green Bay. The river extends 39 miles from the upstream end of OU1 to the downstream end of OU4.
     Our liabilities, if any, for this contamination primarily arise under the federal Comprehensive Environmental, Response, Compensation and Liability Act (“CERCLA” or “Superfund”). The Governments have sought to recover “response actions” or “response costs,” which are the costs of studying and cleaning up contamination, from various “responsible parties.” In addition, various natural resource trustee agencies of the United States, the States of Wisconsin and Michigan, and several Indian Tribes (the “Natural Resources Trustees” or “Trustees”) have sought to recover natural resource damages (“NRDs”), including natural resource damage assessment costs. Parties that have incurred response costs or NRDs either voluntarily or in response to the governments’ and Trustees’ demands may have an opportunity to seek contribution or other recovery of some or all of those costs from other parties who are jointly and severally responsible under Superfund for those costs. Therefore, as we incur costs, we also acquire a claim against other parties who may not have paid their equitable share of those costs. As others incur costs, they acquire a claim against us to the extent that they claim that we have not paid our equitable share of the total. Any party that resolves its liability to the United States or a state in a judicially or administratively approved settlement agreement obtains protection from contribution claims for matters addressed in the settlement.
     For these reasons, all of the parties who are potentially responsible (“PRPs”) under CERCLA for response costs or NRDs have exposure to liability for: (a) the cost of past response actions taken by anyone else, (b) the cost of past NRD payments or restoration projects incurred by anyone else, (c) the cost of response actions to be taken in the future, and (d) NRDs. All of this exposure is subject to substantial defenses, including, for example, that the PRP is not liable or not jointly and severally liable for any particular cost or damage, that the cost or damage is not recoverable under CERCLA or any other law, or that the recovery is barred by the passage of time. In addition, a party that has incurred or committed to incur costs or has paid NRDs may be able to claim credit for that cost or payment in any equitable allocation of response costs or NRDs in any action for reallocation of costs.
     As is discussed more fully below in this Note 14, the current state of our exposure to liability for contamination at the Site is as follows:
     (a) EPA has ordered us and other parties, including Appleton Papers Inc. (“API”) and NCR Corporation (“NCR”) to implement the remedy in OU2-5;
     (b) a federal district court has ruled that neither API nor NCR may recover contribution from either us or any other of the paper recyclers ordered by EPA to clean up


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the Site any costs of response or any NRDs that either of them incur or pay in connection with the Site. NCR and API have state their intention to appeal this ruling;
     (c) we have substantially completed the remedy in OU1 in conjunction with WTM I Company (“WTM I”) and with some financial contribution from Menasha Corporation (“Menasha”) and API/NCR; we have also made payments toward NRDs and other costs of response at the site;
     (d) the same federal district court is currently considering whether we and Menasha have a right to recover those response costs and payments of NRDs described in subsection (c) above from NCR and API; and
     (e) the United States and the NRD Trustees have notified us that, due to an approaching statute of limitations deadline and another deadline established by a series of court orders, they are considering commencing litigation against us and others later in 2010 to obtain an injunction requiring work or to recover any amounts that they have not recovered through other means.
     Cleanup Decisions. Our liability exposure depends importantly on the decisions made by EPA and the Wisconsin Department of Natural Resources (“WDNR”) as to how the Site will be cleaned up, and consequently the costs and timing of those response actions. The nature of the response actions has been highly controversial. EPA issued a record of decision (“ROD”) selecting response actions for OU1 and OU2 in December 2002. EPA issued a separate ROD selecting response actions for OU3, OU4, and OU5 in March 2004 and in June 2007.
     EPA amended the RODs for OUs 2-5 in June 2007 to require less dredging and more capping and covering of sediments containing PCBs. The governments have concluded that these methods will result in a reduction in the costs for this portion of the cleanup. Others disagree. Likewise, in June 2008, EPA also amended the ROD for OU1.
     NRD Assessment. The Natural Resources Trustees have engaged in work to assess NRDs at and arising from the Site. However, they have not completed a required NRD Assessment under the pertinent regulations. The Trustees’ 2009 estimate of NRDs and associated costs ranges from $287 million to $423 million, some of which has already been satisfied. With specific respect to NRD claims, we and others contended that the Trustees’ claims are barred by the applicable 3 year statute of limitations.
     Past Costs Demand. By letter dated January 15, 2009, EPA demanded that we and six other parties reimburse EPA for approximately $17.6 million in costs that EPA claims it incurred as necessary costs of response
not subject to any other agreement in this matter. In response, we and the other parties which were contacted notified the EPA that the supporting documentation provided by EPA did not allow us to fully evaluate this demand and we requested that the EPA provide additional supporting information for the claimed costs. EPA has not yet responded to this request. Accordingly we are unable to reasonably estimate our potential liability for these costs.
     Work Under Agreements, Orders, and Decrees. As we mention above, our exposure to liability depends on the amount of work done, costs incurred, and damages paid both by us and by others. The procedural context of any work done, costs incurred, and damages paid also impact our ultimate exposure.
     Since 1991, the Governments and various groups of potentially responsible parties, including us, have entered into a series of agreements, orders, and decrees under which we and others have performed work, incurred costs, or paid damages in connection with the Site. As a result, some parties have contributed or performed substantial work at the Site and at least one party, Fort Howard Corporation (whose successor is either the Fort James Operating Company or Georgia Pacific Corporation) has resolved its NRD liability at the Site.
     Notably, in April 2004, the United States District Court for the Eastern District of Wisconsin entered a consent decree (“OU1 Consent Decree”) in United States v. P.H. Glatfelter Co., No. 2:03-cv-949, under which we and WTM I Corp. have been implementing the remedy in OU1, dividing costs evenly in addition to a $7 million contribution from Menasha Corp. and a $10 million contribution that the United States contributed from a separate settlement in United States v. Appleton Papers Inc., No. 2:01-cv-816, obligating NCR and Appleton Papers to contribute to certain NRD projects. In June 2008, the parties entered into an amendment to the OU1 Consent Decree (“Amended OU1 Consent Decree”). This amendment allowed for implementation of the amended remedy for OU1 and committed us and WTM I to implement that remedy without a cost limitation on that commitment. We and WTM I have substantially completed the amended remedy for OU1other than monitoring and maintenance.
     Further, in November 2007, EPA issued an administrative order for remedial action (“UAO”) to Appleton Papers Inc., CBC Coating, Inc. (formerly known as Riverside Paper Corporation), Georgia-Pacific Consumer Products, L.P. (formerly known as Fort James Operating Company), Menasha Corporation, NCR Corporation, us, U.S. Paper Mills Corp., and WTM I Company directing those respondents to implement the amended remedy in OU2-5. Shortly following issuance of


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the UAO, Appleton Papers Inc. and NCR Corp. commenced litigation against us and others, as described below. Accordingly, we have no vehicle for complying with the UAO’s overall requirements other than answering a judgment in the litigation, and we have so informed EPA. However, in February 2009, the EPA sent a demand to each of the respondents on the UAO other than WTM I seeking payment of the government’s oversight costs under the UAO for the period from November 2007 through August 2008. In February 2009, we notified the EPA that we believed that its demand could prove distracting to litigation commenced by Appleton Papers and NCR against the other UAO respondents. In order to remove this distraction, and in the spirit of cooperation, we stated that we would satisfy the EPA’s demand, an amount which was insignificant, in full. We paid this amount.
     Cost estimates. Estimates of the Site remediation change over time as we, or others, gain additional data and experience at the Site. In addition, disagreement exists over the likely costs for some of this work. On February 26, 2010, EPA issued an “explanation of Significant Differences”—a document explaining changes to a remedy, including changes in cost, that are significant but which do not require the issuance of a new Record of Decision. In that ESD, EPA estimated the cost for the OU 2-5 remedy to be $701 million. EPA estimates costs as a range, in this case from $491 million to $1.05 billion. This estimate is slightly different than, but not inconsistent with, an estimate of the total cost for remediation of the Site that the Governments prepared for purposes of justifying a recent “de minimis” settlement with certain parties whose liability at the Site the United States and the Governments believe to be insignificant. That settlement was approved by the federal court in Green Bay on December 16, 2009. In their brief in support of that settlement, the Governments estimated the total past costs incurred at the Site — including the OU1 project — to be $200 million. In addition, they estimated the cost of implementing the remedy set forth in the amended ROD for OU2-5 (the downstream portions of the Site) to total between $600 million and $700 million exclusive of amounts already spent. For purposes of the settlement, the Governments took the high end of that range and applied a 50% contingency to arrive at a cost estimate for future cleanup work of $1.05 billion. Based upon independent estimates commissioned by various potentially responsible parties, we have no reason to disagree with the Governments’ assertion that future costs to implement the amended remedy for OU2-5 are likely to fall between $700 million and $1.05 billion.
     NRDs. The Trustees claimed that we were jointly and severally responsible for NRDs with a value between $176 million and $333 million. In their recently filed brief, they further claim that this range should be inflated
to 2009 dollars and then certain unreimbursed past assessment costs should be added, so that the range of their claim would be $287 million to $423 million. We deny (a) liability for most of these NRDs, (b) that if anyone is liable, that we are jointly and severally liable for the full amount; and (c) that the Trustees can pursue this claim at this late date as the limitations period for NRD claims is three years from discovery.
     Allocation. Since 1991, various potentially responsible parties have, without success, attempted to agree on a binding, final, allocation of costs and damages among themselves. All costs that they have incurred to date have been incurred individually, or under interim, nonbinding allocations. However, the consent decree in United States v. P. H. Glatfelter Co. affords us and WTM I contribution protection for claims seeking to reallocate costs of implementing the OU1 remedy, and Fort James Operating Co. (now Georgia-Pacific) has certain rights under its consent decree. Otherwise, the parties have not litigated their internal allocation with us except as described below.
     NCR and Appleton Papers Inc. commenced litigation in the United States District Court for the Eastern District of Wisconsin captioned Appleton Papers Inc. v. George A. Whiting Paper Co., No. 2:08-cv-16, seeking to reallocate costs and damages allegedly incurred or paid or to be incurred or paid by NCR or Appleton Papers (the “Whiting Litigation”). They have to date joined a number of defendants, dismissed some of those, filed a parallel action, and consolidated the two cases. At present, the case involves allocation claims among the two plaintiffs and 28 defendants: us, George A. Whiting Paper Co., Menasha Corporation, Green Bay Packaging Inc., International Paper Company, Leicht Transfer & Storage Company, Neenah Foundry Company, Newpage Wisconsin System Inc., The Procter & Gamble Paper Products Company, Wisconsin Public Service Corp., the Cities of Appleton, De Pere, and Green Bay, Brown County, Green Bay Metropolitan Sewerage District, Heart of the Valley Metropolitan Sewerage District, Neenah-Menasha Sewerage Commission, WTM I Company, U.S. Paper Mills Corporation, Georgia-Pacific Consumer Products LP, Georgia-Pacific LLC, Fort James Operating Company, CBC Coating Company, Inc., Fort James Corporation, Kimberly-Clark Corporation, LaFarge North America Inc., Union Pacific Railroad Company, and the United States Army Corps of Engineers. As the result of certain third-party claims, federal agencies other than the Corps of Engineers are also involved in this allocation.
     On December 16, 2009, the Court granted motions for summary judgment in our favor on the contribution claims brought by NCR and Appleton Papers Inc. in the Whiting litigation. The Court held that neither NCR nor Appleton Papers may seek contribution from us or other


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recyclers under CERCLA. The Court made no ruling as to any other allocation, the liability of NCR or Appleton Papers to us for costs we have incurred, or our liability to the governments or Trustees. NCR and Appleton Papers have stated their intention to appeal but an appeal is not yet timely because the Court has not entered a final judgment.
     As described above, we have counterclaims against NCR and Appleton Papers Inc. to recover the costs we have incurred and may later incur and the damages we have paid and may later pay in connection with the Fox River site. Other defendants have similar claims. On January 20, 2010, the Court issued an order inviting submissions from the parties as to whether the counterclaims of the defendants, as well as certain additional claims, could be resolved without a trial within approximately six months. On April 3, 2010, we and others, including NCR and Appleton Papers Inc., filed separate motions for summary judgment on the counterclaims of the defendants. In the aggregate, the defendants’ motions seek a declaration that NCR and Appleton Papers, Inc. are liable to them for any future costs defendants may come to pay and seek recovery of just less than $210 million in past costs, plus interest on some of the recovery. Our summary judgment motion sought recovery of $58.6 million in past costs and the declaration.
     As noted above, on December 16, 2009, the Court approved a de minimis party consent decree (“Consent Decree”) settlement among the United States, the State of Wisconsin, and eleven defendants resolving those defendants’ liability for this site. The eleven settling defendants are: George A. Whiting Paper Co.; Green Bay Metropolitan Sewerage District; Green Bay Packaging, Inc.; Heart of the Valley Metropolitan Sewerage District; International Paper Co.; LaFarge North America Inc.; Leicht Transfer and Storage Co.; Neenah Foundry Co.; Procter & Gamble Paper Products Co.; Union Pacific Railroad Co.; and Wisconsin Public Service Corp. (collectively, the “Eleven Settling Defendants”). The Consent Decree reflects the conclusion by the United States and the State of Wisconsin that each of the Eleven Settling Defendants qualifies for treatment as a de minimis party under CERCLA. The Consent Decree requires the Settling Defendants to make a collective payment of $1,875,000. Those Eleven Settling Defendants have moved for judgment in the Whiting Litigation based upon the protections in the Consent Decree. In addition, the Governments on September 25, 2009, lodged a separate consent decree in the same case that would, if entered, resolve the liabilities of the City of De Pere. Under that consent decree, the City of De Pere would pay $210,000 to resolve its liability at the Site. That Consent Decree has since been approved and entered. API and NCR have appealed those two Consent
Decrees to the Court of Appeals for the Seventh Circuit at Docket No. 10-2480.
     We contend that we are not jointly and severally liable for costs or damages arising from the presence of PCBs downstream of OU1. In addition, we contend that NCR or other sources of NCR®-brand carbonless copy paper that our Neenah Mill recycled bear most of the responsibility for costs and damages arising from the presence of PCBs in OU1. Other parties disagree. Our counterclaims for a re-allocation of costs we have incurred or may incur remain pending.
     Reserves for the Fox River Site. As of June 30, 2010, our reserve for our claimed liability at the Fox River, including our remediation and ongoing monitoring obligations at OU1, our claimed liability for the remediation of OU2-5, our claimed liability for NRDs associated with PCB contamination at the Site and all pending, threatened or asserted and unasserted claims against us relating to PCB contamination at the Site totaled $17.2 million. No additional amounts were accrued during the first half of 2010 or 2009. Of our total reserve for the Fox River, $0.5 million is recorded in the accompanying consolidated balance sheets under the caption “Environmental liabilities” and the remaining is recorded under the caption “Other long term liabilities.”
     Under the OU1 Consent Decree which was signed in 2004, we contributed $27.0 million to past and future costs and NRDs. Since the initial funding, we contributed an additional total of $15.5 million pursuant to various supplements or amendments to the OU1 Consent Decree. No payments were required to be made since January 2009. WTM I has contributed parallel amounts. These funds were placed into an escrow account from which we and WTM I pay for work on the project. As required by the Amended Consent Decree, in a quarterly report submitted to EPA in November 2009, we and WTM I concluded that the amounts in the escrow account would be sufficient to pay for the estimated cost of the work at OU1, including operation, maintenance, and other post-construction expenses. However, there can be no assurance that these amounts will in fact suffice. WTM I has filed a bankruptcy petition in the Bankruptcy Court in Richmond. There can be no assurance should additional amounts be required to complete the project that WTM I will be able to fulfill its obligation to pay half the additional cost.
     We believe that we have strong defenses to liability for remediation of OU2-5 including the existence of ample data that indicate that PCBs did not leave OU1 in concentrations that could have caused or contributed to the need for cleanup in OU2-5. Others, including the EPA and other PRPs, disagree with us and, as a result, the EPA has issued a UAO to us and to others to perform the OU2-5 work. NCR and Appleton Papers commenced the Whiting


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Litigation and joined us and others as defendants, but did not prevail. Additional litigation associated with the remediation of the Site is likely.
     Even if we are not successful in establishing that we are not liable for the remediation of OU2-5, we do not believe that we would be allocated a significant percentage share of liability in any equitable allocation of the remediation costs and other potential damages associated with OU2—5. The accompanying consolidated financial statements do not include reserves for defense costs for the Whiting Litigation or any future defense costs related to our involvement at the Fox River which could be significant.
     In setting our reserve for the Fox River, we have assessed our legal defenses, including our successful defenses to the allegations made in the Whiting Litigation, and assumed that we will not bear the entire cost of remediation and damages to the exclusion of other known PRPs at the Site who are also potentially jointly and severally liable. The existence and ability of other PRPs to participate has also been taken into account in setting our reserve, and is generally based on our evaluation of recent publicly available financial information on each PRP, and any known insurance, indemnity or cost sharing agreements between PRPs and third parties. In addition, our assessment is based upon the magnitude, nature, location and circumstances associated with the various discharges of PCBs to the river and the relationship of those discharges to identified contamination. We will 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.
     Other than with respect to the Amended 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, the response actions that may ultimately be required, the availability of remediation equipment, and landfill space, and the number and financial resources of any other PRPs.
     Other Information. Based in part upon the Court’s December 16, 2009 ruling and the Court’s January 10, 2010 order in the Whiting Litigation, we continue to believe that a volumetric allocation would not constitute an equitable allocation of the potential liability for the contamination at the Fox River. We contend that 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.
     The Wisconsin DNR and FWS have each published studies, the latter in draft form, estimating the amount of PCBs discharged by each identified PRP’s facility to the lower Fox River and the Bay of Green Bay. These reports estimate the 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 data on the Site. We believe that the Neenah Facility’s volumetric contribution is significantly lower than the estimates set forth in these studies.
     We previously entered into interim cost-sharing agreements with four of the other PRPs, which provided for those PRPs to share certain costs relating to scientific studies of PCBs discharged at the Site (“Interim Cost Sharing Agreements”). These interim cost-sharing agreements do not establish the final allocation of remediation costs incurred at the Site. Based upon our evaluation of the Court’s December 16, 2009 ruling in the Whiting Litigation as well as the volume, nature and location of the various discharges of PCBs at the Site and the relationship of those discharges to identified contamination, we believe our allocable share of liability at the Site is less than our share of costs under the Interim Cost Sharing Agreements.
     While the Amended OU1 Consent Decree provides a negotiated framework for resolving both our and WTM I’s liability for the remediation of OU1, it does not resolve our exposure at the Site. The OU1 Consent Decree does not address response costs necessary to remediate the remainder of the Site and only addresses NRDs and claims for reimbursement of government expenses to a limited extent. Because CERCLA imposes strict and often joint and several liability, uncertainty persists regarding our exposure with respect to the remainder of the Fox River site. In addition, as mentioned previously, EPA has issued a UAO to us and others calling for further work in OU2-5, and Appleton Papers and NCR have commenced the Whiting Litigation that may become more complicated and involve additional parties. We cannot predict the ultimate outcome of the Whiting Litigation or any other litigation or regulatory actions related to this matter.
     Range of Reasonably Possible Outcomes. Our analysis of the range of reasonably possible outcomes is derived from all available information, including but not limited to official documents such as RODs, discussions with the United States and other PRPs, as well as legal counsel and engineering consultants. Based on our analysis of the current RODs and cost estimates for work to be performed at the Site, we believe that it is reasonably possible that our costs associated with the Fox


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River matter may exceed our cost estimates and the aggregate amounts accrued for the Fox River matter by amounts that are insignificant or that could range up to $265 million over a period that is currently undeterminable but that could range beyond 15 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. The summary judgment in our favor in the Whiting Litigation, if sustained on appeal, suggests that outcomes in the upper end of the monetary range have become somewhat less probable, while increases in cost estimates for some of the work may militate in the opposite direction.
     Summary. Our current assessment is that we will be able to manage this environmental matter without a long-term, material adverse impact on the Company. This matter 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 this matter, that our share of costs and/or damages 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. If we are not successful in obtaining acknowledgment that the remedial work at OU1 has been substantially completed and/or should the United States seek to enforce the UAO for OU2-5 against us which requires us either to perform directly or to contribute significant amounts towards the performance of that work, those developments could have a material adverse effect on our consolidated financial position, liquidity and results of operations and might result in a default under our loan covenants.


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15.   SEGMENT INFORMATION
     The following table sets forth financial and other information by business unit for the periods indicated:
                                                                                           
    Three months ended June 30
In millions   Specialty Papers     Composite Fibers     Advanced Airlaid Materials     Other and Unallocated     Total  
    2010       2009     2010       2009     2010       2009     2010       2009     2010       2009  
                                   
Net sales
  $ 208.7       $ 184.4     $ 102.0       $ 94.6     $ 52.0       $     $       $     $ 362.8       $ 279.0  
Energy and related sales, net
    1.9         2.1                                                 1.9         2.1  
                                   
Total revenue
    210.6         186.5       102.0         94.6       52.0                             364.7         281.1  
Cost of products sold
    194.9         178.8       84.1         82.7       48.5               1.8         (39.4 )     329.2         222.1  
                                   
Gross profit
    15.7         7.7       17.9         11.9       3.6               (1.8 )       39.4       35.5         59.0  
SG&A
    13.0         14.1       9.0         8.3       1.6               5.2         4.2       28.8         26.5  
Gains on dispositions of plant, equipment and timberlands
                                              (0.2 )             (0.2 )        
                                   
Total operating income (loss)
    2.7         (6.4 )     8.9         3.6       1.9               (6.8 )       35.2       6.8         32.4  
Non-operating income (expense)
                                              (6.3 )       (4.7 )     (6.3 )       (4.7 )
                                   
Income (loss) before income taxes
  $ 2.7       $ (6.4 )   $ 8.9       $ 3.6     $ 1.9       $     $ (13.1 )     $ 30.5     $ 0.5       $ 27.7  
                                   
                                   
Supplementary Data
                                                                                         
Net tons sold
    187.8         171.3       23.0         20.1       20.1                             230.9         191.4  
Depreciation, depletion and amortization
  $ 8.7       $ 8.9     $ 5.8       $ 5.7     $ 1.9       $     $       $     $ 16.4       $ 14.6  
Capital expenditures
    5.7         3.4       1.7         2.7       1.9                       0.1       9.3         6.2  
                               
                                                                                           
    Six months ended June 30
In millions   Specialty Papers     Composite Fibers     Advanced Airlaid Materials     Other and Unallocated     Total  
    2010       2009     2010       2009     2010       2009     2010       2009     2010       2009  
                                   
Net sales
  $ 416.4       $ 384.0     $ 203.5       $ 186.6     $ 80.1       $     $       $     $ 700.1       $ 570.5  
Energy and related sales, net
    5.5         4.1                                                 5.5         4.1  
                                   
Total revenue
    422.0         388.0       203.5         186.6       80.1                             705.6         574.6  
Cost of products sold
    376.6         350.1       170.2         160.4       75.4               3.8         (38.2 )     625.9         472.3  
                                   
Gross profit
    45.4         37.9       33.3         26.2       4.7               (3.8 )       38.2       79.7         102.3  
SG&A
    26.7         25.9       18.1         17.1       2.6               16.1         8.0       63.5         51.1  
Gains on dispositions of plant, equipment and timberlands
                                              (0.2 )       (0.7 )     (0.2 )       (0.7 )
                                   
Total operating income (loss)
    18.7         12.0       15.2         9.1       2.2               (19.7 )       30.9       16.3         51.9  
Non-operating income (expense)
                                              (15.8 )       (9.1 )     (15.8 )       (9.1 )
                                   
Income (loss) before income taxes
  $ 18.7       $ 12.0     $ 15.2       $ 9.1     $ 2.2       $     $ (35.5 )     $ 21.8     $ 0.6       $ 42.8  
                                   
                                   
Supplementary Data
                                                                                         
Net tons sold
    381.0         356.4       44.3         39.3       31.2                             456.5         395.6  
Depreciation, depletion and amortization
  $ 17.3       $ 17.8     $ 11.9       $ 11.3     $ 3.0       $     $       $     $ 32.2       $ 29.1  
Capital expenditures
    8.7         7.0       3.2         4.4       3.5                       0.1       15.4         11.5  
                               
The mathematical accuracy of certain amounts set forth above may be impacted by the rounding of the individual line items.
     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 primarily allocated based on an estimated utilization of support area services or are included in “Other and Unallocated” in the table above.
     Management evaluates results of operations of the business units before non-cash net pension income or expense, acquisition and integration related charges, unusual items, certain corporate level costs, and the effects of asset dispositions. Management believes that this is a more meaningful representation of the operating performance of its core businesses, the profitability of business units and the extent of cash flow generated from these core operations. Such amounts are presented under the caption “Other and Unallocated.” This presentation is aligned with the management and operating structure of our company. It is also on this basis that our performance is evaluated internally and by our Board of Directors.


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16.   GUARANTOR FINANCIAL STATEMENTS
     Our 7⅛% Notes have been fully and unconditionally guaranteed, on a joint and several basis, by certain of our 100%-owned domestic subsidiaries: PHG Tea Leaves, Inc., Mollanvick, Inc., The Glatfelter Pulp Wood Company, and Glatfelter Holdings, LLC.
     The following presents our condensed consolidating statements of income and cash flow, and our condensed consolidating balance sheets. These financial statements reflect P. H. Glatfelter Company (the parent), the guarantor subsidiaries (on a combined basis), the non-guarantor subsidiaries (on a combined basis) and elimination entries necessary to combine such entities on a consolidated basis.
Condensed Consolidating Statement of Income for the
three months ended June 30, 2010
                                         
    Parent           Non   Adjustments/    
In thousand   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
Net sales
  $ 208,740     $ 11,750     $ 154,041     $ (11,750 )   $ 362,781  
Energy and related sales — net
    1,915                         1,915  
     
Total revenues
    210,655       11,750       154,041       (11,750 )     364,696  
Costs of products sold
    198,062       10,283       132,620       (11,729 )     329,236  
     
Gross profit
    12,593       1,467       21,421       (21 )     35,460  
Selling, general and administrative expenses
    17,034       627       11,186             28,847  
Gains on dispositions of plant, equipment and timberlands, net
          (168 )                 (168 )
     
Operating income
    (4,441 )     1,008       10,235       (21 )     6,781  
Non-operating income (expense)
                                       
Interest expense
    (6,474 )           (343 )           (6,817 )
Interest income
    (551 )     1,929       (1,210 )           168  
     
Other income (expense) — net
    8,395       (835 )     1,183       (8,377 )     366  
     
Total other income (expense)
    1,370       1,094       (370 )     (8,377 )     (6,283 )
     
Income (loss) before income taxes
    (3,071 )     2,102       9,865       (8,398 )     498  
Income tax provision (benefit)
    (3,174 )     390       3,187       (8 )     395  
     
Net income (loss)
  $ 103     $ 1,712     $ 6,678     $ (8,390 )   $ 103  
     
Condensed Consolidating Statement of Income for the
three months ended June 30, 2009
                                         
    Parent           Non   Adjustments/    
In thousands   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
Net sales
  $ 184,364     $ 10,766     $ 94,615     $ (10,766 )   $ 278,979  
Energy and related sales — net
    2,131                         2,131  
     
Total revenues
    186,495       10,766       94,615       (10,766 )     281,110  
Costs of products sold
    140,350       9,733       82,789       (10,763 )     222,109  
     
Gross profit
    46,145       1,033       11,826       (3 )     59,001  
Selling, general and administrative expenses
    17,495       529       8,524             26,548  
Gains on dispositions of plant, equipment and timberlands, net
    27                         27  
     
Operating income
    28,623       504       3,302       (3 )     32,426  
Non-operating income (expense)
                                       
Interest expense
    (4,384 )           (760 )           (5,144 )
Interest income
    (263 )     1,298       (28 )     (450 )     557  
     
Other income (expense) — net
    (1,852 )     1,403       (234 )     548       (135 )
     
Total other income (expense)
    (6,499 )     2,701       (1,022 )     98       (4,722 )
     
Income (loss) before income taxes
    22,124       3,205       2,280       95       27,704  
Income tax provision (benefit)
    2,254       1,215       4,535       (170 )     7,834  
     
Net income (loss)
  $ 19,870     $ 1,990     $ (2,255 )   $ 265     $ 19,870  
     
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Condensed Consolidating Statement of Income for the
six months ended June 30, 2010
                                         
    Parent           Non   Adjustments/    
In thousand   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
Net sales
  $ 416,443     $ 24,353     $ 283,613     $ (24,353 )   $ 700,056  
Energy and related sales — net
    5,522                         5,522  
     
Total revenues
    421,965       24,353       283,613       (24,353 )     705,578  
Costs of products sold
    383,690       20,693       245,711       (24,192 )     625,902  
     
Gross profit
    38,275       3,660       37,902       (161 )     79,676  
Selling, general and administrative expenses
    39,582       1,168       22,767             63,517  
Gains on dispositions of plant, equipment and timberlands, net
          (168 )                 (168 )
     
Operating income
    (1,307 )     2,660       15,135       (161 )     16,327  
Non-operating income (expense)
                                       
Interest expense
    (11,805 )           (675 )           (12,480 )
Interest income
    (725 )     3,420       (2,057 )     (300 )     338  
     
Other income (expense) — net
    7,673       (1,317 )     3,212       (13,185 )     (3,617 )
     
Total other income (expense)
    (4,857 )     2,103       480       (13,485 )     (15,759 )
     
Income (loss) before income taxes
    (6,164 )     4,763       15,615       (13,646 )     568  
Income tax provision (benefit)
    (5,893 )     1,554       5,359       (181 )     839  
     
Net income (loss)
  $ (271 )   $ 3,209     $ 10,256     $ (13,465 )   $ (271 )
     
Condensed Consolidating Statement of Income for the
six months ended June 30, 2009
                                         
    Parent           Non   Adjustments/    
In thousands   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
Net sales
  $ 383,971     $ 22,489     $ 186,560     $ (22,489 )   $ 570,531  
Energy and related sales — net
    4,062                         4,062  
     
Total revenues
    388,033       22,489       186,560       (22,489 )     574,593  
Costs of products sold
    313,984       20,448       160,493       (22,647 )     472,278  
     
Gross profit
    74,049       2,041       26,067       158       102,315  
Selling, general and administrative expenses
    32,324       1,073       17,664             51,061  
Gains on dispositions of plant, equipment and timberlands, net
    28       (700 )                 (672 )
     
Operating income
    41,697       1,668       8,403       158       51,926  
Non-operating income (expense)
                                       
Interest expense
    (8,719 )     (6 )     (1,545 )           (10,270 )
Interest income
    (485 )     2,908       (108 )     (1,050 )     1,265  
     
Other income (expense) — net
    7,125       1,230       (179 )     (8,294 )     (118 )
     
Total other income (expense)
    (2,079 )     4,132       (1,832 )     (9,344 )     (9,123 )
     
Income (loss) before income taxes
    39,618       5,800       6,571       (9,186 )     42,803  
Income tax provision (benefit)
    8,210       2,239       1,279       (333 )     11,395  
     
Net income (loss)
  $ 31,408     $ 3,561     $ 5,292     $ (8,853 )   $ 31,408  
     
GLATFELTER

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Table of Contents

Condensed Consolidating Balance Sheet as of June 30, 2010
                                         
    Parent           Non   Adjustments/    
In thousands   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
Assets
                                       
Current assets
                                       
Cash and cash equivalents
  $ 20,353     $ 572     $ 21,702     $     $ 42,627  
Other current assets
    244,824       422,077       207,779       (479,198 )     395,482  
Plant, equipment and timberlands — net
    248,319       6,937       348,860             604,116  
Other assets
    759,198       157,724       104,865       (798,878 )     222,909  
     
Total assets
  $ 1,272,694     $ 587,310     $ 683,206     $ (1,278,076 )   $ 1,265,134  
     
 
                                       
Liabilities and Shareholders’ Equity
                                       
Current liabilities
  $ 307,117     $ 26,840     $ 348,411     $ (476,490 )   $ 205,878  
Long-term debt
    295,201             36,695             331,896  
Deferred income taxes
    71,035       10,658       40,988       (32,585 )     90,096  
Other long-term liabilities
    123,936       13,618       11,179       13,126       161,859  
     
Total liabilities
    797,289       51,116       437,273       (495,949 )     789,729  
Shareholders’ equity
    475,405       536,194       245,933       (782,127 )     475,405  
     
Total liabilities and shareholders’ equity
  $ 1,272,694     $ 587,310     $ 683,206     $ (1,278,076 )   $ 1,265,134  
     
Condensed Consolidating Balance Sheet as of December 31, 2009
                                         
    Parent           Non   Adjustments/    
In thousands   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
Assets
                                       
Current assets
                                       
Cash and cash equivalents
  $ 76,970     $ 985     $ 57,465     $     $ 135,420  
Other current assets
    275,490       260,834       148,090       (299,778 )     384,636  
Plant, equipment and timberlands — net
    255,886       6,921       207,825             470,632  
Other assets
    600,116       145,304       75,731       (621,545 )     199,606  
     
Total assets
  $ 1,208,462     $ 414,044     $ 489,111     $ (921,323 )   $ 1,190,294  
     
 
                                       
Liabilities and Shareholders’ Equity
                                       
Current liabilities
  $ 301,908     $ 1,357     $ 179,273     $ (296,428 )   $ 186,110  
Long-term debt
    200,241             36,695             236,936  
Deferred income taxes
    71,035       15,347       26,284       (15,998 )     96,668  
Other long-term liabilities
    124,574       13,531       9,654       12,117       159,876  
     
Total liabilities
    697,758       30,235       251,906       (300,309 )     679,590  
Shareholders’ equity
    510,704       383,809       237,205       (621,014 )     510,704  
     
Total liabilities and shareholders’ equity
  $ 1,208,462     $ 414,044     $ 489,111     $ (921,323 )   $ 1,190,294  
     
GLATFELTER

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Condensed Consolidating Statement of Cash Flows for
the six months ended June 30, 2010
                                         
    Parent           Non   Adjustments/    
In thousands   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
Net cash provided (used) by
                                       
Operating activities
  $ (90,129 )   $ 132,713     $ 40,391     $ (300 )   $ 82,675  
Investing activities
                                       
Purchase of plant, equipment and timberlands
    (8,404 )     (301 )     (6,740 )             (15,445 )
Proceeds from disposals of plant, equipment and timberlands
          182                   182  
Acquisition of Concert Industries Corp., net of cash acquired
                (229,080 )           (229,080 )
Repayments from (advances of) intercompany loans, net
    (1,676 )     (132,507 )     4,806       129,377        
     
Total investing activities
    (10,080 )     (132,626 )     (231,014 )     129,377       (244,343 )
Financing activities
                                       
Net proceeds from indebtedness
    76,470             2,016             78,486  
Payment of dividends to shareholders
    (8,360 )                       (8,360 )
(Repayments) borrowings of intercompany loans, net
    (24,628 )           154,205       (129,577 )      
Payment of intercompany dividends
          (500 )           500        
Proceeds from stock options exercised and other
    110                         110  
     
Total financing activities
    43,592       (500 )     156,221       (129,077 )     70,236  
Effect of exchange rate on cash
                (1,361 )           (1,361 )
     
Net increase (decrease) in cash
    (56,617 )     (413 )     (35,763 )           (92,793 )
Cash at the beginning of period
    76,970       985       57,465             135,420  
     
Cash at the end of period
  $ 20,353     $ 572     $ 21,702     $     $ 42,627  
     
Condensed Consolidating Statement of Cash Flows for
the six months ended June 30, 2009
                                         
    Parent             Non     Adjustments/        
In thousands   Company     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net cash provided (used) by
                                       
Operating activities
  $ 57,559     $ 3,131     $ 5,227     $ (1,050 )   $ 64,867  
Investing activities
                                       
Purchase of plant, equipment and timberlands
    (7,063 )     (55 )     (4,357 )           (11,475 )
Proceeds from disposal plant, equipment and timberlands
          728                   728  
Proceeds from installment note receivable
                37,850             37,850  
Repayments from (advances of) intercompany loans, net
    1,109       1,000             (2,109 )      
     
Total investing activities
    (5,954 )     1,673       33,493       (2,109 )     27,103  
Financing activities
                                       
Net (repayments of) proceeds from indebtedness
    (8,829 )           (30,756 )           (39,585 )
Payment of dividends to shareholders
    (8,272 )                       (8,272 )
(Repayments) borrowings of intercompany loans, net
          (4,225 )     2,116              
Payment of intercompany dividends
          (1,050 )           1,050        
     
Total financing activities
    (17,101 )     (5,275 )     (28,640 )     3,159       (47,857 )
Effect of exchange rate on cash
                1,857             1,857  
     
Net increase (decrease) in cash
    34,504       (471 )     11,937             45,970  
Cash at the beginning of period
    8,860       736       22,618             32,234  
     
Cash at the end of period
  $ 43,364     $ 285     $ 34,555     $     $ 78,204  
     
GLATFELTER

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Glatfelter’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2009 Annual Report on Form 10-K.
     Forward-Looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future consolidated financial position or results of operations, made in this Report on Form 10-Q are forward looking. We use words such as “anticipates”, “believes”, “expects”, “future”, “intends” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from such expectations. The following discussion includes forward-looking statements regarding expectations of, among others, net sales, costs of products sold, environmental costs, capital expenditures and liquidity, all of which are inherently difficult to predict. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Accordingly, we identify the following important factors, among others, which could cause our results to differ from any results that might be projected, forecasted or estimated in any such forward-looking statements:
i.   variations in demand for our products including the impact of any unplanned market-related downtime, or variations in product pricing;
 
ii.   changes in the cost or availability of raw materials we use, in particular pulpwood, market pulp, pulp substitutes, caustic soda and abaca fiber;
 
iii.   changes in energy-related costs and commodity raw materials with an energy component;
 
iv.   our ability to develop new, high value-added Specialty Papers, Composite Fibers and Advanced Airlaid Material products;
 
v.   the impact of exposure to volatile market-based pricing for sales of excess electricity;
 
vi.   the impact of competition, changes in industry production capacity, including the construction of new mills, the closing of mills and incremental changes due to capital expenditures or productivity increases;
vii.   the impairment of financial institutions and any resulting impact on us, our customers or our vendors;
 
viii.   the gain or loss of significant customers and/or on-going viability of such customers;
 
ix.   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 former Neenah mill was located;
 
x.   risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates;
 
xi.   geopolitical events, including war and terrorism;
 
xii.   disruptions in production and/or increased costs due to labor disputes;
 
xiii.   the impact of unfavorable outcomes of audits by various state, federal or international tax authorities;
 
xiv.   enactment of adverse state, federal or foreign tax or other legislation or changes in government policy or regulation;
 
xv.   adverse results in litigation; and
 
xvi.   our ability to finance, consummate and integrate current or future acquisitions.
     Introduction We manufacture, both domestically and internationally, a wide array of specialty papers and fiber-based engineered products. We manage our business along three business units: i) Specialty Papers with revenues earned from the sale of carbonless papers and forms, book publishing, envelope & converting, and engineered products; ii) Composite Fibers with revenue from the sale of food & beverage filtration papers, metallized papers, composite laminates used for decorative furniture and flooring applications, and technical specialties; and iii) Advanced Airlaid Materials with revenue from the sale of airlaid non-woven fabric like materials used in feminine hygiene products, adult incontinence products, cleaning pads and wipes, food pads, napkins and tablecloths, and baby wipes.


GLATFELTER

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     Overview Our reported results of operations for the first six months of 2010 when compared with the same period of 2009 are lower primarily due to the benefit in 2009 from alternative fuel mixture credits totaling $30.4 million, after-tax. Our results for the first six months of 2010 also reflect an aggregate of $10.0 million, after-tax, of acquisition and integration costs, together with a loss on forward foreign currency contracts that hedged the Canadian dollar purchase price, of the February 12, 2010 acquisition of Concert Industries Corp. (“Concert”).
     Operationally, our results were favorably affected by higher volumes shipped associated with improving demand in many of the markets served by our businesses and the inclusion of Concert. Higher average selling prices offset the adverse affect of rising input costs, particularly purchased pulp. Our results for the first six months of 2009 were adversely impacted by market related downtime in both the Specialty Papers and Composite Fibers business units related to the weak economic environment. During 2010, demand for our products improved and, as a results, we did not incur market related downtime.
RESULTS OF OPERATIONS
Six months ended June 30, 2010 versus the
Six months ended June 30, 2009
     The following table sets forth summarized results of operations:
                   
    Six months ended June 30
In thousands, except per share   2010     2009
       
Net sales
  $ 700,056       $ 570,531  
Gross profit
    79,676         102,315  
Operating income
    16,327         51,926  
Net income (loss)
    (271 )       31,408  
Earnings (loss) per share
    (0.01 )       0.69  
       
     The consolidated results of operations for the six months ended June 30, 2010 and 2009 include the following significant items:
                 
In thousands, except per share   After-tax
Gain (loss)
  Diluted EPS
 
 
2010
               
Acquisition and integration costs
  $ (8,321 )   $ (0.18 )
Foreign currency hedge on acquisition price
    (1,673 )     (0.04 )
 
               
2009
               
Alternative fuel mixture credit
  $ 30,418     $ 0.67  
 
     The above items reduced earnings by $10.0 million, or $0.22 per diluted share, in first six months of 2010 and increased earnings by $30.4 million, or $0.67 per diluted share, in the first half of 2009.


                                                                                           
Business Units   Six months ended June 30
In millions   Specialty Papers   Composite Fibers   Advanced Airlaid Materials   Other and Unallocated   Total
    2010     2009   2010     2009   2010     2009   2010     2009   2010     2009
                                   
Net sales
  $ 416.4       $ 384.0     $ 203.5       $ 186.6     $ 80.1       $     $       $     $ 700.1       $ 570.5  
Energy and related sales, net
    5.5         4.1                                                 5.5         4.1  
                                   
Total revenue
    422.0         388.0       203.5         186.6       80.1                             705.6         574.6  
Cost of products sold
    376.6         350.1       170.2         160.4       75.4               3.8         (38.2 )     625.9         472.3  
                                   
Gross profit
    45.4         37.9       33.3         26.2       4.7               (3.8 )       38.2       79.7         102.3  
SG&A
    26.7         25.9       18.1         17.1       2.6               16.1         8.0       63.5         51.1  
Gains on dispositions of plant, equipment and timberlands
                                              (0.2 )       (0.7 )     (0.2 )       (0.7 )
                                   
Total operating income (loss)
    18.7         12.0       15.2         9.1       2.2               (19.7 )       30.9       16.3         51.9  
Non-operating income (expense)
                                              (15.8 )       (9.1 )     (15.8 )       (9.1 )
                                   
Income (loss) before income taxes
  $ 18.7       $ 12.0     $ 15.2       $ 9.1     $ 2.2       $     $ (35.5 )     $ 21.8     $ 0.6       $ 42.8  
                                   
                                   
Supplementary Data
                                                                                         
Net tons sold
    381.0         356.4       44.3         39.3       31.2                             456.5         395.6  
Depreciation, depletion and amortization
  $ 17.3       $ 17.8     $ 11.9       $ 11.3     $ 3.0       $     $       $     $ 32.2       $ 29.1  
Capital expenditures
    8.7         7.0       3.2         4.4       3.5                       0.1       15.4         11.5  
                               
The mathematical accuracy of certain amounts set forth above may be impacted by the rounding of the individual line items.
GLATFELTER

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Table of Contents

     Business Units 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 or are included in “Other and Unallocated” in the table above.
     Management evaluates results of operations of the business units before non-cash net pension income or expense, acquisition and integration related charges, unusual items, certain corporate level costs, and the effects of asset dispositions. Management believes that this is a more meaningful representation of the operating performance of its core businesses, the profitability of business units and the extent of cash flow generated from these core operations. Such amounts are presented under the caption “Other and Unallocated.” This presentation is aligned with the management and operating structure of our company. It is also on this basis that our performance is evaluated internally and by our Board of Directors.
     Sales and Costs of Products Sold
                           
    Six months ended
June 30
       
In thousands   2010       2009     Change  
       
Net sales
  $ 700,056       $ 570,531     $ 129,525  
Energy and related sales — net
    5,522         4,062       1,460  
           
Total revenues
    705,578         574,593       130,985  
Costs of products sold
    625,902         472,278 (1)     153,624  
           
Gross profit
  $ 79,676       $ 102,315     $ (22,639 )
           
Gross profit as a percent of Net sales
    11.4 %       17.9 %        
       
(1)   Includes $40.8 million of alternative fuel mixture credits.
     The following table sets forth the contribution to consolidated net sales by each business unit:
                   
    Six months ended
June 30
Percent of Total   2010     2009
       
Business Unit
                 
Specialty Papers
    59.5 %       68.5 %
Composite Fibers
    29.1         31.5  
Advanced Airlaid Material
    11.4          
           
Total
    100.0 %       100.0 %
       
     Net sales for the first six months of 2010 were $700.1 million, a 22.7% increase compared with $570.5 million for the same period of 2009, reflecting improved demand and the inclusion of Concert, now operated and reported as Advanced Airlaid Materials business unit.
     In the Specialty Papers business unit, net sales for the first half of 2010 increased $32.4 million, or 8.4%, to $416.4 million. The increase was primarily due to higher volumes shipped. Higher average selling prices favorably impacted net sales by $2.9 million in the period-over-period comparison.
     Specialty Papers’ operating profit in the first half of 2010 improved by $6.7 million compared with the same period of 2009 primarily due to a 6.9% increase in volumes shipped and the lack of market related downtime. These favorable factors were partially offset by higher maintenance costs primarily associated with the annual mill outages.
     We sell excess power generated by the Spring Grove, PA facility. In addition, two of our facilities are registered generators of renewable energy credits (“RECs”). The following table summarizes this activity for the first six months of 2010 and 2009:
                             
In thousands   2010       2009       Change  
             
Energy sales
  $ 7,670       $ 10,142       $ (2,472 )
Costs to produce
    (5,261 )       (6,080 )       819  
                 
Net
    2,409         4,062         (1,653 )
Renewable energy credits
    3,113                 3,113  
                 
Total
  $ 5,522       $ 4,062       $ 1,460  
             
     Prior to March 31, 2010, all energy sales were made pursuant to a long-term contract that expired at the end of the first quarter 2010. We continue to sell power but at market rates, the forward pricing for which is 30% below the expired contract rate. We expect increased volatility and lower overall profitability.
     RECs represent sales of certified credits earned related to burning renewable sources of energy such as black liquor and wood waste. We sell RECs into an emerging and somewhat illiquid market. The extent and value of future revenues from REC sales is dependent on many factors outside of management’s control. Therefore, we may not be able to generate consistent additional sales of RECs in future periods.


GLATFELTER

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     In Composite Fibers, net sales for the first six months of 2010 were $203.5 million, an increase of $16.9 million, or 9.1%, from the same period of 2009. The improvement in Composite Fibers’ net sales reflects strengthening demand in each of its product lines. On a constant currency basis, average selling prices were lower by $1.1 million, and the translation of foreign currencies favorably affected net sales by approximately $0.3 million.
     Lower raw material and energy costs, primarily natural gas, favorably affected this business unit’s profitability by $4.4 million. In addition, improving market conditions and business development increased production volumes eliminating market-driven down time. On a net basis, Composite Fibers’ operating profit increased $6.1 million, or 67.0%, in the period-to-period comparison.
     Results for Advanced Airlaid Materials are included from February 12, 2010, the date of the Concert acquisition. Reported results were adversely impacted by $1.4 million as a result of charging cost of products sold for the write-up of acquired inventory to fair value.
     Pension Expense The following table summarizes the amounts of pension expense recognized for the periods indicated:
                           
    Six months ended    
    June 30    
In thousands   2010     2009   Change
       
Recorded as:
                         
Costs of products sold
  $ 3,591       $ 2,502     $ 1,089  
SG&A expense
    1,146         1,203       (57 )
           
Total
  $ 4,737       $ 3,705     $ 1,032  
       
     The amount of pension expense or 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.
     Selling, general and administrative (“SG&A”) expenses totaled $63.6 million, a $12.6 million increase primarily due to acquisition and integration related costs associated with the Concert transaction. For the remainder of 2010, integration costs are expected to approximate $1.0 million.
     Income taxes For the first six months of 2010, we recorded a provision for income taxes of $0.8 million on $0.6 million of pretax income. The comparable amounts in the same period of 2009 were income tax expense of $11.4 million on $42.8 million of pretax income. The lower tax provision in 2010 was primarily due to $13.8 million of acquisition and integration costs incurred in the first half of 2010. There were no such costs in the same period of 2009. The higher tax provision in 2009 was primarily due to the $40.8 million of alternative fuel mixture credit earned in that period.
     Foreign Currency We own and operate facilities in Canada, Germany, France, the United Kingdom and the Philippines. The functional currency of our Canadian operations is the U.S. dollar. However, in Germany and France it is the Euro, in the UK it is the British Pound Sterling, and in the Philippines the currency is the Peso. During the first six months of 2010, Euro functional currency operations generated approximately 24.3% of our sales and 22.8% of operating expenses and British Pound Sterling operations represented 9.0% of net sales and 8.8% 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 the first six months of 2010 reported results compared to the first six months 2009:
         
    Six months  
In thousands   ended June 30  
 
    Favorable  
  (unfavorable)  
Net sales
  $ 292  
Costs of products sold
    (978 )
SG&A expenses
    (91 )
Income taxes and other
    70  
 
     
Net income
  $ (707 )
 
     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.


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Three months ended June 30, 2010 versus the Three months ended June 30, 2009
     The following table sets forth summarized results of operations:
                   
    Three months ended June 30
In thousands, except per share   2010     2009
       
Net sales
  $ 362,781       $ 278,979  
Gross profit
    35,460         59,001  
Operating income
    6,781         32,426  
Net income (loss)
    103         19,870  
Earnings (loss) per share
    0.00         0.43  
       
     The consolidated results of operations for the three months ended June 30, 2010 and 2009 include the following significant items:
                 
    After-tax   Diluted EPS
In thousands, except per share   Gain (loss)  
 
2010
               
Acquisition and integration costs
  $ (1,318 )   $ (0.03 )
Foreign currency hedge on acquisition price
    403       0.01  
Timberland sales
    99        
 
               
2009
               
Alternative fuel mixture credits
    30,418       0.67  
Timberland sales and related transaction costs
    441       0.01  
 
     The above items reduced earnings by $0.8 million, or $0.02 per diluted share, in second quarter of 2010 and increased earnings by $30.9 million, or $0.68 per diluted share, in the second quarter of 2009.


                                                                                           
Business Units   Three months ended June 30   
In millions   Specialty Papers   Composite Fibers   Advanced Airlaid Materials   Other and Unallocated   Total
    2010     2009   2010     2009   2010     2009   2010     2009   2010     2009
                                   
Net sales
  $ 208.7       $ 184.4     $ 102.0       $ 94.6     $ 52.0       $     $       $     $ 362.8       $ 279.0  
Energy and related sales, net
    1.9         2.1                                                 1.9         2.1  
                                   
Total revenue
    210.6         186.5       102.0         94.6       52.0                             364.7         281.1  
Cost of products sold
    194.9         178.8       84.1         82.7       48.5               1.8         (39.4 )     329.2         222.1  
                                   
Gross profit
    15.7         7.7       17.9         11.9       3.6               (1.8 )       39.4       35.5         59.0  
SG&A
    13.0         14.1       9.0         8.3       1.6               5.2         4.2       28.8         26.5  
Gains on dispositions of plant, equipment and timberlands
                                              (0.2 )             (0.2 )        
                                   
Total operating income (loss)
    2.7         (6.4 )     8.9         3.6       1.9               (6.8 )       35.2       6.8         32.4  
Non-operating income (expense)
                                              (6.3 )       (4.7 )     (6.3 )       (4.7 )
                                   
Income (loss) before income taxes
  $ 2.7       $ (6.4 )   $ 8.9       $ 3.6     $ 1.9       $     $ (13.1 )     $ 30.5     $ 0.5       $ 27.7  
                                   
                                   
Supplementary Data
                                                                                         
Net tons sold
    187.8         171.3       23.0         20.1       20.1                             230.9         191.4  
Depreciation, depletion and amortization
  $ 8.7       $ 8.9     $ 5.8       $ 5.7     $ 1.9       $     $       $     $ 16.4       $ 14.6  
Capital expenditures
    5.7         3.4       1.7         2.7       1.9                       0.1       9.3         6.2  
                                   
     The mathematical accuracy of certain amounts set forth above may be impacted by the rounding of the individual line items.
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     Sales and Costs of Products Sold
                           
    Three months    
    ended June 30    
In thousands   2010     2009   Change
       
Net sales
  $ 362,781       $ 278,979     $ 83,802  
Energy and related sales — net
    1,915         2,131       (216 )
           
Total revenues
    364,696         281,110       83,586  
Costs of products sold
    329,236         222,109 (1)     107,127  
           
Gross profit
  $ 35,460       $ 59,001     $ (23,541 )
           
Gross profit as a percent of Net sales
    9.8 %       21.1 %        
       
(1)   Includes $40.8 million of alternative fuel mixture credits.
     The following table sets forth the contribution to consolidated net sales by each business unit:
                   
    Three months ended
    June 30
Percent of Total   2010     2009
       
Business Unit
                 
Specialty Papers
    57.5 %       66.1 %
Composite Fibers
    28.1         33.9  
Advanced Airlaid Material
    14.4          
           
Total
    100.0         100.0 %
       
     Net sales for the second quarter of 2010 were $362.8 million, a 30.0% increase compared with $279.0 million for the second quarter of 2009, reflecting the February 2010 Concert Industries acquisition, and strong demand in the Specialty Papers and Composite Fibers business units.
     In the Specialty Papers business unit, 2010 second quarter net sales increased $24.3 million, or 13.3%, to $208.7 million. The increase was primarily due to a 9.7% increase in volumes shipped, an improved mix and a $4.9 million benefit from higher average selling prices in the quarter-over-quarter comparison.
     During the second quarters of 2010 and 2009, we completed the annually scheduled maintenance outages at our Chillicothe, OH and Spring Grove, PA facilities. The maintenance outages adversely impacted gross profit by $19.6 million in the second quarter of 2010, compared with $16.1 million in the same quarter a year ago. These required outages result in increased maintenance spending, reduced production volumes, and lower product sales all negatively affecting the second-quarter results when compared with other quarters.
     Specialty Papers’ 2010 second quarter-operating profit increased $9.1 million compared with the prior-year quarter primarily due to the benefits of higher volumes shipped, improved mix, operating efficiencies and the lack of market-related downtime during the 2010 second quarter. In the quarter-to-quarter comparison, the adverse impact of higher raw material costs was offset by the benefit of higher average selling prices.
     The following table summarizes sales of excess power and related items for the second quarters of 2010 and 2009:
                             
In thousands   2010     2009     Change
             
Energy sales
  $ 3,067       $ 5,294       $ (2,227 )
Costs to produce
    (2,649 )       (3,163 )       514  
                 
Net
    418         2,131         (1,713 )
Renewable energy credits
    1,497                 1,497  
                 
Total
  $ 1,915       $ 2,131       $ (216 )
             
     In Composite Fibers, 2010 second quarter net sales were $101.9 million, an increase of $7.4 million, or 7.8%, from the second quarter of 2009. The improvement in Composite Fibers’ net sales reflects strengthening demand in all of its product lines as volumes shipped increased 14.4%. Net sales increased despite a $0.2 million adverse impact from lower average selling prices and a $5.4 million adverse impact from the translation of foreign currencies.
     Composite Fibers’ operating profit increased $5.3 million in the quarter-to-quarter comparison. Improving market conditions and business development increased production volumes eliminating market-driven down time to benefit operating profit by $3.9 million. In addition, operating efficiencies and the lower cost of energy offset the negative impact of higher wood pulp prices.
     Advanced Airlaid Materials’ volumes shipped were adversely impacted by greater than anticipated quarter-end inventory management by customers. Operating income was negatively impacted by an increase in pulp costs and a lag in related cost pass through arrangements. Operating income was also adversely impacted by $0.2 million as a result of charging cost of products sold for the write-up of acquired inventory to fair value.
     Pension Expense The following table summarizes the amounts of pension expense recognized for the periods indicated:
                           
    Three months ended
    June 30
In thousands   2010     2009   Change
       
Recorded as:
                         
Costs of products sold
  $ 1,698       $ 1,314     $ 384  
SG&A expense
    653         709       (56 )
           
Total
  $ 2,351       $ 2,023     $ 328  
       
     The amount of pension expense or 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.


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     Selling, general and administrative (“SG&A”) expenses totaled $28.8 million, a $2.3 million increase primarily due to acquisition and integration related costs associated with the Concert acquisition and to the inclusion of this acquired entity’s operating expenses for the quarter. For the remainder of 2010, integration costs are expected to approximate $1.0 million.
     Income taxes For the second quarter of 2010, we recorded a provision for income taxes of $0.4 million on $0.5 million of pretax income. The comparable amounts in the second quarter of 2009 were income tax expense of $7.8 million on $27.7 million of pretax income. The 2010 second quarter tax provision was negatively impacted an increase in the German trade tax rate in 2010 and the impact on the 2010 rate of the expiration of the research and development tax credit at the end of 2009. The higher tax provision in 2009 was primarily due to the $40.8 million of alternative fuel mixture credit earned in that period.
     Foreign Currency We own and operate facilities in Canada, Germany, France, the United Kingdom and the Philippines. The functional currency of our Canadian operations is the U.S. dollar. However, in Germany and France it is the Euro, in the UK it is the British Pound Sterling, and in the Philippines the currency is the Peso. During the second quarter of 2010, Euro functional currency operations generated approximately 24.7% of our sales and 23.0% of operating expenses and British Pound Sterling operations represented 9.4% of net sales and 8.7% 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 second quarter 2010 reported results compared to the second quarter 2009:
         
    Three months  
In thousands   ended June 30  
    Favorable  
    (unfavorable)  
Net sales
  $ (5,428 )
Costs of products sold
    4,293  
SG&A expenses
    415  
Income taxes and other
    100  
 
     
Net income
  $ (620 )
 
     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.
LIQUIDITY AND CAPITAL RESOURCES
     Our business is capital intensive and requires significant expenditures for new or enhanced equipment, for environmental compliance matters, to support our research and development efforts and for our business strategy. The following table summarizes cash flow information for each of the years presented:
                   
    Six months ended
    June 30
In thousands   2010     2009
       
Cash and cash equivalents at beginning of period
  $ 135,420       $ 32,234  
Cash provided by (used for)
                 
Operating activities
    82,675         64,867  
Investing activities
    (244,343 )       27,103  
Financing activities
    70,236         (47,857 )
Effect of exchange rate changes on cash
    (1,361 )       1,857  
           
Net cash used
    (92,793 )       45,970  
           
Cash and cash equivalents at end of period
  $ 42,627       $ 78,204  
       
     As of June 30, 2010, we had $42.6 million in cash and cash equivalents and $218.3 million available under our revolving credit agreement.
     Operating cash flow improved by $17.8 million in the first half of 2010 compared to the same period of 2009. While net income in 2010 was lower than the prior-year period as a result of acquisition related costs in 2010 and the benefit in 2009 of alternative fuel mixture credits, operating cash flow in the first half of 2010 benefited from the collection of a $54.9 million tax refund related to alternative fuel mixture credits. In addition, in 2009 we funded an environmental payments associated with the Fox River matter using $6.5 million in cash.
     Net cash used by investing activities totaled $244.3 million in the first six months of 2010 reflecting the Concert acquisition. Capital expenditures totaled $15.4 million and $11.5 million in the first six months of 2010 and 2009, respectively.
     Net cash provided by financing activities totaled $70.2 million in the first six months of 2010, reflecting increased borrowings to fund the Concert acquisition including the proceeds, net of debt issue costs and original issue discount, from the issuance of $100.0 million of senior notes, at 95% of par.
     During the first six months of 2010 and 2009 cash dividends paid on common stock totaled $8.4 million and $8.3 million, respectively. Our Board of Directors determines what, if any, dividends will be paid to our shareholders. Dividend payment decisions are based upon then-existing factors and conditions and, therefore,


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historical trends of dividend payments are not necessarily indicative of future payments.
     The following table sets forth our outstanding long-term indebtedness:
                     
    June 30,     Dec. 31,
In thousands   2010     2009
       
Revolving credit facility, due April 2011
  $       $  
Term Loan, due April 2011
            14,000  
7⅛% Notes, due May 2016
    200,000         200,000  
7⅛% Notes, due May 2016 - net of original issue discount
    95,201          
Term Loan, due January 2013
    36,695         36,695  
           
Total long-term debt
    331,896         250,695  
Less current portion
            (13,759 )
           
Long-term debt, net of current portion
  $ 331,896       $ 236,936  
       
     The significant terms of the debt obligations are set forth in Item 1 — Financial Statements — Note 11. Although we do not have immediate intentions to make use of our credit facility, we believe this agreement, and the banks that are party to it, provides us with ready access to liquidity should we need it.
     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 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 1 — Financial Statements — Note 14 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 credit facility or other bank lines of credit and other long-term debt. However, as discussed in Item 1 — Financial Statements — Note 14, an unfavorable outcome of various environmental matters could have a material adverse impact on our consolidated financial position, liquidity and/or results of operations.
     Our credit agreement contains a number of customary compliance covenants. A breach of these requirements would give rise to certain remedies under the credit agreement as amended, among which are the termination of the agreement and accelerated repayment of the outstanding borrowings plus accrued and unpaid interest under the credit facility. In addition, the 7⅛% Notes contain cross default provisions that could result in all such notes becoming due and payable in the event of a failure to repay debt outstanding under the credit agreement at maturity or a default under the credit agreement, that accelerates the debt outstanding thereunder. As of June 30, 2010, we were not aware of any breach of any such requirements.
     Off-Balance-Sheet Arrangements As of June 30, 2010 and December 31, 2009, we had not entered into any off-balance-sheet arrangements. Financial derivative instruments, to which we are a party, and guarantees of indebtedness, which solely consist of obligations of subsidiaries and a partnership, are reflected in the condensed consolidated balance sheets included herein in Item 1 — Financial Statements.
     Outlook For Specialty Papers, we expect shipping volumes in the third quarter of 2010 to be approximately 8% ahead of the second quarter of 2010 levels and selling prices are expected to increase in the same comparison. In addition, input costs are expected to in line with second quarter 2010 levels.
     For Composite Fibers, we anticipate shipping volumes, selling prices and input costs in the third quarter of 2010 to be relatively in line with the second quarter of 2010.
     Shipping volumes for the Advanced Airlaid Materials business unit in the third quarter of 2010 are expected to increase by approximately 10% compared with the second quarter. Operating income is also expected to increase by approximately $1.2 million from the pass through to customers of past raw material cost increases. We continue to expect the acquisition will be modestly accretive to 2010 earnings, excluding acquisition and integration costs. For the remainder of 2010, integration costs are expected to approximate $1.0 million.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
                                                         
    Year Ended December 31   At June 30, 2010
Dollars in thousands   2010   2011   2012   2013   2014   Carrying Value   Fair Value
 
Long-term debt
                                                       
Average principal outstanding
                                                       
At fixed interest rates — Bond
  $ 300,000     $ 300,000     $ 300,000     $ 300,000     $ 300,000     $ 295,201     $ 291,750  
At variable interest rates
    36,695       36,695       36,695       1,407             36,695       38,245  
                                             
 
                                          $ 331,896     $ 329,995  
                                             
Weighted-average interest rate
                                                       
On fixed rate debt — Bond
    7.13 %     7.13 %     7.13 %     7.13 %     7.13 %                
On variable rate debt
    1.66       1.66       1.66       1.66                        
 
     The table above presents average principal outstanding and related interest rates for the next five years. The amounts set forth above for fixed rate bonds represent the coupon rate. Such amounts include $100.0 million of bonds issued at a 5% original issue discount resulting in an 8.16% yield. Fair values included herein have been determined based upon rates currently available to us for debt with similar terms and remaining maturities. Our market risk exposure primarily results from changes in interest rates and currency exchange rates. At June 30, 2010, we had long-term debt outstanding of $331.9 million, of which $36.7 million or 11.0% was at a variable interest rate.
     Variable-rate debt outstanding represents a cash collateralized borrowing incurred in connection with the 2007 installment timberland sale that accrues interest based on 6 month LIBOR plus a margin. At June 30, 2010, the interest rate paid on variable rate debt was 1.66%. 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.
     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 first six months of 2010, Euro functional currency operations generated approximately 24.3% of our sales and 22.8% of operating expenses and British Pound Sterling operations represented 9.0% of net sales and 8.8% of operating expenses.
ITEM 4. CONTROLS AND PROCEDURES
     Evaluation of Disclosure Controls and Procedures Our chief executive officer and our principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2010, have concluded that, as of the evaluation date, our disclosure controls and procedures are effective.
     Changes in Internal Controls On February 12, 2010, we completed the acquisition of Concert Industries Corp. We are in the process of incorporating Concert’s internal controls into our control structure. We consider the ongoing integration of Concert a material change in our internal control over financial reporting. There were no other changes in our internal control over financial reporting during the three months ended June 30, 2010, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.


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PART II
     ITEM 6.     EXHIBITS
     The following exhibits are filed herewith or incorporated by reference as indicated.
     The following exhibits (10.1 through 10.4) are being re-filed with the Securities and Exchange Commission to include appendices that were previously omitted from the original filing.
     
10.1
  Credit Agreement, dated as of April 29, 2010, by and among the Company, certain of the Company’s subsidiaries as borrowers, certain of the Company’s subsidiaries as guarantors, the banks party thereto, PNC Bank, National Association, as agent for the banks under the Credit Agreement, PNC Capital Markets LLC and Citizens Bank of Pennsylvania, as joint arrangers and bookrunners, Citizens Bank of Pennsylvania, as syndication agent.
 
   
10.2
  Term Loan Agreement dated January 15, 2008, among GPW Virginia Timberlands LLC, certain lenders party thereto and SunTrust Bank, in its capacity as agent for such lenders
 
   
10.3(a)
  Consent Decree for Remedial Design and Remedial Action at Operable Unit 1 of the Lower Fox River and Green Bay site by and among the United States of America and the State of Wisconsin v. P. H. Glatfelter Company and WTMI Company (f/k/a Wisconsin Tissue Mills, Inc.)
 
   
10.3(b)
  Agreed Supplement to Consent Decree between United States of America and the State of Wisconsin vs. P.H. Glatfelter Company and WTM I Company (f/k/a Wisconsin Tissue Mills Inc.)
 
   
10.3(c)
  Second Agreed Supplement to Consent Decree between United States of America and the State of Wisconsin vs. P.H. Glatfelter Company and WTM I Company (f/k/a Wisconsin Tissue Mills Inc.)
 
   
10.3(d)
  Amended Consent Decree for Remedial Design and Remedial Action at Operable Unit 1 of the Lower Fox River and Green Bay Site by and among the United States of America and the State of Wisconsin v. P. H. Glatfelter and WTM I Company (f/k/a Wisconsin Tissue Mills Inc.), certain Appendices have been intentionally omitted, copies of which can be obtained free of charge from the Registrant)
 
   
10.4
  Contract for the Purchase and Bargain Sale of Property, dated as of December 16, 2002, by and among Glatfelter Pulp Wood Company (a wholly owned subsidiary of the Registrant), the Conservation Fund and Fidelity National Title Insurance Company
 
   
10.4(a)
  First Amendment, dated as of February 10, 2003 — to the Contract for the Purchase and Bargain Sale of Property, dated December 16, 2002 by and among Glatfelter Pulp Wood Company (a wholly owned subsidiary of the Registrant), the Conservation Fund and Fidelity National Title Insurance Company
 
   
10.5
  Separation Agreement and General Release entered into between Jeffrey J. Norton and P. H. Glatfelter Company dated as of October 25, 2008
     The following exhibits (10.6(a) through 10.6(d)) are being re-filed with the Securities and Exchange Commission to include appendices that were previously omitted from the original filing. As reported in our Current Report on Form 8-K dated May 3, 2010, the credit agreement to which these appendices relate was terminated in connection with us entering our new credit agreement re-filed herewith as Exhibit 10.1.
     
10.6(a)
  Credit Agreement, dated as of April 3, 2006, by and among the Company, certain of the Company’s subsidiaries as guarantors, the banks party thereto, PNC Bank, National Association, as agent for the banks under the Credit Agreement, PNC Capital Markets LLC and Credit Suisse Securities (USA) LLC, as joint arrangers and bookrunners, and Credit Suisse Securities (USA) LLC, as syndication agent
 
   
10.6(b)
  First Amendment to Credit Agreement among the Company, certain of the Company’s subsidiaries, certain lenders party thereto and PNC Bank, National Association, in its capacity as agent for such lenders, dated April 25, 2006
 
   
10.6(c)
  Second Amendment to Credit Agreement among the Company, certain of the Company’s subsidiaries, certain lenders party thereto and PNC Bank, National Association, in its capacity as agent for such lenders, dated December 22, 2006
 
   
10.6(d)
  Third Amendment to Credit Agreement among the Company, certain of the Company’s subsidiaries, certain lenders party thereto and PNC Bank, National Association, in its capacity as agent for such lenders, dated June 8, 2007*
 
   
 
 
*   Confidential treatment has been granted for certain portions thereof pursuant to a confidential treatment request filed with the Commission on August 7, 2007. Such provisions have been filed separately with the Commission.
 
   
31.1
  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.
 
   
31.2
  Certification of John P. Jacunski, Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
 
   
32.2
  Certification of John P. Jacunski, Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
GLATFELTER

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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.
         
  P. H. GLATFELTER COMPANY
(Registrant)
 
 
August 6, 2010  By   /s/ David C. Elder    
    David C. Elder   
    Corporate Controller   
 
GLATFELTER

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EXHIBIT INDEX
     The following exhibits (10.1 through 10.4) are being re-filed with the Securities and Exchange Commission to include appendices that were previously omitted from the original filing.
     
10.1
  Credit Agreement, dated as of April 29, 2010, by and among the Company, certain of the Company’s subsidiaries as borrowers, certain of the Company’s subsidiaries as guarantors, the banks party thereto, PNC Bank, National Association, as agent for the banks under the Credit Agreement, PNC Capital Markets LLC and Citizens Bank of Pennsylvania, as joint arrangers and bookrunners, Citizens Bank of Pennsylvania, as syndication agent.
 
   
10.2
  Term Loan Agreement dated January 15, 2008, among GPW Virginia Timberlands LLC, certain lenders party thereto and SunTrust Bank, in its capacity as agent for such lenders
 
   
10.3(a)
  Consent Decree for Remedial Design and Remedial Action at Operable Unit 1 of the Lower Fox River and Green Bay site by and among the United States of America and the State of Wisconsin v. P. H. Glatfelter Company and WTMI Company (f/k/a Wisconsin Tissue Mills, Inc.)
 
   
10.3(b)
  Agreed Supplement to Consent Decree between United States of America and the State of Wisconsin vs. P.H. Glatfelter Company and WTM I Company (f/k/a Wisconsin Tissue Mills Inc.)
 
   
10.3(c)
  Second Agreed Supplement to Consent Decree between United States of America and the State of Wisconsin vs. P.H. Glatfelter Company and WTM I Company (f/k/a Wisconsin Tissue Mills Inc.)
 
   
10.3(d)
  Amended Consent Decree for Remedial Design and Remedial Action at Operable Unit 1 of the Lower Fox River and Green Bay Site by and among the United States of America and the State of Wisconsin v. P. H. Glatfelter and WTM I Company (f/k/a Wisconsin Tissue Mills Inc.), certain Appendices have been intentionally omitted, copies of which can be obtained free of charge from the Registrant)
 
   
10.4
  Contract for the Purchase and Bargain Sale of Property, dated as of December 16, 2002, by and among Glatfelter Pulp Wood Company (a wholly owned subsidiary of the Registrant), the Conservation Fund and Fidelity National Title Insurance Company
 
   
10.4(a)
  First Amendment, dated as of February 10, 2003 — to the Contract for the Purchase and Bargain Sale of Property, dated December 16, 2002 by and among Glatfelter Pulp Wood Company (a wholly owned subsidiary of the Registrant), the Conservation Fund and Fidelity National Title Insurance Company
 
   
10.5
  Separation Agreement and General Release entered into between Jeffrey J. Norton and P. H. Glatfelter Company dated as of October 25, 2008
     The following exhibits (10.6(a) through 10.6(d)) are being re-filed with the Securities and Exchange Commission to include appendices that were previously omitted from the original filing. As reported in our Current Report on Form 8-K dated May 3, 2010, the credit agreement to which these appendices relate was terminated in connection with us entering our new credit agreement re-filed herewith as Exhibit 10.1.
     
10.6(a)
  Credit Agreement, dated as of April 3, 2006, by and among the Company, certain of the Company’s subsidiaries as guarantors, the banks party thereto, PNC Bank, National Association, as agent for the banks under the Credit Agreement, PNC Capital Markets LLC and Credit Suisse Securities (USA) LLC, as joint arrangers and bookrunners, and Credit Suisse Securities (USA) LLC, as syndication agent
 
   
10.6(b)
  First Amendment to Credit Agreement among the Company, certain of the Company’s subsidiaries, certain lenders party thereto and PNC Bank, National Association, in its capacity as agent for such lenders, dated April 25, 2006
 
   
10.6(c)
  Second Amendment to Credit Agreement among the Company, certain of the Company’s subsidiaries, certain lenders party thereto and PNC Bank, National Association, in its capacity as agent for such lenders, dated December 22, 2006
 
   
10.6(d)
  Third Amendment to Credit Agreement among the Company, certain of the Company’s subsidiaries, certain lenders party thereto and PNC Bank, National Association, in its capacity as agent for such lenders, dated June 8, 2007*
 
   
 
 
*   Confidential treatment has been granted for certain portions thereof pursuant to a confidential treatment request filed with the Commission on August 7, 2007. Such provisions have been filed separately with the Commission.
31.1   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.
 
31.2   Certification of John P. Jacunski, Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
 
32.1   Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
 
32.2   Certification of John P. Jacunski, Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
GLATFELTER

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