Glatfelter Corp - Quarter Report: 2012 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company).

Small reporting company

From 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2012

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

LOGO

96 South George Street, Suite 520

York, Pennsylvania 17401

(Address of principal executive offices)

(717) 225-4711

(Registrant’s telephone number, including area code)

Commission file

number

Exact name of registrant as

specified in its charter

IRS Employer

Identification No.

State or other jurisdiction of

incorporation or organization

1-03560

P. H. Glatfelter Company

23-0628360

Pennsylvania

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 the past 90 days. Yes x No ¨.

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 x No ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x.

Common Stock outstanding on July 23, 2012 totaled 42,660,371 shares.

P. H. GLATFELTER COMPANY AND

SUBSIDIARIES

REPORT ON FORM 10-Q

For the QUARTERLY PERIOD ENDED

JUNE 30, 2012

Table of Contents


		Page
PART I – FINANCIAL INFORMATION

Item 1	Financial Statements
	Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2012 and 2011 (unaudited)		2
	Condensed Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2012 and 2011 (unaudited)		3
	Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 (unaudited)		4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)		5
	Notes to Condensed Consolidated Financial Statements (unaudited)		6

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3	Quantitative and Qualitative Disclosures About Market Risks		31

Item 4	Controls and Procedures		32

PART II – OTHER INFORMATION

Item 6	Exhibits		32

SIGNATURES			33

PART I

Item 1 – Financial Statements

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)


	Three months ended June 30						Six months ended June 30
In thousands, except per share	2012			2011			2012			2011

Net sales	$	384,693		$	397,985		$	782,045		$	794,756
Energy and related sales – net		1,630			2,060			3,491			5,047

Total revenues		386,323			400,045			785,536			799,803
Costs of products sold		345,445			362,545			683,688			702,136

Gross profit		40,878			37,500			101,848			97,667

Selling, general and administrative expenses		30,113			31,320			60,080			63,090
Gains on dispositions of plant, equipment and timberlands, net		(6,961	)		(29	)		(6,998	)		(3,204	)

Operating income		17,726			6,209			48,766			37,781
Non-operating income (expense)
Interest expense		(4,159	)		(6,461	)		(8,428	)		(12,921	)
Interest income		103			150			226			357
Other – net		103			(275	)		299			(268	)

Total other income (expense)		(3,953	)		(6,586	)		(7,903	)		(12,832	)

Income (loss) before income taxes		13,773			(377	)		40,863			24,949
Income tax provision (benefit)		341			(2,878	)		8,553			5,022

Net income	$	13,432		$	2,501		$	32,310		$	19,927


Earnings per share
Basic	$	0.31		$	0.05		$	0.75		$	0.43
Diluted		0.31			0.05			0.74			0.43

Cash dividends declared per common share	$	0.09		$	0.09		$	0.18		$	0.18

Weighted average shares outstanding
Basic		42,854			46,080			42,802			46,075
Diluted		43,558			46,633			43,529			46,502

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)


	Three months ended June 30					Six months ended June 30
In thousands	2012			2011		2012			2011

Net income	$	13,432		$	2,501	$	32,310		$	19,927

Foreign currency translation adjustments		(14,049	)		3,791		(4,575	)		18,268
Deferred losses on cash flow hedges, net of taxes of $183, $6, $(137), and $6, respectively		479			16		(341	)		16
Amortization of unrecognized retirement obligations, net of taxes of $1,753, $1,368, $3,644, and $3,026, respectively		2,951			2,167		5,948			4,675

Other comprehensive income (loss)		(10,619	)		5,974		1,032			22,959

Comprehensive income	$	2,813		$	8,475	$	33,342		$	42,886

The accompanying notes are an integral part of these condensed consolidated financial statements.

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P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)


In thousands	June 30 2012			December 31 2011

Assets
Current assets
Cash and cash equivalents	$	23,437		$	38,277
Accounts receivable – net		146,819			135,412
Inventories		227,128			206,707
Prepaid expenses and other current assets		47,735			42,017

Total current assets		445,119			422,413

Plant, equipment and timberlands – net		595,055			601,950

Other assets		114,610			112,562

Total assets	$	1,154,784		$	1,136,925


Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	118,052		$	109,490
Dividends payable		3,894			3,902
Environmental liabilities		250			250
Other current liabilities		106,443			97,598

Total current liabilities		228,639			211,240

Long-term debt		218,000			227,000

Deferred income taxes		54,328			69,791

Other long-term liabilities		137,776			138,490

Total liabilities		638,743			646,521

Commitments and contingencies		—			—

Shareholders’ equity
Common stock		544			544
Capital in excess of par value		51,826			51,477
Retained earnings		800,349			775,825
Accumulated other comprehensive loss		(165,709	)		(166,741	)

		687,010			661,105
Less cost of common stock in treasury		(170,969	)		(170,701	)

Total shareholders’ equity		516,041			490,404

Total liabilities and shareholders’ equity	$	1,154,784		$	1,136,925

The accompanying notes are an integral part of these condensed consolidated financial statements.

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P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Six months ended June 30
In thousands	2012			2011

Operating activities
Net income	$	32,310		$	19,927
Adjustments to reconcile to net cash provided by operations:
Depreciation, depletion and amortization		34,053			34,257
Amortization of debt issue costs and original issue discount		608			1,331
Pension expense, net of unfunded benefits paid		5,141			3,733
Deferred income tax provision (benefit)		(26,040	)		9,916
Gains on dispositions of plant, equipment and timberlands, net		(6,998	)		(3,204	)
Share-based compensation		3,336			2,860
Cellulosic biofuel and alternative fuel mixture credits		—			17,833
Change in operating assets and liabilities
Accounts receivable		(12,779	)		(18,426	)
Inventories		(21,166	)		(16,647	)
Prepaid and other current assets		2,458			(8,685	)
Accounts payable		9,825			18,263
Environmental matters		(26	)		—
Accruals and other current liabilities		6,948			(4,928	)
Other		862			(7,917	)

Net cash provided by operating activities		28,532			48,313

Investing activities
Expenditures for purchases of plant, equipment and timberlands		(30,587	)		(27,877	)
Proceeds from disposals of plant, equipment and timberlands, net		7,189			3,440

Net cash used by investing activities		(23,398	)		(24,437	)

Financing activities
Net repayments of revolving credit facility		(9,000	)		—
Net repayments of other short term debt		—			(798	)
Repurchase of common stock		(3,565	)		(4,369	)
Payments of dividends		(7,800	)		(8,396	)
Proceeds from stock options exercised and other		629			117

Net cash used by financing activities		(19,736	)		(13,446	)

Effect of exchange rate changes on cash		(238	)		2,078

Net (decrease) increase in cash and cash equivalents		(14,840	)		12,508
Cash and cash equivalents at the beginning of period		38,277			95,788

Cash and cash equivalents at the end of period	$	23,437		$	108,296


Supplemental cash flow information
Cash paid (received) for
Interest, net of amounts capitalized	$	7,625		$	11,551
Income taxes		22,214			(10,906	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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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 materials. 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 worldwide, either through wholesale 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 2011 Annual Report on Form 10-K (“2011 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.

Recently Issued Accounting Pronouncements In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, “Presentation of Comprehensive Income.” This ASU is designed to improve the comparability and transparency of other comprehensive income components. The guidance provides an option to present total comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement or two separate but consecutive statements. This ASU eliminates the option to present other comprehensive income components as part of the statement of changes in shareholders’ equity. The provisions of this ASU are required to be applied retrospectively. We have adopted this standard by presenting a separate consecutive statement of comprehensive income beginning in the first quarter of 2012.

In September 2011, the FASB updated ASC 350, Intangibles – Goodwill and Other to provide an entity the option, when evaluating goodwill and other assets for possible impairment, to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after completing this assessment, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This update became effective for us beginning January 1, 2012.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” which provides common requirements for measuring fair value and disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. We adopted this standard in the first quarter of 2012 and it did not have a material impact on us.

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3.	GAINS (LOSSES) ON DISPOSITIONS OF PLANT, EQUIPMENT AND TIMBERLANDS

Sales of timberlands and other assets in the first six months of 2012 and 2011 are summarized in the following table:


Dollars in thousands	Acres		Proceeds		Gain
2012
Timberlands		3,345	$	6,584	$	6,415
Other		—		605		583

			$	7,189	$	6,998

2011
Timberlands		717	$	3,373	$	3,158
Other		—		67		46

			$	3,440	$	3,204

The 2012 timberland sales were all completed in the second quarter and the 2011 timberland sales were all completed in the first quarter. We received cash proceeds for all sales summarized above.

4.	EARNINGS PER SHARE

The following table sets forth the details of basic and diluted earnings per share (EPS):


	Three months ended June 30
In thousands, except per share	2012		2011
Net income	$	13,432	$	2,501

Weighted average common shares outstanding used in basic EPS		42,854		46,080
Common shares issuable upon exercise of dilutive stock options and PSAs / RSUs		704		553

Weighted average common shares outstanding and common share equivalents used in diluted EPS		43,558		46,633


Earnings per share
Basic	$	0.31	$	0.05
Diluted		0.31		0.05


	Six months ended June 30
In thousands, except per share	2012		2011
Net income	$	32,310	$	19,927

Weighted average common shares outstanding used in basic EPS		42,802		46,075
Common shares issuable upon exercise of dilutive stock options and PSAs / RSUs		727		427

Weighted average common shares outstanding and common share equivalents used in diluted EPS		43,529		46,502


Earnings per share
Basic	$	0.75	$	0.43
Diluted		0.74		0.43

The following table sets forth potential common shares outstanding for stock options and restricted stock units that were not included in the computation of diluted EPS for the period indicated, because their effect would be anti-dilutive:


	2012		2011
Three months ended June 30		558,870		613,900
Six months ended June 30		558,870		1,321,397

5.	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.

As of June 30, 2012 and December 31, 2011, we had $30.5 million and $29.7 million, respectively, of gross unrecognized tax benefits. As of June 30, 2012, if such benefits were to be recognized, approximately $30.5 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.

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The following table summarizes, by major jurisdiction, tax years that remain subject to examination:


	Open Tax Years
Jurisdiction	Examinations not yet initiated	Examination in progress
United States
Federal	2008 - 2011	N/A
State	2005 - 2011	2004, 2006, 2008, 2009
Canada (1)	2007 - 2011	2007 - 2010
Germany (1)	2007 - 2011	N/A
France	2009 - 2011	N/A
United Kingdom	2008 - 2011	N/A
Philippines	2010 - 2011	2009 - 2010

(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 decrease within the next twelve months by a range of zero to $6.0 million. Substantially all of this range relates to tax positions taken in the U.S. and in the U.K.

We recognize interest and penalties related to uncertain tax positions as income tax expense. During the first half of the year, we recognized interest expense of $0.4 million. For the second quarter of 2012, we recognized interest expense of $0.2 million. For the first half of 2011 and the second quarter of 2011, we recognized a net reduction of interest expense of $2.0 million and $2.3 million, respectively. As of June 30, 2012, accrued interest payable was $2.1 million, and as of December 31, 2011, accrued interest payable was $1.7 million. We did not record any penalties associated with uncertain tax positions during the second quarters of 2012 or 2011.

In March 2010, we were approved by the Internal Revenue Service to be registered as a producer of cellulosic biofuel under the Internal Revenue Code. The cellulosic biofuel credit was equal to $1.01 per gallon of black liquor produced in operations during 2009. In the second quarter of 2012, we made the decision to convert a portion of the previously utilized refundable alternative fuel mixture credit, which was equal to $0.50 per gallon, to the

non-refundable cellulosic biofuel credit and intend to amend our 2009 federal income tax return to claim the credit for a portion of the black liquor gallons produced in 2009. The conversion to the cellulosic biofuel credit resulted in a net benefit for income taxes in the second quarter of 2012 of $4.4 million. The amount of cellulosic biofuel credits recognized is based on numerous assumptions and estimates about future taxable income. Although we believe our assumptions are reasonable, actual results may differ from these assumptions and estimates and such differences may have a significant impact on the amount of credits recognized. In addition, while we do not intend to convert additional credits, if facts and circumstances change, we could further amend our 2009 tax return and claim additional credits.

6.	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. Since the approval of the LTIP, we have issued to eligible participants restricted stock units, performance share awards and stock only stock appreciation rights (“SOSARs”).

Restricted Stock Units (“RSUs”) and Performance Share Awards (“PSAs”) Awards of RSUs and PSAs are made under our LTIP. The RSUs vest based solely on the passage of time, generally on a graded scale over a three, four, and five-year period. PSAs were first issued in March 2011 and cliff vest three years from the grant date assuming the achievement of predetermined, three-year cumulative performance targets. The performance measures include a minimum, target and maximum performance level providing the grantees an opportunity to receive more or less shares than target depending on actual financial performance. For both RSUs and PSAs, the grant date fair value of the awards is used to determine the amount of expense to be recognized over the applicable service period. Settlement of RSUs and PSAs will be made in shares of our common stock.

The following table summarizes RSU and PSA activity during the first six months of the indicated periods:


Units	2012			2011
Beginning balance		788,088			579,801
Granted		206,278			244,754
Forfeited		(22,167	)		(12,539	)
Shares delivered		(94,830	)		(14,490	)

Ending balance		877,369			797,526

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The amount granted in 2012 and 2011 includes PSAs of 161,083 units and 96,410 units, respectively, exclusive of reinvested dividends. The following table sets forth aggregate RSU and PSA compensation expense for the periods indicated:


	June 30
In thousands	2012		2011

Three months ended	$	703	$	541
Six months ended		1,279		1,007

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 SOSARS for the first six months of the indicated period:


	2012					2011
SOSARS	Shares			Wtd Avg Exercise Price		Shares			Wtd Avg Exercise Price
Outstanding at Jan. 1,		2,298,288		$	12.35		2,061,877		$	12.28
Granted		356,570			15.55		345,290			12.56
Exercised		(65,637	)		10.57		—			—
Canceled / forfeited		(10,000	)		14.96		(102,970	)		12.55

Outstanding at Jun. 30,		2,579,221		$	12.82		2,304,197		$	12.31

*SOSAR Grants*
Weighted average grant date fair value per share	$	4.93				$	4.09
Aggregate grant date fair value (in thousands)	$	1,757				$	1,412
Black-Scholes assumptions
Dividend yield		2.32	%				2.87	%
Risk free rate of return		1.02	%				2.55	%
Volatility		41.49	%				41.91	%
Expected life		6 yrs					6 yrs

The following table sets forth SOSAR compensation expense for the periods indicated:


	June 30
In thousands	2012		2011

Three months ended	$	372	$	411
Six months ended		726		880

7.	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	2012			2011
Pension Benefits
Service cost	$	2,625		$	2,338
Interest cost		5,762			6,033
Expected return on plan assets		(10,547	)		(10,449	)
Amortization of prior service cost		614			637
Amortization of unrecognized loss		4,187			3,082

Net periodic benefit cost	$	2,641		$	1,641


Other Benefits
Service cost	$	708		$	693
Interest cost		607			691
Expected return on plan assets		(113	)		(130	)
Amortization of prior service cost		(235	)		(306	)
Amortization of unrecognized loss		152			183

Net periodic benefit cost	$	1,119		$	1,131


	Six months ended June 30
In thousands	2012			2011
Pension Benefits
Service cost	$	5,556		$	4,943
Interest cost		11,534			12,097
Expected return on plan assets		(21,110	)		(20,914	)
Amortization of prior service cost		1,227			1,283
Amortization of unrecognized loss		8,510			6,626

Net periodic benefit cost	$	5,717		$	4,035


Other Benefits
Service cost	$	1,418		$	1,453
Interest cost		1,216			1,408
Expected return on plan assets		(226	)		(260	)
Amortization of prior service cost		(469	)		(611	)
Amortization of unrecognized loss		331			441

Net periodic benefit cost	$	2,270		$	2,431

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8.	INVENTORIES

Inventories, net of reserves, were as follows:


In thousands	Jun. 30, 2012		Dec. 31, 2011
Raw materials	$	65,624	$	57,547
In-process and finished		103,622		93,096
Supplies		57,882		56,064

Total	$	227,128	$	206,707

9.	LONG-TERM DEBT

Long-term debt is summarized as follows:


In thousands	Jun. 30, 2012		Dec. 31, 2011
Revolving credit facility, due Nov. 2016	$	18,000	$	27,000
7¹/₈% Notes, due May 2016		200,000		200,000

Total long-term debt		218,000		227,000
Less current portion		—		—

Long-term debt, net of current portion	$	218,000	$	227,000

On November 21, 2011, we entered into an amendment to our revolving credit agreement with a consortium of banks (the “Revolving Credit Facility”) which increased the amount available for borrowing to $350 million, extended the maturity of the facility to November 21, 2016, and instituted a lower interest rate pricing grid.

For all U.S. dollar denominated borrowings under the Revolving Credit Facility, the borrowing rate is, at our option, (a) the bank’s base rate which is equal to the greater of i) the prime rate; ii) the federal funds rate plus 50 basis points plus an applicable spread ranging from 25 basis points to 125 basis points based on our corporate credit ratings determined by Standard & Poor’s Rating Services and Moody’s Investor Service, Inc. (the “Corporate Credit Rating”); or iii) the daily Euro-rate plus 100 basis points; or (b) the daily Euro-rate plus an applicable margin ranging from 125 basis points to 225 basis points based on the Corporate Credit Rating. For non-US dollar denominated borrowings, interest is based on (b) above.

The Revolving Credit Facility 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 including: i) maximum net debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio; ii) a consolidated EBITDA to interest expense ratio; and iii) beginning December 31, 2015, a minimum liquidity ratio. A breach of these requirements would give rise to certain remedies under the Revolving Credit Facility, among which are the termination of the agreement and accelerated repayment of the outstanding borrowings plus accrued and unpaid interest under the credit facility.

On April 28, 2006 we completed an offering of $200.0 million aggregate principal amount of our 7¹/₈% Senior Notes due May 2016 (“7¹/₈% Notes”). Net proceeds from this offering totaled approximately $196.4 million, after deducting the commissions and other fees and expenses relating to the offering.

Interest on the 7¹/₈% Notes is payable semiannually in arrears on May 1 and November 1.

The 7¹/₈% 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 Revolving Credit Agreement at maturity or a default under the Revolving Credit Agreement that accelerates the debt outstanding thereunder. As of June 30, 2012, we met all of the requirements of our debt covenants.

As of June 30, 2012 and December 31, 2011, we had $4.6 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 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.

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10.

ASSET RETIREMENT OBLIGATION

During 2008, we recorded $11.5 million representing the estimated fair value of asset retirement obligations related to the legal requirement to close several lagoons at the Spring Grove, PA facility. Historically, the lagoons were used to dispose of residual waste material. Closure of the lagoons will be accomplished by 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 upward revisions to the original estimate, 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 amortized as a charge to operations on the straight-line basis over the expected closure period. Following is a summary of activity recorded during the first six months of 2012 and 2011:


In thousands	2012			2011
Balance at Jan. 1,	$	9,679		$	9,717
Accretion		244			265
Payments		(463	)		(518	)

Balance at Jun. 30,	$	9,460		$	9,464

At June 30, 2012, $3.6 million of the total liability is recorded in the accompanying consolidated balance sheet, under the caption “Other current liabilities” and $5.9 million is recorded under the caption “Other long-term liabilities.”

11.

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:


	Jun. 30, 2012				Dec. 31, 2011
In thousands	Carrying Value		Fair Value		Carrying Value		Fair Value
Fixed-rate bonds	$	200,000	$	205,005	$	200,000	$	204,000
Variable rate debt		18,000		18,000		27,000		27,000

Total	$	218,000	$	223,005	$	227,000	$	231,000

As of June 30, 2012, and December 31, 2011, we had $200.0 million of 7¹/₈% fixed rate debt. These bonds are publicly registered, but thinly traded. Accordingly, the values set forth above are based on debt instruments with similar characteristics (Level – 2). The fair value of financial derivatives is set forth below in Note 12.

12.

FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES

As part of our overall risk management practices, we enter into financial derivatives primarily designed to either i) hedge foreign currency risks associated with forecasted transactions – “cash flow hedges” or ii) mitigate the impact that changes in currency exchange rates have on intercompany financing transactions and foreign currency denominated receivables and payables – “foreign currency hedges.”

Derivatives Designated as Hedging Instruments – Cash Flow Hedges We use currency forward contracts as cash flow hedges to manage our exposure to fluctuations in the currency exchange rates on certain forecasted production costs expected to be incurred over a maximum of twelve months. Currency forward contracts involve fixing the EUR-USD exchange rate or USD-CAD for delivery of a specified amount of foreign currency on a specified date.

We designate certain currency forward contracts as cash flow hedges of forecasted raw material purchases and certain other identified manufacturing cost with exposure to changes in foreign currency exchange rates. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges of foreign exchange risk is deferred as a component of accumulated other comprehensive income in the accompanying consolidated balance sheet and is subsequently reclassified into cost of products sold in the period that inventory produced using the hedged transaction affects earnings. The ineffective portion of the change in fair value of the derivative is recognized directly to earnings and reflected in the accompanying consolidated statement of income as non-operating income (expense) under the caption “Other-net.”

We had the following outstanding derivatives that were used to hedge foreign exchange risks associated with forecasted transactions and designated as hedging instruments:


in thousands	Jun. 30, 2012		Dec. 31, 2011
Derivative	Buy Notional
Sell / Buy
Euro / U.S. dollar		28,279		22,730
U.S. dollar / Canadian dollar		10,973		11,019

These contracts have maturities of twelve months or less.

Derivatives Not Designated as Hedging Instruments – Foreign Currency Hedges We also enter into forward foreign exchange contracts to mitigate the impact changes in currency exchange rates have on balance sheet

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monetary assets and liabilities. None of these contracts are designated as hedges for financial accounting purposes and, accordingly, changes in value of the foreign exchange forward contracts and in the offsetting underlying on-balance-sheet transactions are reflected in the accompanying statement of operations under the caption “Other – net.”


in thousands	Jun. 30, 2012		Dec. 31, 2012
Derivative	Sell Notional
Sell / Buy
Euro / U.S. dollar		19,000		25,500
Euro / British Pound		3,000		—
U.S. dollar / Canadian dollar		1,500		—
Philippine peso / U.S. dollar		—		150,000

These contracts have maturities of one month from the date originally entered into.

Fair Value Measurements The following table summarizes the fair values of derivative instruments as of the periods indicated and the line items in the accompanying consolidated balance sheet where the instruments are recorded:


In thousands	Jun. 30, 2012		Dec. 31, 2011		Jun. 30, 2012		Dec. 31, 2011
Balance sheet caption	Prepaid and Other Current Assets				Other Current Liabilities
*Designated as hedging:*
Forward foreign currency exchange contracts	$	949	$	1,520	$	37		—
*Not designated as hedging:*
Forward foreign currency exchange contracts	$	9	$	338	$	328	$	15

The amounts set forth in the table above represent the net asset or liability with each counterparty giving effect to rights of offset.

The following table summarizes the amount of income or loss from derivative instruments recognized in our results of operations for the periods indicated and the line items in the accompanying consolidated income statement where the results are recorded:


	Three months ended June 30					Six months ended June 30
In thousands	2012		2011			2012		2011
*Designated as hedging:*
Forward foreign currency exchange contracts:
Effective portion – cost of products sold	$	545		—		$	1,117		—
Ineffective portion – other – net		86		(1	)		226		(1	)
*Not designated as hedging*:
Forward foreign currency exchange contracts:
Other – net	$	1,464	($	1,496	)	$	394	($	5,842	)

The impact on our results of operations of marking-to-market activity not designated as hedging was substantially all offset by the remeasurement of the underlying on-balance sheet item.

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The fair values of the foreign exchange forward contracts are considered to be Level 2. Foreign currency forward contracts are valued using foreign currency forward and interest rate curves. The fair value of each contract is determined by comparing the contract rate to the forward rate and discounting to present value. Contracts in a gain position are recorded in the consolidated balance sheet under the caption “Prepaid and other current assets” and the value of contracts in a loss position is recorded under the caption “Other current liabilities.”

A rollforward of fair value amounts recorded as a component of accumulated other comprehensive income is as follows:


In thousands	2012			2011
Balance at January 1	$	1,649		$	0
Deferred gains on cash flow hedges		639			22
Reclassified to earnings		(1,117	)		0

Balance at June 30	$	1,171		$	22

We expect substantially all of the amounts recorded as a component of accumulated other comprehensive income will be realized in results of operations within the next twelve months and the amount will vary depending on market rates.

Credit risk related to derivative activity arises in the event a counterparty fails to meet its obligations to us. This exposure is generally limited to the amounts, if any, by which the counterparty’s obligations exceed our obligation to them. Our policy is to enter into contracts only with financial institutions which meet certain minimum credit ratings.

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13.

SHARE REPURCHASES

In May 2012, our Board of Directors authorized a new share repurchase program for up to $25.0 million of our outstanding common stock, exclusive of commissions. The following table summarizes share repurchases under this program:


	shares	(thousands)
Authorized amount	n/a	$	25,000
Repurchases	172,157		(2,605	)

Remaining authorization		$	22,395

In April 2011, our Board of Directors authorized a share repurchase program for up to $50.0 million of our outstanding common stock, exclusive of commissions, all of which was used, including 82,533 shares at a cost of $1.2 million repurchased under this program in the first quarter of 2012.

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 our 1979 acquisition of the Bergstrom Paper Company, we acquired a facility located at the Site (the “Neenah Facility”). The Neenah Facility used wastepaper as a source of fiber. Discharges to the lower Fox River from the Neenah Facility that may have contained PCBs from wastepaper may have occurred from 1954 to the late 1970s. We believe that any PCBs that the Neenah Facility may have 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 other entities (including local Native American tribes), 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” (the “OUs”), including the most upstream (“OU1”) and four downstream reaches of the river and bay (“OU2-5”). OU1 extends from primarily Lake Winnebago to the dam at Appleton, and is comprised of Little Lake Butte des Morts. The Neenah Facility discharged its wastewater into OU1.

Our liabilities, if any, for this contamination primarily arise under the federal Comprehensive Environmental, Response, Compensation and Liability Act (“CERCLA” or “Superfund”), pursuant to which the Governments have sought to recover “response actions” or “response costs,” which are the costs of studying and cleaning up contamination. Other agencies and natural resource trustee agencies (collectively, the “Trustees”) have sought to recover natural resource damages (“NRDs”), including natural resource damage assessment costs.

We are one of eight entities that have been formally notified that they are potentially responsible parties (“PRPs”) under CERCLA for response costs or NRDs. Others, including the United States and the State of Wisconsin, may also be liable for some or all of the costs of NRD at this Site.

The Governments have sought to recover response actions, response costs, and NRDs from us through three principal enforcement actions.

OU1 CD. On October 1, 2003, the United States and the State of Wisconsin commenced an action captioned United States v. P .H. Glatfelter Co. against us and WTM I Company (“WTM I”). in the United States District Court for the Eastern District of Wisconsin and simultaneously lodged a consent decree (“OU1 CD”) that the court entered on April 12, 2004. Under that OU1 CD, and an amendment dated August 2008, we and WTM I, with a limited fixed contribution from Menasha Corp. and funds provided by the United States from an agreement with others, have implemented the remedy for OU1. We have also resolved claims for all Governmental response costs in OU1 after July 2003 and made a payment on NRDs. That remedy is complete. We have continuing operation and maintenance obligations that we expect to fund from contributions we and WTM I have already made to an escrow account for OU1 under the OU1 CD.

OU2-5 UAO. In November 2007, the United States Environmental Protection Agency (“EPA”) issued an administrative order for remedial action (“UAO”) to Appleton Papers Inc. (“API”), CBC Coating, Inc. (formerly known as Riverside Paper Corporation),

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Georgia-Pacific Consumer Products, L.P. (formerly known as Fort James Operating Company), Menasha Corporation, NCR Corporation, Glatfelter, U.S. Paper Mills Corp., and WTM I directing those respondents to implement the remedy in OU2-5. Shortly following issuance of the UAO, API and NCR 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, but, to minimize disruptions, have paid certain de minimis amounts to EPA for oversight costs under the UAO.

Government Action. On October 14, 2010, the United States and the State of Wisconsin filed an action in the United States District Court for the Eastern District of Wisconsin captioned United States v. NCR Corp. (the “Government Action”) against 12 parties, including us. The Government Action seeks to recover from each of the defendants, jointly and severally, all of the governments’ past costs of response, which are approximately $17 million to date, a declaration as to liability for all of the governments’ future costs of response, and compensation for natural resource damages, as well as a declaration as to liability for compliance with the UAO for OU2-5. The United States twice sought a preliminary injunction in 2011 to obtain “full-scale remediation” from NCR or API, and those motions were denied. NCR implemented less than a full season of work in 2011. On March 19, 2012, the United States again moved for a preliminary injunction to require NCR and API to conduct “full-scale” remediation – defined as dredging of 660,000 cubic yards of sediment – in 2012. On April 10, 2012, the court granted summary judgment to API, holding that API was not a successor to the Appleton Coated Papers Division of NCR Corporation. On April 27, 2012, the court granted the preliminary injunction that the United States had requested, but against NCR only. NCR has appealed that preliminary injunction to the United States Court of Appeals for the Seventh Circuit. That appeal was argued on June 4, 2012, and we expect a decision at any time. The preliminary injunction has not been stayed pending appeal, so work continues in OU2-5. Active litigation of the United States’ claim for a declaratory judgment or permanent injunctive relief against all recipients of the UAO for OU2-5, including us, is on an accelerated schedule, and the district court has scheduled it for a trial beginning December 3, 2012. Among other issues, disposition of that claim will require litigation of challenges to the United States’ selection of the remedy for this Site and will also require disposition of various parties’ asserted defenses that liability for some or all of this Site is not joint and several and may be apportioned. Should the government obtain the order against us that it is now seeking on the claim to be tried, the court would issue a mandatory injunction requiring us, jointly and severally with any other defendants against which the government were to prevail, to complete the remedy for OU2-5. However, the government is not seeking at that trial any change to the rulings in the Whiting Litigation under which NCR bears full responsibility for any obligations we share jointly with NCR.

Whiting Litigation. On January 7, 2008, NCR and API commenced litigation in the United States District Court for the Eastern District of Wisconsin captioned Appleton Papers Inc. v. George A. Whiting Paper Co., seeking to reallocate costs and damages allegedly incurred or paid or to be incurred or paid by NCR or API (the “Whiting Litigation”). The case involves allocation claims among the two plaintiffs and 28 defendants including us. We and other defendants counterclaimed against NCR and API. Some of the claims have since been resolved as described below.

Claims against governments. The Whiting Litigation involves claims by certain parties against federal agencies who are responsible parties for this site. In the Government Action many defendants, including us, asserted counterclaims against the United States and the State of Wisconsin.

Settlements. Certain parties have resolved their liability to the United States affording them contribution protection. These settlements are embodied in consent decrees. Notably, we entered into the OU1 CD. Also, in a case captioned United States v. George A. Whiting Paper Co., the district court entered two consent decrees under which 13 de minimis defendants in the Whiting Litigation settled with the United States and Wisconsin. The Court of Appeals for the Seventh Circuit denied an appeal of these settlements by NCR and API on May 4, 2011. Further, Georgia-Pacific Consumer Products LP, has entered into a consent decree resolving its liability for NRDs and a separate consent decree in the Government Action that resolves all of its liabilities except for the downstream portion of the OU4 remedy. Finally, the United States has lodged a consent decree that would resolve the liability of itself and two municipalities. The United States moved for entry of that consent decree, but later withdrew that motion due to a ruling by the court adverse to the government in a related case captioned Menasha Corp. v. United States Department of Justice, seeking disclosure of certain documents under the Freedom of Information Act. We oppose entry of that consent decree, which the district court must approve. The United States or the State of Wisconsin may enter into settlements with us or with other parties that would affect our ultimate obligations because settling parties may become unavailable to pay any share other than their settlement amount, depending upon the terms of the settlement and the court’s order entering any consent decree.

Cleanup Decisions. The extent of our exposure depends, in large part, on the decisions made by EPA and the Wisconsin Department of Natural Resources

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(“WDNR”) as to how the Site will be cleaned up and the costs and timing of those response actions. The nature of the response actions has been highly controversial. Between 2002 and 2008, the EPA issued records of decision (“RODs”) regarding required remedial actions for the OUs. Some of those RODs have been amended. We contend that the remedy for OU2-5 is arbitrary and capricious. We and others have begun to litigate that issue in the Government Action. If we were to be successful in modifying any existing selected remedy, our exposure could be reduced materially.

NRD Assessment. We are engaged in disputes as to (i) whether various documents prepared by the Trustees taken together constitute a sufficient NRD assessment under applicable regulations; and (ii) on a number of legal grounds, whether the Trustees may recover from us on the specific NRD claims they have made.

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. Based upon estimates made by the Governments and independent estimates commissioned by various potentially responsible parties, we have no reason to disagree with the Governments’ assertion that total past and future costs and NRDs at this site may exceed $1 billion and that $1.5 billion is a reasonable “outside estimate.”

NRDs. Of that amount, the Trustees’ assessment documents claimed that we are jointly and severally responsible for NRDs with a value between $176 million and $333 million. They now 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 liability for most of these NRDs and believe that even if anyone is liable, that we are not jointly and severally liable for the full amount. Moreover, we believe that the Trustees may not legally pursue this claim at this late date, as the limitations period for NRD claims is three years from discovery.

Allocation and Divisibility. 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, if not all, of the responsibility for costs and damages arising from the presence of PCBs in OU1 and downstream.

On December 16, 2009, the court granted motions for summary judgment in our favor in the Whiting Litigation holding that neither NCR nor API may seek contribution

from us or other recyclers under CERCLA. The Court made no ruling as to any other allocation, the liability of NCR or API to us for costs we have incurred, or our liability to the Governments or Trustees. NCR and API have stated their intention to appeal, but an appeal is not yet timely because the court has not entered a final judgment.

We also filed counterclaims against NCR and API 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 Site. Other defendants have similar claims. On February 28, 2011, the district court granted our summary judgment motions on those counterclaims in part and denied them in part. The court granted a declaration that NCR and API are liable to us (and to others) in contribution for 100% of any costs of response (that is, clean up) that we may be required to pay for work in OU2-5 in the future. On September 30, 2011, the court clarified its ruling with respect to NRDs and natural resource damage assessment costs, holding that NCR and API owe full contribution to us (and others) for NRDs or natural resource damage assessment costs that we have paid or may be required to pay in the future. The court required further proceedings to decide whether or to what extent NCR and API owe contribution to us and others for costs that we and others incurred in the past and costs that we and others incurred in connection with OU1. In addition, NCR and API contended that some of the costs we claim are not recoverable and that our insurance coverage settlements ought to be set off against any recovery in whole or in part. Those issues were tried to the court in February 2012. On July 3, 2012, the court issued findings of fact and conclusions of law awarding us approximately $4.25 million in claimed past costs associated with the work of the “Fox River Group,” subject to an unresolved insurance coverage settlement off-set. The court also found that the sale of production scrap known as “broke” from NCR’s predecessor Appleton Coated Paper Company to recyclers did not constitute “arranging” for disposal of the PCBs coated on that broke and therefore did not render NCR liable on that basis for costs we had incurred in OU1, a decision with which we disagree. Further motions are now pending to determine whether NCR or API may be responsible for our costs in OU1 on any other theory. An appeal of the court’s February 28, 2011, September 30, 2011, and July 3, 2012, decisions is not yet ripe for any party.

Reserves for the Site. As of June 30, 2012, our reserve for our claimed liability at the Site, including our remediation and ongoing monitoring obligations at OU1, our claimed liability for the remediation of the rest of the Site, 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 $16.5 million. Of our

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total reserve for the Fox River, $0.3 million is recorded in the accompanying consolidated balance sheets under the caption “Environmental liabilities” and the remainder is recorded under the caption “Other long term liabilities.”

Although we believe that amounts already funded by us and WTM I to implement the OU1 remedy are adequate and no payments have been required since January 2009, 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; accordingly, there can be no assurance that WTM I will be able to fulfill its obligation to pay half of any additional costs, if required.

We believe that we have strong defenses to liability for further remediation downstream of OU1, 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 additional cleanup downstream. 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 additional remedial work, and filed the Government Action seeking, in part, the same relief. NCR and API commenced the Whiting Litigation and joined us and others as defendants, but, to this point, have not prevailed.

Even if we are not successful in establishing that we have no further remediation liability, we do not believe that we would be allocated a significant percentage share of liability in any equitable allocation of the remediation costs and natural resource damages. The accompanying consolidated financial statements do not include reserves for defense costs for the Whiting Litigation, the Government Action, or any future defense costs related to our involvement at the Site, which could be significant.

In setting our reserve for the Site, 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 or 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 certain of the PRPs 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 Site.

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. The Governments have published studies estimating the amount of PCBs discharged by each identified PRP’s facility to the lower Fox River and Green Bay. These reports estimate the Neenah Facility’s share of the mass of PCBs discharged to be as high as 27%. We do not believe the discharge mass estimates used in these studies are accurate because (a) the studies themselves disclose that they are not accurate and (b) the PCB mass 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 absolute and relative contribution of PCB mass is significantly lower than the estimates set forth in these studies.

In any event, based upon the court’s December 16, 2009, and February 28, 2011, rulings in the Whiting Litigation, statements in the court’s disposition of the United States’ 2011 and 2012 motions for a preliminary injunction in the Government Action, as well as certain other procedural orders, we continue to believe that an allocation in proportion to mass of PCBs discharged 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.

We previously entered into interim cost-sharing agreements with six 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, February 28, 2011, and July 3, 2012, rulings 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.

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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 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 an undeterminable period that could range beyond 10 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 two summary judgments in our favor in the Whiting Litigation, if sustained on appeal, suggest that outcomes in the upper end of the monetary range have become somewhat less likely, while the result of the February 2012 trial and increases in cost estimates for some of the work may make an outcome in the upper end of the range more likely.

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 debt 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. Should a court grant the United States or the State of Wisconsin relief which requires us either to perform directly or to contribute significant amounts towards remedial action downstream of OU1 or to natural resource damages, 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
	2012		2011			2012		2011		2012		2011		2012			2011			2012			2011
Net sales	$	214.1	$	216.7		$	108.6	$	116.4	$	62.0	$	64.9		—			—		$	384.7		$	398.0
Energy and related sales, net		1.6		2.1			—		—		—		—		—			—			1.6			2.1

Total revenue		215.7		218.8			108.6		116.4		62.0		64.9		—			—			386.3			400.0
Cost of products sold		197.5		206.5			90.7		97.6		55.0		58.3		2.2			0.1			345.4			362.5

Gross profit		18.3		12.2			17.9		18.8		6.9		6.6		(2.2	)		(0.1	)		40.9			37.5
SG&A		14.0		12.3			10.0		9.6		2.3		2.8		3.8			6.6			30.1			31.3
Gains on dispositions of plant, equipment and timberlands, net		—		—			—		—		—		—		(7.0	)		—			(7.0	)		—

Total operating income (loss)		4.2		(0.1	)		7.9		9.2		4.6		3.8		1.0			(6.7	)		17.7			6.2
Other non-operating income (expense)		—		—			—		—		—		—		(4.0	)		(6.6	)		(4.0	)		(6.6	)

Income (loss) before income taxes	$	4.2	$	(0.1	)	$	7.9	$	9.2	$	4.6	$	3.8	$	(3.0	)	$	(13.3	)	$	13.8		$	(0.4	)


Supplementary Data
Net tons sold		186.8		191.8			23.0		22.9		22.7		22.3		—			—			232.5			237.0
Depreciation, depletion and amortization	$	9.0	$	8.9		$	5.8	$	6.4	$	2.2	$	2.1		—			—		$	17.0		$	17.4
Capital expenditures		9.1		9.4			6.3		6.6		0.9		3.7		0.1			—			16.4			19.8


Six months ended June 30 In millions	Specialty Papers				Composite Fibers				Advanced Airlaid Materials				Other and Unallocated						Total
	2012		2011		2012		2011		2012		2011		2012			2011			2012			2011
Net sales	$	437.9	$	437.2	$	220.6	$	231.6	$	123.6	$	126.0		—			—		$	782.0		$	794.8
Energy and related sales, net		3.5		5.0		—		—		—		—		—			—			3.5			5.0

Total revenue		441.4		442.2		220.6		231.6		123.6		126.0		—			—			785.5			799.8
Cost of products sold		386.1		393.9		182.3		190.6		110.1		115.0		5.2			2.6			683.7			702.1

Gross profit		55.3		48.3		38.3		41.0		13.4		11.0		(5.2	)		(2.6	)		101.8			97.7
SG&A		27.4		26.2		19.5		19.4		5.0		5.5		8.3			12.0			60.1			63.1
Gains on dispositions of plant, equipment and timberlands, net		—		—		—		—		—		—		(7.0	)		(3.2	)		(7.0	)		(3.2	)

Total operating income (loss)		27.9		22.1		18.8		21.6		8.4		5.5		(6.5	)		(11.5	)		48.8			37.8
Other non-operating income (expense)		—		—		—		—		—		—		(7.9	)		(12.8	)		(7.9	)		(12.8	)

Income (loss) before income taxes	$	27.9	$	22.1	$	18.8	$	21.6	$	8.4	$	5.5	$	(14.4	)	$	(24.3	)	$	40.9		$	24.9


Supplementary Data
Net tons sold		382.6		390.5		45.7		45.8		45.1		43.8		—			—			473.3			480.2
Depreciation, depletion and amortization	$	17.9	$	17.5	$	11.8	$	12.5	$	4.3	$	4.3		—			—		$	34.1		$	34.3
Capital expenditures		13.7		13.3		15.3		10.5		1.4		4.1		0.1			—			30.6			27.9

The clerical accuracy of the amounts set forth above may be affected by, or the amounts may not agree to the consolidated financial statements included herein due to, rounding.

Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the business unit are allocated primarily based on an estimated utilization of support area services.

Management evaluates results of operations of the business units before pension income or expense, alternative fuel mixture and cellulosic biofuel credits, charges related to the Fox River environmental reserves, acquisition and integration related costs, restructuring 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 the Company’s Board of Directors.

- 18 -

16.

GUARANTOR FINANCIAL STATEMENTS

Our 7¹/₈% 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, 2012

In thousand

Parent
Company

Guarantors

Non
Guarantors

Adjustments/
Eliminations

Consolidated

Net sales

214,113

12,002

170,580

(12,002

)

384,693

Energy and related sales – net

1,630

—

1,630

Total revenues

215,743

12,002

170,580

(12,002

)

386,323

Costs of products sold

200,549

11,103

145,827

(12,034

)

345,445

Gross profit

15,194

899

24,753

40,878

Selling, general and administrative expenses

17,691

602

11,820

—

30,113

Gains on dispositions of plant, equipment and timberlands, net

(497

)

(6,451

)

(13

)

—

(6,961

)

Operating income

(2,000

)

6,748

12,946

17,726

Other non-operating income (expense)

Interest expense, net

(4,830

)

1,699

(925

)

—

(4,056

)

Other – net

13,611

285

388

(14,181

)

103

Total other non-operating income (expense)

8,781

1,984

(537

)

(14,181

)

(3,953

)

Income (loss) before income taxes

6,781

8,732

12,409

(14,149

)

13,773

Income tax provision (benefit)

(6,651

)

3,793

3,186

341

Net income (loss)

13,432

4,939

9,223

(14,162

)

13,432

Other comprehensive income (loss)

(10,619

)

—

(13,532

)

13,532

(10,619

)

Comprehensive income

2,813

4,939

(4,309

)

(630

)

2,813

Condensed Consolidating Statement of Income for the

three months ended June 30, 2011


In thousand	Parent Company			Guarantors		Non Guarantors			Adjustments/ Eliminations			Consolidated

Net sales	$	216,708		$	11,986	$	181,277		$	(11,986	)	$	397,985
Energy and related sales – net		2,060			—		—			—			2,060

Total revenues		218,768			11,986		181,277			(11,986	)		400,045
Costs of products sold		208,575			11,271		154,753			(12,054	)		362,545

Gross profit		10,193			715		26,524			68			37,500
Selling, general and administrative expenses		17,293			688		13,339			—			31,320
Gains on dispositions of plant, equipment and timberlands, net		(29	)		—		—			—			(29	)

Operating income		(7,071	)		27		13,185			68			6,209
Other non-operating income (expense)
Interest expense, net		(6,608	)		1,992		(1,695	)		—			(6,311	)
Other – net		12,863			34		(100	)		(13,072	)		(275	)

Total other non-operating income (expense)		6,255			2,026		(1,795	)		(13,072	)		(6,586	)

Income (loss) before income taxes		(816	)		2,053		11,390			(13,004	)		(377	)
Income tax provision (benefit)		(3,317	)		676		(257	)		20			(2,878	)

Net income (loss)		2,501			1,377		11,647			(13,024	)		2,501
Other comprehensive income (loss)		5,974			—		3,786			(3,786	)		5,974

Comprehensive income	$	8,475		$	1,377	$	15,433		$	(16,810	)	$	8,475

- 19 -

Condensed Consolidating Statement of Income for the

six months ended June 30, 2012

In thousands

Parent
Company

Guarantors

Non
Guarantors

Adjustments/
Eliminations

Consolidated

Net sales

437,915

27,372

344,141

(27,383

)

782,045

Energy and related sales – net

3,491

—

3,491

Total revenues

441,406

27,372

344,141

(27,383

)

785,536

Costs of products sold

393,425

25,051

292,568

(27,356

)

683,688

Gross profit

47,981

2,321

51,573

(27

)

101,848

Selling, general and administrative expenses

34,727

1,341

24,012

—

60,080

Gains on dispositions of plant, equipment and timberlands, net

(522

)

(6,451

)

(25

)

—

(6,998

)

Operating income

13,776

7,431

27,586

(27

)

48,766

Non-operating income (expense)

Interest expense, net

(9,786

)

3,341

(1,757

)

—

(8,202

)

Other – net

24,800

374

861

(25,736

)

299

Total other income (expense)

15,014

3,715

(896

)

(25,736

)

(7,903

)

Income (loss) before income taxes

28,790

11,146

26,690

(25,763

)

40,863

Income tax provision (benefit)

(3,520

)

4,886

7,198

(11

)

8,553

Net income (loss)

32,310

6,260

19,492

(25,752

)

32,310

Other comprehensive income

1,032

—

(4,898

)

4,898

1,032

Comprehensive income

33,342

6,260

14,594

(20,854

)

33,342

Condensed Consolidating Statement of Income for the

six months ended June 30, 2011


In thousand	Parent Company			Guarantors			Non Guarantors			Adjustments/ Eliminations			Consolidated

Net sales	$	437,162		$	24,818		$	357,594		$	(24,818	)	$	794,756
Energy and related sales – net		5,047			—			—			—			5,047

Total revenues		442,209			24,818			357,594			(24,818	)		799,803
Costs of products sold		399,537			22,742			304,855			(24,998	)		702,136

Gross profit		42,672			2,076			52,739			180			97,667
Selling, general and administrative expenses		36,011			1,247			25,832			—			63,090
Gains on dispositions of plant, equipment and timberlands, net		(42	)		(3,158	)		(4	)		—			(3,204	)

Operating income		6,703			3,987			26,911			180			37,781
Non-operating income (expense)
Interest expense, net		(9,937	)		3,872			(3,199	)		(3,300	)		(12,564	)
Other – net		23,389			121			(179	)		(23,599	)		(268	)

Total other income (expense)		13,452			3,993			(3,378	)		(26,899	)		(12,832	)

Income (loss) before income taxes		20,155			7,980			23,533			(26,719	)		24,949
Income tax provision (benefit)		228			3,132			2,836			(1,174	)		5,022

Net income (loss)		19,927			4,848			20,697			(25,545	)		19,927
Other comprehensive income		22,959			—			18,200			(18,200	)		22,959

Comprehensive income	$	42,886		$	4,848		$	38,897		$	(43,745	)	$	42,886

- 20 -

Condensed Consolidating Balance Sheet as of

June 30, 2012

In thousands

Parent
Company

Guarantors

Non
Guarantors

Adjustments/
Eliminations

Consolidated

Assets

Current assets

Cash and cash equivalents

1,436

3,424

18,577

—

23,437

Other current assets

264,584

422,835

228,525

(494,262

)

421,682

Plant, equipment and timberlands – net

240,564

6,179

348,312

—

595,055

Other assets

761,892

157,083

47,659

(852,024

)

114,610

Total assets

1,268,476

589,521

643,073

(1,346,286

)

1,154,784

Liabilities and Shareholders’ Equity

Current liabilities

390,880

53,140

282,452

(497,833

)

228,639

Long-term debt

218,000

—

218,000

Deferred income taxes

27,959

3,643

38,913

(16,187

)

54,328

Other long-term liabilities

115,596

10,048

9,049

3,083

137,776

Total liabilities

752,435

66,831

330,414

(510,937

)

638,743

Shareholders’ equity

516,041

522,690

312,659

(835,349

)

516,041

Total liabilities and shareholders’ equity

1,268,476

589,521

643,073

(1,346,286

)

1,154,784

Condensed Consolidating Balance Sheet as of

December 31, 2011


In thousands	Parent Company		Guarantors		Non Guarantors		Adjustments/ Eliminations			Consolidated

Assets
Current assets
Cash and cash equivalents	$	3,007	$	2,894	$	32,376	$	—		$	38,277
Other current assets		203,173		378,519		223,494		(421,050	)		384,136
Plant, equipment and timberlands – net		243,554		6,648		351,748		—			601,950
Other assets		736,733		175,945		48,610		(848,726	)		112,562

Total assets	$	1,186,467	$	564,006	$	656,228	$	(1,269,776	)	$	1,136,925


Liabilities and Shareholders’ Equity
Current liabilities	$	310,814	$	31,328	$	293,283	$	(424,185	)	$	211,240
Long-term debt		227,000		—		—		—			227,000
Deferred income taxes		42,252		4,079		39,511		(16,051	)		69,791
Other long-term liabilities		115,997		10,059		9,415		3,019			138,490

Total liabilities		696,063		45,466		342,209		(437,217	)		646,521
Shareholders’ equity		490,404		518,540		314,019		(832,559	)		490,404

Total liabilities and shareholders’ equity	$	1,186,467	$	564,006	$	656,228	$	(1,269,776	)	$	1,136,925

- 21 -

Condensed Consolidating Statement of Cash Flows for the six months ended June 30, 2012

In thousands

Parent

Company

Guarantors

Non

Guarantors

Adjustments/
Eliminations

Consolidated

Net cash provided (used) by

Operating activities

$3,464

$3,369

$21,699

$28,532

Investing activities

Purchase of plant, equipment and timberlands

(13,767)

(78)

(16,742)

(30,587)

Proceeds from disposal plant, equipment and timberlands

533

6,620

7,189

Repayments from (advances of) intercompany loans, net and other

5,662

(9,381)

(514)

4,233

Total investing activities

(7,572)

(2,839)

(17,220)

4,233

(23,398)

Financing activities

Net repayments of indebtedness

(9,000)

Payment of dividends to shareholders

(7,800)

Repurchases of common stock

(3,565)

(Repayments) borrowings of intercompany loans, net

22,300

(18,067)

(4,233)

Proceeds from stock options exercised and other

602

629

Total financing activities

2,537

(18,040)

(4,233)

(19,736)

Effect of exchange rate on cash

(238)

Net increase (decrease) in cash

(1,571)

530

(13,799)

(14,840)

Cash at the beginning of period

3,007

2,894

32,376

38,277

Cash at the end of period

$1,436

$3,424

$18,577

$23,437

Condensed Consolidating Statement of Cash Flows for the six months ended June 30, 2011


In thousands	Parent Company	Guarantors	Non Guarantors	Adjustments/ Eliminations	Consolidated
Net cash provided (used) by
Operating activities	$38,587	$2,969	$10,057	$(3,300)	$48,313
Investing activities
Purchase of plant, equipment and timberlands	(13,284)	(16)	(14,577)	–	(27,877)
Proceeds from disposals of plant, equipment and timberlands	49	3,373	18	–	3,440
Repayments of (advances from) intercompany loans, net	(3,586)	(2,156)	–	5,742	–
Total investing activities	(16,821)	1,201	(14,559)	5,742	(24,437)
Financing activities
Net repayments of indebtedness	–	–	(798)	–	(798)
Payment of dividends to shareholders	(8,396)	–	–	–	(8,396)
Repurchases of common stock	(4,369)	–	–	–	(4,369)
(Repayments) borrowings of intercompany loans, net	13,500	–	(7,758)	(5,742)	–
Payment of intercompany dividends	–	(3,300)	–	3,300	–
Proceeds from stock options exercised and other	117	–	–	–	117
Total financing activities	852	(3,300)	(8,556)	(2,442)	(13,446)
Effect of exchange rate on cash	–	–	2,078	–	2,078
Net increase (decrease) in cash	22,618	870	(10,980)	-	12,508
Cash at the beginning of period	61,953	91	33,744	–	95,788
Cash at the end of period	$84,571	$961	$22,764	$-	$108,296

- 22 -

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 2011 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, non-cash pension expense, 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, 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 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 gain or loss of significant customers and/or on-going viability of such customers;

viii.

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;

ix.	risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates;

x.	geopolitical events, including war and terrorism;

xi.	disruptions in production and/or increased costs due to labor disputes;

xii.	the impact of unfavorable outcomes of audits by various state, federal or international tax authorities;

xiii.

enactment of adverse state, federal or foreign tax or other legislation or changes in government policy or regulation;

xiv.	adverse results in litigation in the Fox River matter;

xv.	our ability to finance, consummate and integrate acquisitions; and

xvi.	the cost, and successful design and construction, of the Composite Fibers capacity expansion project.

We manufacture a wide array of specialty papers and fiber-based engineered materials. We manage our company along three business units:

Specialty Papers with revenue from the sale of carbonless papers and forms, book publishing, envelope & converting papers, and fiber-based engineered products;

ii)

Composite Fibers with revenue from the sale of single-serve coffee and tea filtration papers, metallized papers, composite laminates used for decorative furniture and flooring applications, and other technical specialty papers; 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, wipes, food pads, napkins, tablecloths, and baby wipes.

- 23 -

RESULTS OF OPERATIONS

Six months ended June 30, 2012 versus the Six months ended June 30, 2011

Overview For the first six months of 2012, net income was $32.3 million, or $0.74 per diluted share, compared with $19.9 million, or $0.43 per diluted share, in the same period of 2011.

Operationally, our results reflect $5.9 million of higher operating income from our business units primarily reflecting higher selling prices, efficient operations and continuous improvement initiatives.

Specialty Papers’ operating income increased $5.8 million to $27.9 million for the first six months of 2012. Volumes shipped declined 2.0%; however this unit’s profitability was favorably impacted by higher selling prices, the mix of products sold and efficient operations.

Our Composite Fibers business unit’s operating income declined $2.8 million to $18.8 million primarily due to lost production associated with two machine upgrades as well as the translation of foreign currencies. Volumes shipped were essentially unchanged in the comparison, although the demand trends were impacted by the uncertain European economic conditions.

Advanced Airlaid Materials’ operating income increased $2.9 million to $8.4 million, reflecting improvements in operating efficiency and lower raw material and energy costs.

Consolidated net income also benefited by $2.9 million, or $0.07 per diluted share, from lower interest expense as a result of the debt refinancing activities undertaken in the fourth quarter of 2011. Diluted shares outstanding for the first six months of 2012 declined by 3.0 million shares compared with the same period of 2011 primarily due to the 2011 share repurchase program.


	Six months ended June 30
In thousands, except per share	2012		2011
Net sales	$	782,045	$	794,756
Gross profit		101,848		97,667
Operating income		48,766		37,781
Net income		32,310		19,927
Earnings per diluted share		0.74		0.43

The consolidated results of operations summarized above include the following significant items:


In thousands, except per share	After-tax Gain (loss)			Diluted EPS
2012
Conversion of Alternative fuel mixture for Cellulosic biofuel credits	$	4,440		$	0.10
Timberland sales and related costs		3,696			0.08

2011
Timberlands sales and related costs	$	1,650		$	0.04
Acquisition and integration costs		(793	)		(0.02	)

The above items increased earnings by $8.1 million, or $0.18 per diluted share, in the first six months of 2012 and by $0.9 million, or $0.02 per diluted share, in the first six months of 2011.

During the second quarter of 2012, we recorded a $4.4 million, or $0.10 per diluted share, benefit in connection with our intention to convert alternative fuel mixture credits earned in 2009 for cellulosic biofuel credits.

The consolidated amounts reported for 2012 and 2011 also includes $3.7 million and $1.7 million, respectively, in after-tax gains from timberland sales.

- 24 -

Business Unit Performance


Six months ended June 30 In millions	Specialty Papers				Composite Fibers				Advanced Airlaid Materials				Other and Unallocated						Total
	2012		2011		2012		2011		2012		2011		2012			2011			2012			2011
Net sales	$	437.9	$	437.2	$	220.6	$	231.6	$	123.6	$	126.0		—			—		$	782.0		$	794.8
Energy and related sales, net		3.5		5.0		—		—		—		—		—			—			3.5			5.0

Total revenue		441.4		442.2		220.6		231.6		123.6		126.0		—			—			785.5			799.8
Cost of products sold		386.1		393.9		182.3		190.6		110.1		115.0		5.2			2.6			683.7			702.1

Gross profit		55.3		48.3		38.3		41.0		13.4		11.0		(5.2	)		(2.6	)		101.8			97.7
SG&A		27.4		26.2		19.5		19.4		5.0		5.5		8.3			12.0			60.1			63.1
Gains on dispositions of plant, equipment and timberlands, net		—		—		—		—		—		—		(7.0	)		(3.2	)		(7.0	)		(3.2	)

Total operating income (loss)		27.9		22.1		18.8		21.6		8.4		5.5		(6.5	)		(11.5	)		48.8			37.8
Other non-operating income (expense)		—		—		—		—		—		—		(7.9	)		(12.8	)		(7.9	)		(12.8	)

Income (loss) before income taxes	$	27.9	$	22.1	$	18.8	$	21.6	$	8.4	$	5.5	$	(14.4	)	$	(24.3	)	$	40.9		$	24.9


Supplementary Data
Net tons sold		382.6		390.5		45.7		45.8		45.1		43.8		—			—			473.3			480.2
Depreciation, depletion and amortization	$	17.9	$	17.5	$	11.8	$	12.5	$	4.3	$	4.3		—			—		$	34.1		$	34.3
Capital expenditures		13.7		13.3		15.3		10.5		1.4		4.1		0.1			—			30.6			27.9

The clerical accuracy of the amounts set forth above may be affected by, or the amounts may not agree to the consolidated financial statements included herein due to, rounding.

Sales and Costs of Products Sold


	Six months ended June 30
In thousands	2012			2011			Change
Net sales	$	782,045		$	794,756		$	(12,711	)
Energy and related sales – net		3,491			5,047			(1,556	)

Total revenues		785,536			799,803			(14,267	)
Costs of products sold		683,688			702,136			(18,448	)

Gross profit	$	101,848		$	97,667		$	4,181

Gross profit as a percent of Net sales		13.0	%		12.3	%

Net sales for the first six months of 2012 decreased by $12.7 million, or 1.6%, to $782.0 million. The translation of foreign currencies unfavorably impacted net sales by $18.5 million in the comparison more than offsetting a $6.8 million benefit from higher selling prices. Total volumes shipped declined 1.4%.

The following table sets forth the contribution to consolidated net sales by each business unit:


	Six months ended June 30
Percent of Total	2012			2011
Business Unit
Specialty Papers		56.0	%		55.0	%
Composite Fibers		28.2			29.1
Advanced Airlaid Material		15.8			15.9

Total		100.0	%		100.0	%

In the Specialty Papers business unit, net sales increased slightly primarily reflecting a $6.3 million benefit from higher selling prices and an improved mix of products sold, substantially offset by a 2.0% decline in volumes shipped.

Specialty Papers’ operating income in the first six months of 2012 was $5.8 million higher than the same period of 2011 reflecting the benefits from higher selling prices, a $0.5 million benefit from lower raw material costs, in addition to benefits from continuous improvement initiatives, production efficiencies, and cost control initiatives. These factors were partially offset by $1.5 million of lower energy and related sales. Results for the first six months of 2011 benefited by $2.8 million from an insurance recovery and the resolution of a tax audit.

We sell excess power generated by the Spring Grove, PA facility. The following table summarizes this activity for the first half of 2012 and 2011:


	Six months ended June 30
In thousands	2012			2011			Change
Energy sales	$	2,112		$	5,816		$	(3,704	)
Costs to produce		(1,805	)		(4,956	)		3,151

Net		307			860			(553	)
Renewable energy credits		3,184			4,187			(1,003	)

Total	$	3,491		$	5,047		$	(1,556	)

Renewable energy credits (“RECs”) represent sales of certified credits earned related to burning renewable sources of energy such as black liquor and wood waste.

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We sell RECs into an emerging and 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.

In Composite Fibers, net sales were $220.6 million, a decrease of $11.0 million, or 4.8%, primarily due to the translation of foreign currencies which unfavorably impacted the comparison by $12.7 million partially offset by a $0.7 million benefit from higher selling prices. Total volumes shipped were essentially unchanged in the comparison.

Composite Fibers’ operating income in the first half of 2012 decreased by $2.8 million, primarily due to $1.8 million from the translation of foreign currencies. In addition, unfavorable operating costs including higher energy costs, general inflation, and a $1.6 million impact from the completion of machine upgrades adversely affected the comparison.

In Advanced Airlaid Materials, net sales were $123.6 million and $126.0 million in the first half of 2012 and 2011, respectively. The total volumes shipped increased 3.0%; however, currency translation and average selling prices unfavorably affected the comparison by $5.7 million and $0.9 million, respectively.

Operating income in this business unit increased $2.9 million compared with the year ago quarter led by a $3.0 million benefit from lower raw material and energy costs in addition to continuous improvement initiatives including supply chain efficiencies, waste reduction and improved throughput, and benefits from a new festooner. The translation of foreign currencies negatively impacted results by $1.0 million.

Pension Expense The following table summarizes the amounts of pension expense recognized for the periods indicated:


	Six months ended June 30
In thousands	2012		2011		Change
Recorded as:
Costs of products sold	$	4,538	$	3,264	$	1,274
SG&A expense		1,179		771		408

Total	$	5,717	$	4,035	$	1,682

The amount of pension expense recognized each year is determined using various actuarial assumptions and certain other factors.

Other and Unallocated The amount of net expenses not allocated to a business unit and reported as “Other and Unallocated” in our table of Business Unit Performance totaled $6.5 million in the first half of 2012 compared with $11.5 million in the first half of 2011. The change was primarily due to a $3.8 million increase in gains on dispositions of plant, equipment and timberlands in the first half of 2012. Excluding these gains, other and unallocated net operating expenses decreased $1.2 million as lower legal and professional fees were partially offset by an increase in pension expense.

Non-operating income (expense) as presented in the Business Unit Performance table includes $8.4 million of interest expense for the first half of 2012, a decrease of $4.5 million in the comparison primarily due to the redemption in the fourth quarter of 2011 of $100.0 million of 7¹/₈% bonds.

Income taxes For the first six months of 2012, we recorded a provision for income taxes of $8.6 million on $40.9 million of pretax income, or 20.9%. The comparable amounts in the first half of 2011 were income tax expense $5.0 million on $24.9 million of pretax income, or 20.1%. Income taxes in the first half of 2012 benefited by $4.4 million from the conversion of alternative fuel mixture credits to cellulosic biofuel credits. The 2011 amounts include the benefit recorded in connection with the resolution of certain foreign tax audits, partially offset by adjustments to the carrying value of deferred taxes in connection with changes in state tax laws.

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 functional currency is the Peso. During the first six months of 2012, Euro functional currency operations generated approximately 25.9% of our sales and 24.7% of operating expenses and British Pound Sterling operations represented 7.5% of net sales and 7.3% 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.

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The table below summarizes the effect from foreign currency translation on the first six months of 2012 reported results compared to the first six months 2011:


In thousands	Six months ended June 30
	Favorable (unfavorable)
Net sales	$	(18,493	)
Costs of products sold		14,225
SG&A expenses		1,528
Income taxes and other		225

Net income	$	(2,515	)

The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2012 were the same as 2011. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.

Three months ended June 30, 2012 versus the Three months ended June 30, 2011

Overview Net income in the second quarter of 2012 totaled $13.4 million, or $0.31 per diluted share compared with $2.5 million or $0.05 per diluted share for the second quarter of 2011. The following table sets forth summarized results of operations:


	Three months ended June 30
In thousands, except per share	2012		2011
Net sales	$	384,693	$	397,985
Gross profit		40,878		37,500
Operating income		17,726		6,209
Net income		13,432		2,501
Earnings per diluted share		0.31		0.05

The consolidated results of operations for the three months ended June 30, 2012 and 2011 include the following significant items:


In thousands, except per share	After-tax Gain (loss)			Diluted EPS
2012
Conversion of Alternative fuel mixture for Cellulosic biofuel credits	$	4,440		$	0.10
Timberland sales and related costs		3,696			0.08

2011
Timberlands sales and related costs	$	(69	)		—
Acquisition and integration costs		(518	)		(0.01	)

The above items increased earnings in the second quarter of 2012 by $8.1 million, or $0.18 per diluted share and reduced earnings by $0.6 million, or $0.01 per diluted share, in the second quarter of 2011.

Business Unit Performance


Three months ended June 30 In millions	Specialty Papers					Composite Fibers				Advanced Airlaid Materials				Other and Unallocated						Total
	2012		2011			2012		2011		2012		2011		2012			2011			2012			2011
Net sales	$	214.1	$	216.7		$	108.6	$	116.4	$	62.0	$	64.9		—			—		$	384.7		$	398.0
Energy and related sales, net		1.6		2.1			—		—		—		—		—			—			1.6			2.1

Total revenue		215.7		218.8			108.6		116.4		62.0		64.9		—			—			386.3			400.0
Cost of products sold		197.5		206.5			90.7		97.6		55.0		58.3		2.2			0.1			345.4			362.5

Gross profit		18.3		12.2			17.9		18.8		6.9		6.6		(2.2	)		(0.1	)		40.9			37.5
SG&A		14.0		12.3			10.0		9.6		2.3		2.8		3.8			6.6			30.1			31.3
Gains on dispositions of plant, equipment and timberlands, net		—		—			—		—		—		—		(7.0	)		—			(7.0	)		—

Total operating income (loss)		4.2		(0.1	)		7.9		9.2		4.6		3.8		1.0			(6.7	)		17.7			6.2
Other non-operating income (expense)		—		—			—		—		—		—		(4.0	)		(6.6	)		(4.0	)		(6.6	)

Income (loss) before income taxes	$	4.2	$	(0.1	)	$	7.9	$	9.2	$	4.6	$	3.8	$	(3.0	)	$	(13.3	)	$	13.8		$	(0.4	)


Supplementary Data
Net tons sold		186.8		191.8			23.0		22.9		22.7		22.3		—			—			232.5			237.0
Depreciation, depletion and amortization	$	9.0	$	8.9		$	5.8	$	6.4	$	2.2	$	2.1		—			—		$	17.0		$	17.4
Capital expenditures		9.1		9.4			6.3		6.6		0.9		3.7		0.1			—			16.4			19.8

The clerical accuracy of the amounts set forth above may be affected by, or the amounts may not agree to the consolidated financial statements included herein due to, rounding.

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Sales and Costs of Products Sold


	Three months ended June 30
In thousands	2012			2011			Change
Net sales	$	384,693		$	397,985		$	(13,292	)
Energy and related sales – net		1,630			2,060			(430	)

Total revenues		386,323			400,045			(13,722	)
Costs of products sold		345,445			362,545			(17,100	)

Gross profit	$	40,878		$	37,500		$	3,378

Gross profit as a percent of Net sales		10.6	%		9.4	%

The following table sets forth the contribution to consolidated net sales by each business unit:


	Three months ended June 30
Percent of Total	2012			2011
Business Unit
Specialty Papers		55.7	%		54.5	%
Composite Fibers		28.2			29.2
Advanced Airlaid Material		16.1			16.3

Total		100.0	%		100.0	%

Net sales for the second quarter of 2012 were $384.7 million, a 3.3% decrease compared with the second quarter of 2011, primarily due to unfavorable translation of foreign currencies.

On a year-over-year basis, Specialty Papers’ net sales decreased 1.2% as shipping volumes declined 2.6% partially offset by a $2.6 million benefit from higher selling prices.

During the second quarters of 2012 and 2011, the Company completed annually scheduled maintenance outages at its Chillicothe, OH and Spring Grove, PA facilities. The outages adversely impacted operating income by $19.9 million in the second quarter of 2012, compared with $20.6 million in the same quarter a year ago.

Specialty Papers’ 2012 second quarter operating income increased by $4.3 million compared with the 2011 second quarter due to the benefit from higher selling prices, $2.0 million from lower raw material and energy prices, and $1.9 million from continuous improvement initiatives and production efficiencies. These factors were partially offset by $1.6 million of higher selling, general and administrative costs primarily related to corporate support services and incentive compensation.

The following table summarizes sales of excess power and related items for the second quarters of 2012 and 2011:


	Three months ended June 30
In thousands	2012			2011			Change
Energy sales	$	1,073		$	2,924		$	(1,851	)
Costs to produce		(795	)		(2,479	)		1,684

Net		278			445			(167	)
Renewable energy credits		1,352			1,615			(263	)

Total	$	1,630		$	2,060		$	(430	)

Composite Fibers’ net sales decreased $7.7 million, or 6.7%, primarily due to the translation of foreign currencies which unfavorably impacted the comparison by $9.4 million while selling prices were substantially unchanged.

Composite Fibers’ second-quarter 2012 operating income decreased by $1.3 million primarily due to the negative impact from foreign currency translation totaling $1.3 million. Operating results were also negatively impacted by an aggregate $0.9 million due to start-up costs associated with the completion of machine upgrades at two facilities as well as costs associated with intermittent, external power supply interruptions at one of its facilities. The business unit was able to offset the impact of these factors with benefits from ongoing continuous improvement initiatives.

On a year-over-year basis, Advanced Airlaid Materials’ net sales decreased $2.9 million or 4.5% primarily due to a $4.3 million unfavorable impact from the translation of foreign currencies. Volumes shipped increased 2.0% and average selling prices declined in the comparison.

Second-quarter 2012 operating income increased $0.9 million, or 23.8%, compared with the year ago quarter primarily due to a $2.0 million benefit from lower raw material and energy costs partially offset by $0.8 million from unfavorable foreign currency translations.

Pension Expense The following table summarizes the amounts of pension expense recognized for the periods indicated:


	Three months ended June 30
In thousands	2012		2011		Change
Recorded as:
Costs of products sold	$	1,915	$	1,189	$	726
SG&A expense		726		452		274

Total	$	2,641	$	1,641	$	1,000

The amount of pension expense or income recognized each year is determined using various actuarial assumptions and certain other factors.

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Other and Unallocated The amount of net expenses not allocated to a business unit and reported as “Other and Unallocated” in the Company’s table of Business Unit Performance, excluding gains from sales of plant, equipment and timberlands, totaled $6.0 million in the second quarter of 2012 compared with expenses of $6.7 million in the second quarter of 2011. The Company completed the sale of 3,345 acres of timberlands during the second quarter of 2012 and realized a $6.4 million pre-tax gain. Aggregate cash proceeds received totaled $6.6 million after closing costs. Interest expense declined $2.3 million in the year-over-year comparison primarily reflecting the redemption of $100.0 million of 7 ¹/₈ percent bonds at the end of 2011.

Income taxes In the second quarter of 2012, we recorded a $0.3 million provision for income taxes on pretax income of $13.8 million. The provision for income taxes includes a $4.4 million benefit from the conversion of alternative fuel mixture credits to cellulosic biofuel production credits. In the second quarter of 2011, we recorded an income tax benefit of $2.9 million on a pretax loss of $0.4 million. The benefit was primarily due to the resolution of certain foreign tax audits, partially offset by adjustments to the carrying value of deferred taxes in connection with changes in state tax laws.

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 2012, Euro functional currency operations generated approximately 26.1% of our sales and 24.6% of operating expenses and British Pound Sterling operations represented 8.0% of net sales and 7.7% 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 2012 reported results compared to the second quarter 2011:


In thousands	Three months ended June 30
	Favorable (unfavorable)
Net sales	$	(13,656	)
Costs of products sold		10,502
SG&A expenses		1,104
Income taxes and other		134

Net income	$	(1,917	)

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. In addition we have mandatory debt service requirements of both principal and interest. The following table summarizes cash flow information for each of the years presented:


	Six months ended June 30
In thousands	2012			2011
Cash and cash equivalents at beginning of period	$	38,277		$	95,788
Cash provided by (used for)
Operating activities		28,532			48,313
Investing activities		(23,398	)		(24,437	)
Financing activities		(19,736	)		(13,446	)
Effect of exchange rate changes on cash		(238	)		2,078

Net cash provided (used)		(14,840	)		12,508

Cash and cash equivalents at end of period	$	23,437		$	108,296

As of June 30, 2012, we had $23.4 million in cash and cash equivalents and $327.4 million available under our revolving credit agreement, which matures in November 2016.

Operating cash flow declined in the year-over-year comparison by $19.8 million. The decline was primarily due to $17.8 million of cellulosic biofuel credits in 2011. In 2012, there was no impact on operating cash flows from such credits.

Net cash used by investing activities totaled $23.4 million in the first six months of 2012 compared with $24.4 million in the first six months of 2011. Capital expenditures totaled $30.6 million in the first six months of 2012 compared with $27.9 million in the same period of 2011. Increased capital expenditures include $7.3 million for the Composite Fibers capacity expansion. Capital expenditures are expected to approximate $90 million to $95 million in 2012 including $30 million of the $50 million investment to expand capacity to serve Composite Fibers’ growth markets.

Net cash used by financing activities increased $6.3 million in the first half of 2012 compared with the same period of 2011, reflecting a $9.0 million reduction in borrowings under our revolving credit facility in the first six months of 2012.

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During the first six months of 2012 and 2011 cash dividends paid on common stock totaled $7.8 million and $8.4 million, respectively. Our Board of Directors determines what, if any, dividends will be paid to our shareholders. Dividend payment decisions are based upon then-existing factors and conditions and, therefore, historical trends of dividend payments are not necessarily indicative of future payments.

In May 2012, our Board of Directors authorized a two year share repurchase program for up to $25.0 million of our outstanding common stock. The timing and actual number of shares repurchased will depend on a variety of factors including the market price of our stock, regulatory, legal and contractual requirements, and other market factors. The program, which does not obligate us to repurchase any particular amount of common stock, may be modified or suspended at any time at the Board’s discretion. The following table summarizes share repurchases made under this program through June 30, 2012:


	shares		(thousands)
Authorized amount		n/a	$	25,000
Repurchases		172,157		(2,605	)

Remaining authorization			$	22,395

The following table sets forth our outstanding long-term indebtedness:


In thousands	Jun. 30, 2012		Dec. 31, 2011
Revolving credit facility, due Nov. 2016	$	18,000	$	27,000
7¹/₈% Notes, due May 2016		200,000		200,000

Total long-term debt		218,000		227,000
Less current portion		—		—

Long-term debt, net of current portion	$	218,000	$	227,000

Our revolving credit facility contains a number of customary compliance covenants. In addition, the 7¹/₈% 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, 2012, we met all of the requirements of our debt covenants. The significant terms of the debt instruments are more fully discussed in Item 1 – Financial Statements – Note 9.

We are subject to various federal, state and local laws and regulations which operate to protect the environment as well as human health and safety. We have, at various times, incurred significant cost to comply with these regulations, as new regulations are developed or regulatory priorities change. Currently, we anticipate that

we could incur material capital and operating costs to comply with several air quality regulations including the U.S. EPA Best Available Retrofit Technology rule (BART; otherwise known as the Regional Haze Rule) and the Boiler Maximum Achievable Control Technology rule (Boiler MACT). For example, on March 21, 2011, the U. S. Environmental Protection Agency issued new rules which could require process modifications and/or installation of air pollution controls on power boilers at two of our facilities. We are currently reviewing these rules, and challenges to them filed by others in the court system, to understand the effect they may have on our operations if we are required to comply with the rules in their current form. We are also evaluating options that may be available to us, such as reducing or curtailing boiler usage or modifying the types of boilers operated or fuel consumed. The cost of compliance is likely to be significant. Our initial estimates to implement viable options could result in additional capital spending in excess of $30 million; however, the amount ultimately incurred may be less depending on the outcome of challenges to current rules or on our successful implementation of appropriate available options. In addition, the timing of any additional capital spending is uncertain. Enactment of new environmental laws or regulations or changes in existing laws or regulations could significantly change our estimates.

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.

In connection with our intention to amend our federal income tax returns to convert alternative fuel mixture credits to cellulosic biofuel credits, we will be required to return to the Internal Revenue Service approximately $25 million during the third quarter of 2012. Based on current regulations and on our assumptions regarding future financial results, we expect to be able to utilize the cellulosic biofuel production credits to reduce future income tax payments, including $9.7 million in the second half of 2012. However, changes in regulations or actual financial performance could affect our ability to utilize such credits.

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.

Off-Balance-Sheet Arrangements As of June 30, 2012 and December 31, 2011, we had not entered into any off-balance-sheet arrangements. Financial derivative instruments, to which we are a party, and guarantees of

- 30 -

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 to increase by approximately 5% in the third quarter of 2012 compared with the second quarter of 2012. The impact of selling price increases announced earlier in the year is expected to slightly outpace overall input cost increases compared to the second quarter. During the second quarter the business completed its annual maintenance outages at a cost of $19.9 million. For the third quarter, maintenance spending is expected to be higher than normal quarterly rates due to ongoing initiatives to enhance this business unit’s machine reliability and operating efficiencies.

We anticipate Composite Fibers’ shipping volumes to be slightly higher in the third quarter compared to the second quarter while selling prices and input costs are expected to be generally in line with the second quarter of 2012 upgrades. In addition, start-up issues associated with two machine upgrades completed in the first half of 2012 are expected to be resolved during the third quarter cost control measures are offset to benefit results.

Shipping volumes for the Advanced Airlaid Materials business unit in the third quarter of 2012 are expected to be slightly higher than the second quarter of 2012, while selling prices and input costs are expected to be in-line with the second quarter. We expect ongoing benefits from continuous improvement initiatives.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS


	Year Ended December 31															At June 30, 2012
Dollars in thousands	2012			2013			2014			2015			2016			Carrying Value		Fair Value
Long-term debt
Average principal outstanding
At fixed interest rates – Bond	$	200,000		$	200,000		$	200,000		$	200,000		$	76,923		$	200,000	$	205,005
At variable interest rates		18,000			18,000			18,000			18,000			15,231			18,000		18,000

																$	218,000	$	223,005

Weighted-average interest rate
On fixed rate debt – Bond		7.13	%		7.13	%		7.13	%		7.13	%		7.13	%
On variable rate debt		2.00	%		2.00	%		2.00	%		2.00	%		2.00	%

The table above presents the average principal outstanding and related interest rates for the next five years for debt outstanding as of June 30, 2012. 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, 2012, we had long-term debt outstanding of $218.0 million, of which $18.0 million, or 8.3%, was at variable interest rates. Variable-rate debt outstanding represents borrowings under our revolving credit agreement that accrues interest based on one month LIBOR plus a margin. At June 30, 2012, the weighted-average interest rate paid was approximately 2.00%. A hypothetical 100 basis point increase or decrease in the interest rate on variable rate debt would increase or decrease annual interest expense by $0.2 million.

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 2012, Euro functional currency operations generated approximately 25.9% of our sales and 24.7% of operating expenses and British Pound Sterling operations represented 7.5% of net sales and 7.3% of operating expenses.

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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, 2012, have concluded that, as of the evaluation date, our disclosure controls and procedures are effective.

Changes in Internal Controls There were no changes in our internal control over financial reporting during the three months ended June 30, 2012, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II

ITEM 6.

EXHIBITS

The following exhibits are filed herewith or incorporated by reference as indicated.


31.1		Certification of Dante C. Parrini, 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 Dante C. Parrini, 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.

101.INS		XBRL Instance Document *

101.SCH		XBRL Taxonomy Extension Schema *

101.CAL		XBRL Extension Calculation Linkbase *

101.DEF		XBRL Extension Definition Linkbase *

101.LAB		XBRL Extension Label Linkbase *

101.PRE		XBRL Extension Presentation Linkbase *

*	Furnished herewith.

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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 1, 2012
	By	/s/ David C. Elder
		David C. Elder
		Vice President, Finance

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