FORM 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD from                      to                     
For the quarterly period ended June 30, 2009
Commission file number 1-3560
P. H. Glatfelter Company
(Exact name of registrant as specified in its charter)
     
Pennsylvania
(State or other jurisdiction of
incorporation or organization)
  23-0628360
(IRS Employer Identification No.)
     
96 South George Street, Suite 500
York, Pennsylvania 17401

(Address of principal executive offices)
 
(717) 225-4711
(Registrant’s telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes þ  No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No þ.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o    Accelerated filer þ    Non-accelerated filer   o
(Do not check if a smaller reporting company)
  Smaller reporting company o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No þ.
As of July 31, 2009, P. H. Glatfelter Company had 45,563,580 shares of common stock outstanding.
 
 

 


 

P. H. GLATFELTER COMPANY
REPORT ON FORM 10-Q
for the QUARTERLY PERIOD ENDED
JUNE 30, 2009
Table of Contents
                 
            Page  
PART I — FINANCIAL INFORMATION        
       
 
       
  Item 1          
            2  
            3  
            4  
            5  
       
 
       
  Item 2       22  
       
 
       
  Item 3       31  
       
 
       
  Item 4       31  
       
 
       
PART II — OTHER INFORMATION        
       
 
       
  Item 4       32  
       
 
       
  Item 6       32  
       
 
       
SIGNATURES     33  
 EX-3.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

 


Table of Contents

PART I
Item 1 — Financial Statements
P. H. GLATFELTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
In thousands, except per share   2009     2008     2009     2008  
 
Net sales
  $ 278,979     $ 320,224     $ 570,531     $ 625,723  
Energy sales — net
    2,131       2,743       4,062       4,727  
     
Total revenues
    281,110       322,967       574,593       630,450  
Costs of products sold
    222,109       290,569       472,278       553,794  
     
Gross profit
    59,001       32,398       102,315       76,656  
 
                               
Selling, general and administrative expenses
    26,548       25,377       51,061       49,512  
Reversal of shutdown and restructuring charges
          (856 )           (856 )
(Gains) losses on dispositions of plant, equipment and timberlands, net
    27       16       (672 )     (14,502 )
     
Operating income
    32,426       7,861       51,926       42,502  
Non-operating income (expense)
                               
Interest expense
    (5,144 )     (5,827 )     (10,270 )     (11,972 )
Interest income
    557       1,357       1,265       2,961  
Other — net
    (135 )     103       (118 )     171  
     
Total other income (expense)
    (4,722 )     (4,367 )     (9,123 )     (8,840 )
     
Income before income taxes
    27,704       3,494       42,803       33,662  
Income tax provision
    7,834       338       11,395       10,831  
     
Net income
  $ 19,870     $ 3,156     $ 31,408     $ 22,831  
     
 
                               
Earnings per share
                               
Basic
  $ 0.44     $ 0.07     $ 0.69       0.51  
Diluted
    0.43       0.07       0.69       0.50  
 
                               
Cash dividends declared per common share
  $ 0.09     $ 0.09     $ 0.18     $ 0.18  
 
                               
Weighted average shares outstanding
                               
Basic
    45,658       45,227       45,624       45,192  
Diluted
    45,698       45,666       45,654       45,594  
The accompanying notes are an integral part of these condensed consolidated financial statements.
GLATFELTER

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P. H. GLATFELTER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
                 
    June 30     December 31  
In thousands   2009     2008  
 
Assets
               
Current assets
               
Cash and cash equivalents
  $ 78,204     $ 32,234  
Accounts receivable net
    128,558       132,635  
Inventories
    177,857       193,354  
Prepaid expenses and other current assets
    37,403       33,596  
     
Total current assets
    422,022       391,819  
 
               
Plant, equipment and timberlands — net
    484,354       493,564  
 
               
Other assets
    133,460       171,926  
     
Total assets
  $ 1,039,836     $ 1,057,309  
     
 
               
Liabilities and Shareholders’ Equity
               
Current liabilities
               
Current portion of long-term debt
  $ 13,759     $ 13,759  
Short-term debt
    3,559       5,866  
Accounts payable
    58,598       59,750  
Dividends payable
    4,161       4,089  
Environmental liabilities
    3,224       5,734  
Other current liabilities
    94,091       100,904  
     
Total current liabilities
    177,392       190,102  
 
               
Long-term debt
    258,270       293,660  
 
               
Deferred income taxes
    82,904       90,158  
 
               
Other long-term liabilities
    140,531       140,682  
     
Total liabilities
    659,097       714,602  
 
               
Commitments and contingencies
           
 
               
Shareholders’ equity
               
Common stock
    544       544  
Capital in excess of par value
    46,325       45,806  
Retained earnings
    628,118       605,001  
Accumulated other comprehensive loss
    (163,468 )     (176,133 )
     
 
    511,519       475,218  
Less cost of common stock in treasury
    (130,780 )     (132,511 )
     
Total shareholders’ equity
    380,739       342,707  
     
Total liabilities and shareholders’ equity
  $ 1,039,836     $ 1,057,309  
     
The accompanying notes are an integral part of these condensed consolidated financial statements.
GLATFELTER

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P. H. GLATFELTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
                 
    Six months ended  
    June 30  
In thousands   2009     2008  
 
Operating activities
               
Net income
  $ 31,408     $ 22,831  
Adjustments to reconcile to net cash provided (used) by operations:
               
Depreciation, depletion and amortization
    29,050       30,666  
Pension expense (income)
    3,359       (7,965 )
Reversal of shutdown and restructuring charges
          (856 )
Deferred income tax provision
    (11,393 )     5,994  
Gains on dispositions of plant, equipment and timberlands, net
    (672 )     (14,502 )
Stock-based compensation
    2,294       2,367  
Cash used for environmental matters
    (7,217 )     (9,481 )
Change in operating assets and liabilities
               
Accounts receivable
    7,007       (20,682 )
Inventories
    18,391       (1,208 )
Prepaid and other current assets
    33       1,956  
Accounts payable
    (2,230 )     (2,898 )
Accruals and other current liabilities
    (6,769 )     (8,983 )
Other
    1,606       (286 )
     
Net cash provided (used) by operating activities
    64,867       (3,047 )
 
               
Investing activities
               
Expenditures for purchases of plant, equipment and timberlands
    (11,475 )     (25,407 )
Proceeds from disposals of plant, equipment and timberlands, net
    728       14,997  
Proceeds from timberland installment sale note receivable
    37,850        
     
Net cash provided (used) by investing activities
    27,103       (10,410 )
 
               
Financing activities
               
Net borrowings (repayments) of revolving credit facility
    4,606       (25,000 )
Net borrowings (repayments) of short term debt
    (2,191 )     3,295  
Repayment of Note payable, due March 2013
    (34,000 )      
Proceeds from Term Loan, due January 2013
          36,695  
Principal repayments — 2011 Term Loan
    (8,000 )     (6,000 )
Payment of dividends
    (8,272 )     (8,220 )
Proceeds from stock options exercised and other
          642  
     
Net cash (used) provided by financing activities
    (47,857 )     1,412  
 
               
Effect of exchange rate changes on cash
    1,857       823  
     
Net increase (decrease) in cash and cash equivalents
    45,970       (11,222 )
Cash and cash equivalents at the beginning of period
    32,234       29,833  
     
Cash and cash equivalents at the end of period
  $ 78,204     $ 18,611  
     
 
               
Supplemental cash flow information
               
Cash paid for
               
Interest
  $ 9,266     $ 11,309  
Income taxes
    13,046       16,110  
The accompanying notes are an integral part of these condensed consolidated financial statements.
GLATFELTER

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

1.   ORGANIZATION
     P. H. Glatfelter Company and subsidiaries (“Glatfelter”, “our”, “us”, or “we”) is a manufacturer of specialty papers and engineered products. Headquartered in York, Pennsylvania, our manufacturing facilities are located in Spring Grove, Pennsylvania; Chillicothe and Freemont, Ohio; Gloucestershire (Lydney), England; Caerphilly, Wales; Gernsbach, Germany; Scaër, France; and the Philippines. Our products are marketed throughout the United States and in over 85 other countries, either through wholesale paper merchants, brokers and agents or directly to customers.
2.   ACCOUNTING POLICIES
     Basis of Presentation The consolidated financial statements include the accounts of Glatfelter and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. We have evaluated all subsequent events through August 7, 2009, the date the financial statements were issued.
     We prepared these consolidated 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 unaudited interim consolidated financial statements reflect all normal, recurring adjustments needed to present fairly our results for the interim periods. When preparing these unaudited interim consolidated financial statements, we have assumed that you have read the audited consolidated financial statements included in our 2008 Annual Report on Form 10-K (“2008 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 consolidated financial statements are reasonable, based upon currently available facts and known circumstances, but recognizes that actual results may differ from those estimates and assumptions.
3.   RECENT PRONOUNCEMENTS
     On December 30, 2008, the FASB issued FSP FAS 132(R)-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”). This standard, which will be effective for us beginning December 31, 2009, will require more detailed disclosures about pension plan assets, our investment strategies, major categories of plan assets, concentrations of risk within the plan, and valuation techniques used to measure fair value. The adoption of FSP FAS 132(R)-1 is not expected to have a material impact on our consolidated financial position or results of operation.
4.   ALTERNATIVE FUEL MIXTURE CREDITS
     The U.S. Internal Revenue Code provides a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses. The credit, equal to $0.50 per gallon of alternative fuel contained in the mixture, is refundable to the taxpayer. We began mixing black liquor and diesel fuel in late February 2009 and filed an application to be registered as an alternative fuel mixer with the Internal Revenue Service in March 2009. On May 11, 2009, we were notified by the Internal Revenue Service that our application to be registered as an alternative fuel mixer was approved. We subsequently filed an excise tax refund claim for the alternative fuel mixture consumed at our Spring Grove, PA and Chillicothe, OH facilities during the period February 20, 2009 through May 17, 2009 (the “First Refund Claim”). The Company received a payment from the Internal Revenue Service (“IRS”) on June 30, 2009 in the amount of $29.7 million related to the First Refund Claim.
     In addition, for the period May 18, 2009 through June 30, 2009, we earned an additional $12.8 million of alternative fuel mixture credits for which a claim has yet to be submitted to the IRS. We intend to claim this amount as a non-taxable income tax credit in connection with the filing of our 2009 federal corporate income tax return.
     The accompanying consolidated statement of income for the three months and six months ended June 30, 2009 includes a credit of $40.8 million in cost of products sold representing eligible alternative fuel mixture credits earned through June 30, 2009, net of associated expenses. On an after-tax basis, we recognized $30.7 million of alternative fuel mixture credits during the second quarter of 2009.


GLATFELTER

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     According to the Internal Revenue Code, the tax credit is scheduled to expire on December 31, 2009. However, there can be no assurances that the incentive program for alternative fuel mixtures will continue in effect or that its provisions, including taxes applicable to the credits, will not be changed, or that we will be successful in receiving future credits under the program.
5.   GAIN ON DISPOSITIONS OF PLANT, EQUIPMENT AND TIMBERLANDS
     During the first six months of 2009 and 2008, we completed sales of timberlands as summarized by the following table:
                         
Dollars in thousands   Acres   Proceeds   Gain
 
2009
                       
Timberlands
    189     $ 728     $ 699  
Other
    n/a             (27 )
     
 
          $ 728     $ 672  
 
2008
                       
Timberlands
    3,595     $ 14,997     $ 14,603  
Other
    n/a             (101 )
     
 
          $ 14,997     $ 14,502  
 
6.   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   2009   2008
 
Net income
  $ 19,870     $ 3,156  
     
Weighted average common shares outstanding used in basic EPS
    45,658       45,227  
Common shares issuable upon exercise of dilutive stock options, restricted stock awards and performance awards
    40       439  
     
Weighted average common shares outstanding and common share equivalents used in diluted EPS
    45,698       45,666  
     
 
               
Earnings per share
               
Basic
  $ 0.44     $ 0.07  
Diluted
    0.43       0.07  
 
                 
    Six months ended June 30
In thousands, except per share   2009   2008
 
Net income
  $ 31,408     $ 22,831  
     
Weighted average common shares outstanding used in basic EPS
    45,624       45,192  
Common shares issuable upon exercise of dilutive stock options, restricted stock awards and performance awards
    30       402  
     
Weighted average common shares outstanding and common share equivalents used in diluted EPS
    45,654       45,594  
     
 
               
Earnings per share
               
Basic
  $ 0.69     $ 0.51  
Diluted
    0.69     0.50  
 
     Approximately 2,287,620 and 688,500 of potential common shares have been excluded from the computation of diluted earnings per share for the three month period ended June 30, 2009 and 2008, respectively, due to their anti-dilutive nature. The amounts excluded for the six month period ended June 30, 2009 and 2008, were 2,287,620 and 691,500, respectively.
7.   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, 2009 and December 31, 2008, we had $29.4 million and $29.2 million, respectively, of gross unrecognized tax benefits. As of June 30, 2009, if such benefits were to be recognized, approximately $25.8 million would be recorded as a component of income tax expense, thereby affecting our effective tax rate.


GLATFELTER

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     We, or one of our subsidiaries, file income tax returns with the United States Internal Revenue Service, as well as various state and foreign authorities. The following table summarizes tax years that remain subject to examination by major jurisdiction:
                 
    Open Tax Year
    Examination in   Not under
Jurisdiction   progress   examination
 
 
               
United States
               
Federal
    N/A     2007 and 2008
State
    2004       2003 — 2008
International
               
Germany (1)
    2003 — 2006     2007 and 2008
France
    N/A       2006 — 2008
United Kingdom
    N/A       2006 — 2008
Philippines
    2005 — 2007       2008
 

(1)   — includes provincial or similar local jurisdictions, as applicable
     The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Management performs a comprehensive review of its global tax positions on a quarterly basis and accrues amounts for uncertain tax positions. Based on these reviews and the result of discussions and resolutions of matters with certain tax authorities and the closure of tax years subject to tax audit, reserves are adjusted as necessary. However, future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are determined or resolved or as such statutes are closed. Due to potential for resolution of federal, state and foreign examinations, and the expiration of various statutes of limitation, it is reasonably possible our gross unrecognized tax benefits balance may change within the next twelve months by a range of $0.8 million to $8.5 million. Substantially all of this range relates to tax positions taken in the U.S. and in Germany.
     On July 14, 2009, we received notification that the IRS’ examination of our federal returns for the tax years 2004 through 2006 was completed. Accordingly, we expect to recognize in the third quarter of 2009 approximately $0.6 million, net, of previously unrecognized tax benefits related to uncertain tax positions for these periods.
     We recognize interest and penalties related to uncertain tax positions as income tax expense. Interest expense recognized in the second quarter of 2009 totaled $0.3 million. Accrued interest was $3.3 million and $2.6 million as of June 30, 2009 and December 31, 2008, respectively. We did not record any penalties associated with uncertain tax positions during the second quarters of 2009 or 2008.
8.   STOCK-BASED COMPENSATION
     On April 29, 2009, shareholders approved the P. H. Glatfelter Amended and Restated Long Term Incentive Plan (the “LTIP”) to authorize, among other things, the issuance of up to 5,500,000 shares of Glatfelter common stock to eligible participants. The LTIP provides for the issuance of restricted stock units, restricted stock awards, non-qualified stock options, performance shares, incentive stock options and performance units.
     Restricted Stock Units (“RSU”) Awards of RSU are made under our LTIP. The RSUs vest based solely on the passage of time on a graded scale over a three, four, and five-year period. The following table summarizes RSU activity during the first six months of 2009:
         
Units   2009  
 
Beginning balance
    486,988  
Granted
    205,360  
Forfeited
    (4,800 )
Restriction lapsed/shares delivered
    (5,747 )
 
     
Ending balance
    681,801  
 
     
 
Dollars in thousands
       
Compensation expense
  $ 727  
 


GLATFELTER

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     Stock Only Stock Appreciation Rights (SOSARs) Under terms of the SOSAR, the recipients receive the right to a payment in the form of shares of common stock equal to the difference, if any, in the fair market value of one share of common stock at the time of exercising the SOSAR and the strike price. The SOSARs vest ratably over a three year period and have a term of ten years. The following table sets forth information related to outstanding SOSARS.
                 
    2009  
            Wtd Avg  
            Exercise  
SOSARS   Shares     Price  
 
Outstanding at Jan. 1,
    718,810     $ 14.63  
Granted
    1,043,210       9.91  
Exercised
             
Canceled
             
 
             
Outstanding at June 30,
    1,762,020     $ 11.84  
 
               
Dollars in thousands
               
Compensation expense
  $ 697          
 
               
2009 SOSAR Grants
               
Weighted average grant date fair value per share
  $ 2.83          
Aggregate grant date fair value (in thousands)
  $ 2,957          
Black-Scholes Assumptions
               
Dividend yield
    3.63 %        
Risk free rate of return
    2.26 %        
Volatility
    40.59 %        
Expected life
    6 yrs          
 
9.   RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS
     The following table provides information with respect to the net periodic costs of our qualified and non-qualified pension plans and our post retirement medical benefit plans.
                 
    Three months ended
    June 30
In thousands   2009   2008
 
Pension Benefits
               
Service cost
  $ 2,067     $ 1,991  
Interest cost
    5,973       6,158  
Expected return on plan assets
    (9,936 )     (13,037 )
Amortization of prior service cost
    537       597  
Amortization of unrecognized loss
    3,382       95  
     
Net periodic benefit cost (income)
  $ 2,023     $ (4,196 )
     
 
               
Other Benefits
               
Service cost
  $ 653     $ 503  
Interest cost
    882       825  
Expected return on plan assets
    (122 )     (216 )
Amortization of prior service cost
    (309 )     (337 )
Amortization of unrecognized loss
    509       359  
     
Net periodic benefit cost
  $ 1,613     $ 1,134  
 
 
    Six months ended
    June 30
In thousands   2009   2008
 
Pension Benefits
               
Service cost
  $ 4,317     $ 4,528  
Interest cost
    11,721       11,749  
Expected return on plan assets
    (19,780 )     (25,632 )
Amortization of prior service cost
    1,074       1,197  
Amortization of unrecognized loss
    6,373       193  
     
Net periodic benefit cost (income)
  $ 3,705     $ (7,965 )
     
 
               
Other Benefits
               
Service cost
  $ 1,309     $ 1,061  
Interest cost
    1,756       1,576  
Expected return on plan assets
    (244 )     (417 )
Amortization of prior service cost
    (617 )     (596 )
Amortization of unrecognized loss
    1,037       622  
     
Net periodic benefit cost
  $ 3,241     $ 2,246  
 


GLATFELTER

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    June 30,   Dec. 31,
In millions   2009   2008
 
Pension Plan Assets
               
Fair value at end of period
  $ 416.9     $ 400.6  
 
     The fair value of the plans’ assets declined approximately 29% during 2008. As a result, during 2009 we expect to recognize net pension expense totaling approximately $7.3 million, on a pre-tax basis. As of December 31, 2008, approximately 63% of the pension plan assets were invested in publicly-traded equity securities and the balance was comprised of cash and fixed rate debt instruments.
     As of December 31, 2008, our pension plans were overfunded by $14.3 million. We do not expect to be required to make contributions to our qualified pension plans during 2009.
10.   COMPREHENSIVE INCOME
     The following table sets forth comprehensive income and its components:
                 
    Three months ended
    June 30
In thousands   2009   2008
 
Net income
  $ 19,870     $ 3,156  
Foreign currency translation adjustments
    19,522       (1,203 )
Amortization of unrecognized pension liability, net of tax
    2,320       450  
     
Comprehensive income
  $ 41,712     $ 2,403  
 
 
    Six months ended
    June 30
In thousands   2009   2008
 
Net income
  $ 31,408     $ 22,831  
Foreign currency translation adjustment
    8,053       14,841  
Amortization of unrecognized pension liability, net of tax
    4,612       904  
     
Comprehensive income
  $ 44,073     $ 38,576  
 
 
11.  INVENTORIES
 
     Inventories, net of reserves, were as follows:
 
    June 30,   Dec. 31,
In thousands   2009 2008
 
Raw materials
  $ 52,332     $ 49,083  
In-process and finished
    78,564       97,390  
Supplies
    46,961       46,881  
     
Total
  $ 177,857     $ 193,354  
 
12.   LONG-TERM DEBT
     Long-term debt is summarized as follows:
                   
    June 30,   Dec. 31,
In thousands   2009   2008
 
Revolving credit facility, due April 2011
  $ 13,334     $ 6,724  
Term Loan, due April 2011
    22,000       30,000  
Term Loan, due January 2013
    36,695       36,695  
Note payable, due March 2013
          34,000  
71/8% Notes, due May 2016
    200,000       200,000  
     
Total long-term debt
    272,029       307,419  
Less current portion
    (13,759 )     (13,759 )
     
Long-term debt, net of current portion
  $ 258,270     $ 293,660  
 
     On April 3, 2006, we, along with certain of our subsidiaries as borrowers and certain of our subsidiaries as guarantors, entered into a credit agreement with certain financial institutions. Pursuant to the credit agreement, we may borrow, repay and reborrow revolving credit loans in an aggregate principal amount not to exceed $200 million outstanding at any time. All borrowings under our credit facility are unsecured. The revolving credit commitment expires on April 2, 2011.
     In addition, on April 3, 2006, pursuant to the credit agreement, we received a term loan in the principal amount of $100 million. Quarterly repayments of principal outstanding under the term loan began on March 31, 2007 with the final principal payment due on April 2, 2011. In addition, if certain prepayment events occur, such as the incurrence of additional indebtedness in excess of $30.0 million in the aggregate, or the issuance of additional equity; we must repay a specified portion of the term loan within five days of the prepayment event.
     We have the right to prepay the term loan and revolving credit borrowings in whole or in part without premium or penalty, subject to timing conditions related to the interest rate option chosen.
     Borrowings under the credit agreement bear interest, at our option, at either (a) the bank’s base rate described in the credit agreement as the greater of the prime rate or the federal funds rate plus 50 basis points, or (b) the EURO rate based generally on the London Interbank Offer Rate, plus an applicable margin that varies from 67.5 basis points to 137.5 basis points according to our corporate credit rating determined by S&P and Moody’s.
     The credit agreement contains a number of customary covenants for financings of this type that, among other things, restrict our ability to dispose of or create liens on assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make acquisitions and engage in mergers or consolidations. We are also required to comply with specified financial tests and


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ratios, each as defined in the credit agreement, including a consolidated minimum net worth test and a maximum debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio. A breach of these requirements, of which we were not aware of any at June 30, 2009, would give rise to certain remedies under the credit agreement as amended, among which are the termination of the agreement and accelerated repayment of the outstanding borrowings plus accrued and unpaid interest under the credit facility.
     On April 28, 2006, we completed an offering of $200.0 million aggregate principal amount of our 71/8% Senior Notes due 2016. Net proceeds from this offering totaled approximately $196.4 million, after deducting the commissions and other fees and expenses relating to the offering. The proceeds were primarily used to redeem $150.0 million aggregate principal amount of our then outstanding 67/8% notes due July 2007, plus the payment of applicable redemption premium and accrued interest.
     Interest on these Senior Notes accrues at the rate of 71/8% per annum and is payable semiannually in arrears on May 1 and November 1.
     Prior to May 1, 2011, we may redeem all, but not less than all, of the notes at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, plus a ‘‘make-whole’’ premium. On or after May 1, 2011, we may redeem some or all of the notes at specified redemption prices.
     The 71/8% Senior Note agreement contains a “cross-default” clause that provides if there were to be an event of default under the credit agreement discussed earlier, we would also be in default under the 71/8% Senior Notes.
     In November 2007, we sold timberlands and as consideration received a $43.2 million, 20-year interest bearing note receivable from the timberland buyer (the “Glawson Note”). In January 2008, we monetized the Glawson Note. In this transaction, we entered into a new $36.7 million term loan agreement (the “2008 Term Loan”) with a financial institution. The 2008 Term Loan matures in January 2013 and bears interest at a six-month reserve adjusted LIBOR plus a margin rate of 1.20% per annum. This is secured by, among other assets, the Glawson Note together with a letter of credit issued in our favor by Royal Bank of Scotland, plc. backing the collectability of the Glawson Note.
     The Glawson Note is recorded in the accompanying consolidated balance sheets under the caption “Other long-term assets.”
     On March 21, 2003, we sold timberlands and received as consideration a $37.9 million 10-year interest bearing note receivable from the timberland buyer Sustainable Conservation, Inc. (the “Sustainable Note”). We pledged this note as collateral under a $34.0 million promissory note payable to a financial institution (the “Note Payable”). The Note Payable, as amended was scheduled to mature in March 2013 and was secured by a letter of credit issued in our favor by SunTrust Bank backing the collectability of the Sustainable Note.
     Under terms of each of the above transactions, minimum credit ratings must be maintained by the respective financial institution issuing the letters of credit. If, after 60 days from the date such credit rating falls below the specified minimum, an “event of default” is deemed to have occurred under the respective debt instrument owed by us to the financial institution unless actions are taken to cure such default. Potential remedial actions include: (i) amending the terms of the applicable debt instrument; (ii) a replacement of the letter of credit with an appropriately rated institution; or (iii) repaying the Note Payable.
     On April 23, 2009, the credit rating of the financial institution that issued the letter of credit behind the Sustainable Note fell below the required minimum level. To avoid the occurrence of an event of default associated with the credit downgrade of SunTrust, on June 10, 2009, we, Sustainable Conservation and SunTrust agreed to collapse the transaction, the effect of which was: i) the acceleration of the maturity date of the Sustainable Note to June 10, 2009; (ii) satisfaction in full of the $37.9 million Sustainable Note owed to us; and iii) the satisfaction in full of the $34 million indebtedness owed by us to SunTrust under the Term Loan Agreement. As a result, we received net proceeds of approximately $3.5 million, after transaction costs.
     P. H. Glatfelter Company guarantees debt obligations of all its subsidiaries. All such obligations are recorded in these consolidated financial statements.
     As of June 30, 2009 and December 31, 2008, we had $5.8 million and $12.1 million, respectively, of letters of credit issued to us by certain financial institutions. The letters of credit outstanding as of June 30, 2009, provide financial assurances primarily 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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13.   ASSET RETIREMENT OBLIGATION
     During 2008, we recorded $11.5 million, net present value, of asset retirement obligations related to the legal requirement to close several lagoons at our Spring Grove, PA facility. Historically, the lagoons were used to dispose of residual waste material. Closure of the lagoons, which is expected to occur over the next eight years, will be accomplished by filling the lagoons and installing a non-permeable liner which will be covered with soil to construct the required cap over the lagoons. The amount referred to above was accrued with a corresponding increase in the carrying value of the property, equipment and timberlands caption on the consolidated balance sheet. The amount capitalized is being depreciated as a charge to operations on the straight-line basis in relation to the expected closure period. The amount accrued represented the discounted present value of the expected cash flows to be incurred during the closure period. The present value of the discounted cash flows is being accreted as a charge to earnings on the effective interest method. Following is a summary of activity recorded during the first six months of 2009:
         
In thousands   Liability  
 
Balance at December 31, 2008
  $ 11,606  
Accretion
    322  
Payments
    (851 )
 
     
Balance at June 30, 2009
  $ 11,077  
 
     Of the total liability at June 30, 2009, $1.6 million is recorded in the accompanying consolidated balance sheet, under the caption “Other current liabilities” and $9.5 million is recorded under the caption “Other long-term liabilities.”
14.   FAIR VALUE OF FINANCIAL INSTRUMENTS
     The amounts reported on the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, other assets, and short-term debt approximate fair value. The following table sets forth carrying value and fair value of long-term debt:
                                   
    June 30, 2009     December 31, 2008
    Carrying   Fair     Carrying   Fair
In thousands   Value   Value     Value   Value
           
Fixed-rate Bonds
  $ 200,000     $ 163,404       $ 200,000     $ 167,727  
Fixed rate note payable
                  34,000       36,164  
Variable rate debt
    72,029       76,300         73,419       75,202  
           
Total
  $ 272,029     $ 239,704       $ 307,419     $ 279,093  
       
     We have $200.0 million of 71/8% fixed rate debt that is publicly registered, but is thinly traded, and therefore, market prices are not readily available. Accordingly, the values set forth above were derived from independent pricing service’s algorithm based on debt instruments with similar characteristics. The fair value of the
remaining debt instruments was estimated using discounted cash flow models based on interest rates obtained from readily available, independent sources.
15.   COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
     Fox River — Neenah, Wisconsin
     Background We have significant uncertainties associated with environmental claims arising out of the presence of polychlorinated biphenyls (“PCBs”) in sediments in the lower Fox River and in the Bay of Green Bay Wisconsin (“Site”). As part of the 1979 acquisition of the Bergstrom Paper Company we acquired a facility located at the Site (the “Neenah Facility”). In part, the Neenah Facility used wastepaper as a source of fiber. At no time did the Neenah Facility utilize PCBs in the pulp and paper making process, but discharges to the lower Fox River from the Neenah Facility which may have contained PCBs from wastepaper may have occurred from 1954 to the late 1970s. Any PCBs that our Neenah Facility discharged into the lower Fox River resulted from the presence of PCBs in NCR®-brand carbonless copy paper in the wastepaper that was recycled at the Neenah Facility. We closed the Neenah Facility in June 2006.
     The United States, the State of Wisconsin and various state and federal governmental agencies (collectively, the “Governments”), as well as private parties, have found PCBs in sediments on the bed of the Fox River, apparently from a number of sources at municipal and industrial facilities along the upstream and downstream portions of the Site. The Governments have identified manufacturing and recycling of NCR®-brand carbonless copy paper as the principal source of that contamination.
     The United States Environmental Protection Agency (“EPA”) has divided the lower Fox River and the Bay of Green Bay site into five “operable units” numbered from the most upstream (“OU1”) to the most downstream (“OU5”). OU1 is the reach from primarily Lake Winnebago to the dam at Appleton, and is comprised of Little Lake Butte des Morts. Our Neenah Facility discharged its wastewater into OU1. OU2 extends from the dam at Appleton to the dam at Little Rapids, OU3 from the dam at Little Rapids to the dam at De Pere, OU4 from the dam at De Pere to the mouth of the river, and OU5 from the mouth into the lower portion of Green Bay. The river extends 39 miles from the upstream end of OU1 to the downstream end of OU4.
     Our liabilities, if any, for this contamination primarily arise under the federal Comprehensive Environmental, Response, Compensation and Liability Act (“CERCLA” or “Superfund”). The Governments have sought to recover “response actions” or “response


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costs,” which are the costs of studying and cleaning up contamination, from various “responsible parties.” In addition, various natural resource trustee agencies of the United States, the States of Wisconsin and Michigan, and several Indian Tribes (the “Natural Resources Trustees” or “Trustees”) have sought to recover natural resource damages (“NRDs”), including natural resource damage assessment costs. Parties that have incurred response costs or NRDs either voluntarily or in response to the governments’ and Trustees’ demands may have an opportunity to seek contribution or other recovery of some or all of those costs from other parties who are jointly and severally responsible under Superfund for those costs. Therefore, as we incur costs, we also acquire a claim against other parties who may not have paid their equitable share of those costs. As others incur costs, they acquire a claim against us to the extent that they claim that we have not paid our equitable share of the total. Any party that resolves its liability to the United States or a state in a judicially or administratively approved settlement agreement obtains protection from contribution claims for matters addressed in the settlement.
     For these reasons, all of the parties who are potentially responsible (“PRPs”) under CERCLA for response costs or NRDs have exposure to liability for: (a) the cost of past response actions taken by anyone else, (b) the cost of past NRD payments or restoration projects incurred by anyone else, (c) the cost of response actions to be taken in the future, and (d) NRDs. All of this exposure is subject to substantial defenses, including, for example, that the PRP is not liable or not jointly and severally liable for any particular cost or damage, that the cost or damage is not recoverable under CERCLA or any other law, or that the recovery is barred by the passage of time. In addition, a party that has incurred or committed to incur costs or has paid NRDs may be able to claim credit for that cost or payment in any equitable allocation of response costs or NRDs in any action for reallocation of costs.
     Cleanup Decisions. Our liability exposure depends importantly on the decisions made by EPA and the Wisconsin Department of Natural Resources (“WDNR”) as to how the Site will be cleaned up, and consequently the costs and timing of those response actions. The nature of the response actions has been highly controversial. EPA issued a record of decision (“ROD”) selecting response actions for OU1 and OU2 in December 2002. EPA issued a separate ROD selecting response actions for OU3, OU4, and OU5 in March 2004.
     As the result of continuing discussions with parties other than us, as well as our experience in OU1 (discussed below), EPA amended the ROD for OU2-5 in June 2007 to rely less on dredging and more on capping and covering of sediments containing PCBs. The governments project that these methods will allow certain costs to be lower for this portion of the cleanup. In June 2008, EPA amended the ROD for OU1.
     NRD Assessment. The Natural Resources Trustees have engaged in work to assess NRDs at and arising from the Site. However, they have not completed a required NRD Assessment under the pertinent regulations. The Trustees’ estimate of NRDs ranges from $176 million to $333 million, some of which has already been satisfied. With specific respect to NRD claims, we contended that the Trustees’ claims are barred by the applicable 3 year statute of limitations.
     Past Costs Demand. By letter dated January 15, 2009, EPA demanded that we and six other parties reimburse EPA for approximately $17.6 million in costs that EPA claims it incurred as necessary costs of response not subject to any other agreement in this matter. The supporting documentation provided by EPA has not yet allowed us fully to evaluate this demand, and, accordingly we are unable to reasonably estimate our potential liability.
     Work Under Agreements, Orders, and Decrees. As we mention above, our exposure to liability depends on the amount of work done, costs incurred, and damages paid both by us and by others. The procedural context of the work done, costs incurred, and damages paid also matter.
     Since 1991, the Governments and various groups of potentially responsible parties, including us, have entered into a series of agreements, orders, and decrees under which we and others have performed work, incurred costs, or paid damages in connection with the Site. As a result, some parties have contributed or performed substantial work at the Site and at least one party, Fort Howard Corporation (whose successor is either the Fort James Operating Company or Georgia Pacific Corporation) has resolved its NRD liability at the Site.


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     Notably, in April 2004, the United States District Court for the Eastern District of Wisconsin entered a consent decree (“OU1 Consent Decree”) in United States v. P.H. Glatfelter Co., No. 2:03-cv-949, under which we and WTM I Corp. have been implementing the remedy in OU1, dividing costs evenly in addition to a $7 million contribution from Menasha Corp. and a $10 million contribution that the United States contributed from a separate settlement in United States v. Appleton Papers Inc., No. 2:01-cv-816, obligating NCR and Appleton Papers to contribute to certain NRD projects. In June 2008, the parties entered into an amendment to the OU1 Consent Decree (“Amended OU1 Consent Decree”). The amendment allows for implementation of the amended remedy for OU1. It also commits us and WTM I to implement that remedy without a cost limitation on that commitment. The court entered the Amended OU1 Consent Decree in August 2008.
     Further, in November 2007, EPA issued an administrative order for remedial action (“UAO”) to Appleton Papers Inc., CBC Coating, Inc. (formerly known as Riverside Paper Corporation), Georgia-Pacific Consumer Products, L.P. (formerly known as Fort James Operating Company), Menasha Corporation, NCR Corporation, us, U.S. Paper Mills Corp., and WTM I Company directing those respondents to implement the amended remedy in OU2—5. Shortly following issuance of the UAO, Appleton Papers Inc. and NCR Corp. commenced litigation against us and others, as described below. Accordingly, we have no vehicle for complying with the UAO’s overall requirements other than answering a judgment in the litigation, and we have so informed EPA. However, in February 2009, the EPA sent a demand to each of the respondents on the UAO other than WTM I demanding payment of the government’s oversight costs under the UAO for the period from November 2007 through August 2008. In February 2009, we notified the EPA that we believed that its demand could prove distracting to litigation commenced by Appleton Papers and NCR against the other UAO respondents. In order to remove this distraction, and in the spirit of cooperation, we would satisfy the EPA’s demand, an amount which was insignificant, in full. We have paid this amount.
     Cost estimates. Estimates of the Site remediation change over time as we, or others, gain additional experience. In addition, disagreement exists over the likely costs for some of this work. The Governments estimate that the total cost of implementing the amended remedy in OU1 will be approximately $102 million. Because we have completed a significant amount of work in this portion of the river, we believe the costs of completing the remedial actions specified in the amended ROD can be completed for this amount. The cost of implementing the remedy set forth in the amended ROD
for OU2-5 (the downstream portions of the Site) is estimated by the Governments to total between $270 million and $499 million, reflecting a contingency factor of plus or minus 30%. However, based on independent estimates commissioned by various potentially responsible parties, we believe the actual costs to be incurred to implement the remedy of OU2 — 5 will exceed the Government’s estimate by a significant amount.
     NRDs. The Trustees claim that we are jointly and severally responsible for NRDs with a value between $176 million and $333 million. We deny (a) liability for most of these NRDs, (b) that if anyone is liable, that we are jointly and severally liable for the full amount; and (c) that the Trustees can pursue this claim at this late date as the limitations period for NRD claims is three years from discovery.
     Allocation. Since 1991, various potentially responsible parties have, without success, attempted to agree on a binding, final, allocation of costs and damages among themselves. All costs that they have incurred to date have been incurred individually, or under interim, nonbinding allocations. However, the consent decree in United States v. P. H. Glatfelter Co. affords us and WTM I contribution protection for claims seeking to reallocate costs of implementing the OU1 remedy, and Fort James Operating Co. (now Georgia-Pacific) has certain rights under its consent decree. Otherwise, the parties have not litigated their internal allocation with us.
     NCR and Appleton Papers Inc. have commenced litigation in the United States District Court for the Eastern District of Wisconsin captioned Appleton Papers Inc. v. George A. Whiting Paper Co., No. 2:08-cv-16, seeking to reallocate costs and damages allegedly incurred or paid or to be incurred or paid by NCR or Appleton Papers (the “Whiting Litigation”). They have to date joined a number of defendants, dismissed some of those, filed a parallel action, and consolidated the two cases. At present, the case involves allocation claims among the two plaintiffs and 28 defendants: us, George A. Whiting Paper Co., Menasha Corporation, Green Bay Packaging Inc., International Paper Company, Leicht Transfer & Storage Company, Neenah Foundry Company, Newpage Wisconsin System Inc., The Procter & Gamble Paper Products Company, Wisconsin Public Service Corp., the Cities of Appleton, De Pere, and Green Bay, Brown County, Green Bay Metropolitan Sewerage District, Heart of the Valley Metropolitan Sewerage District, Neenah-Menasha Sewerage Commission, WTM I Company, U.S. Paper Mills Corporation, Georgia-Pacific Consumer Products LP, Georgia-Pacific LLC, Fort James Operating Company, CBC Coating Company, Inc., Fort James Corporation, Kimberly-Clark Corporation, LaFarge North America Inc., Union Pacific Railroad Company, and the United States Army Corps of


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Engineers. As the result of certain third-party claims, federal agencies other than the Corps of Engineers are also involved in this allocation. That litigation may be expected to result in an allocation of responsibility, at least as among these parties.
     On July 16, 2009, the United States lodged a proposed de minimis party consent decree (‘Consent Decree”) with the court asking that the Court approve a settlement with eleven defendants to resolve their liability for this site. The eleven settling defendants are: George A. Whiting Paper Co.; Green Bay Metropolitan Sewerage District; Green Bay Packaging, Inc.; Heart of the Valley Metropolitan Sewerage District; International Paper Co.; LaFarge North America Inc.; Leicht Transfer and Storage Co.; Neenah Foundry Co.; Procter & Gamble Paper Products Co.; Union Pacific Railroad Co.; and Wisconsin Public Service Corp. (collectively, the Settling Defendants”). The Consent Decree reflects the conclusion of the United States and the State of Wisconsin that each of the Settling Defendants qualifies for treatment as a de minimis party under CERCLA. The Consent Decree requires the Settling Defendants to make a collective payment of $1,875,000. If approved by the Court, the Consent Decree would remove these parties from the litigation.
     The court has entered a case management order segmenting the Whiting Litigation for discovery and trial. The first phase of the Whiting Litigation, addressing a single set of issues, is currently scheduled for trial beginning in December 2009. Resolution of those issues could adjudicate the entire case or it may resolve those issues sufficiently that the parties can then settle their remaining disputes. However, there can be no assurance that the first phase of the Whiting Litigation will result, directly or indirectly, in a judgment or settlement disposing of all claims among the parties.
     We contend that we are not jointly and severally liable for costs or damages arising from the presence of PCBs downstream of OU1. In addition, we contend that NCR or other sources of NCR®-brand carbonless copy paper that our Neenah Mill recycled bear most of the responsibility for costs and damages arising from the presence of PCBs in OU1. Other parties disagree.
     To date we have spent nearly $50 million implementing the remedy in OU1, and under the various agreements, orders, and decrees under which we and others have performed work, incurred costs, or paid damages in connection with the Site.
     Reserves for the Fox River Site. As of June 30, 2009, our reserve for our claimed liability at the Fox River, including our remediation obligations at OU1, our claimed liability for the remediation of OU2-5, our claimed liability for NRDs associated with PCB contamination at the Site and all pending, threatened or asserted and unasserted claims against us relating to PCB contamination at the Site totaled $18.4 million. No additional amounts were accrued during the first half of 2009 and 2008. Of our total reserve for the Fox River, $3.2 million is recorded in the accompanying consolidated balance sheets under the caption “Environmental liabilities” and the remaining $15.2 million is recorded under the caption “Other long term liabilities.”
     Under the OU1 Consent Decree which was signed in 2004, we contributed $27.0 million to past and future costs and NRDs. We later contributed $6.0 million under an agreed supplement to the OU1 Consent Decree and have since contributed an additional $9.5 million under the Amended Consent Decree. This amount includes $6.5 million contributed in January 2009. WTM I has contributed parallel amounts. These funds are placed into an escrow account from which we and WTM I pay for work on the project. As required by the Amended Consent Decree, in a quarterly report submitted to EPA in November 2008, we and WTM I concluded that the amounts in the escrow account would be sufficient to pay for the estimated cost of the work at OU1, including operation, maintenance, and other post-construction expenses. However, there can be no assurance that these amounts will in fact suffice. WTM I has filed a bankruptcy petition in the Bankruptcy Court in Richmond. There can be no assurance should additional amounts be required to complete the project that WTM I will be able to fulfill its obligation to pay half the additional cost.
     We believe that we have strong defenses to liability for remediation of OU2-5 including the existence of ample data that indicates that PCBs did not leave OU1 in concentrations that could have caused or contributed to the need for cleanup in OU2-5. Others, including the EPA and other PRPs, disagree with us and, as a result, the EPA has issued a UAO to us and to others to perform the OU2-5 work. NCR and Appleton Papers have recently commenced the Whiting Litigation and have joined us and others as defendants. Additional litigation associated with the remediation of the Site is likely. As illustrated by the Whiting Litigation, we believe that there are additional potentially responsible parties other than the PRPs who were named in the UAO or who have been joined in the Whiting Litigation, including the owners of public wastewater treatment facilities who discharged PCB-contaminated wastewater to the Fox River and entities providing PCB-containing wastepaper to each of the recycling mills.


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     Even if we are not successful in establishing that we are not liable for the remediation of OU2-5, we do not believe that we would be allocated a significant percentage share of liability in any equitable allocation of the remediation costs and other potential damages associated with OU2–5. The accompanying consolidated financial statements do not include reserves for defense costs for the Whiting Litigation or any future defense costs related to our involvement at the Fox River which could be significant.
     In setting our reserve for the Fox River, we have assessed our legal defenses, including our defenses to the allegations made in the Whiting Litigation, and assumed that we will not bear the entire cost of remediation and damages to the exclusion of other known PRPs at the Site who are also potentially jointly and severally liable. The existence and ability of other PRPs to participate has also been taken into account in setting our reserve, and is generally based on our evaluation of recent publicly available financial information on each PRP, and any known insurance, indemnity or cost sharing agreements between PRPs and third parties. In addition, our assessment is based upon the magnitude, nature, location and circumstances associated with the various discharges of PCBs to the river and the relationship of those discharges to identified contamination. We will continue to evaluate our exposure and the level of our reserves, including, but not limited to, our potential share of the costs and NRDs, if any, associated with the Fox River site.
     Other than with respect to the Amended OU1 Consent Decree, the amount and timing of future expenditures for environmental compliance, cleanup, remediation and personal injury, NRDs and property damage liabilities cannot be ascertained with any certainty due to, among other things, the unknown extent and nature of any contamination, the response actions that may ultimately be required, the availability of remediation equipment, and landfill space, and the number and financial resources of any other PRPs.
     Other Information The Wisconsin DNR and FWS have each published studies, the latter in draft form, estimating the amount of PCBs discharged by each identified PRP to the lower Fox River and the Bay of Green Bay. These reports estimate the Neenah Facility’s share of the volumetric discharge to be as high as 27%. We do not believe the volumetric estimates used in these studies are accurate because (a) the studies themselves disclose that they are not accurate and (b) the volumetric estimates contained in the studies are based on assumptions that are unsupported by existing data on the Site. We believe that our volumetric contribution is significantly lower than the estimates set forth in these studies. Further, we do not believe that a volumetric allocation would constitute an equitable allocation of the potential liability for the contamination. Other factors, such as the location of contamination, the location of discharge, and a party’s role in causing discharge, must be considered in order for the allocation to be equitable.
     We previously entered into interim cost-sharing agreements with four of the other PRPs, which provided for those PRPs to share certain costs relating to scientific studies of PCBs discharged at the Site (“Interim Cost Sharing Agreements”). These interim cost-sharing agreements do not establish the final allocation of remediation costs incurred at the Site. Based upon our evaluation of the volume, nature and location of the various discharges of PCBs at the Site and the relationship of those discharges to identified contamination, we believe our allocable share of liability at the Site is less than our share of costs under the Interim Cost Sharing Agreements.
     While the Amended OU1 Consent Decree provides a negotiated framework for resolving both our and WTM I’s liability for the remediation of OU1, it does not resolve our exposure at the Site. The OU1 Consent Decree does not address response costs necessary to remediate the remainder of the Site and only addresses NRDs and claims for reimbursement of government expenses to a limited extent. Because CERCLA imposes strict joint and several liability, uncertainty persists regarding our exposure with respect to the remainder of the Fox River site. In addition, as mentioned previously, EPA has issued a UAO to us and others calling for further work in OU2-5, and Appleton Papers and NCR have commenced the Whiting Litigation that may become more complicated and involve additional parties. We cannot predict the outcome of the Whiting Litigation or any other litigation or regulatory actions related to this matter.


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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 a period that is currently undeterminable but that could range beyond 15 years. We believe that the likelihood of an outcome in the upper end of the monetary range is significantly less than other possible outcomes within the range and that the possibility of an outcome in excess of the upper end of the monetary range is remote.
     All remedial work in OU-1 has been completed and we and WTMI are in the process of decommissioning and performing the restoration of the staging area from which the remediation activity occurred, and completing all required reports for the project. We believe that these activities can be completed with the funds that remain in the OU1 Escrow Account.
     Summary Our current assessment is that we will be able to manage this environmental matter without a long-term, material adverse impact on the Company. This matter could, however, at any particular time or for any particular year or years, have a material adverse effect on our consolidated financial position, liquidity and/or results of operations or could result in a default under our loan covenants. Moreover, there can be no assurance that our reserves will be adequate to provide for future obligations related to this matter, that our share of costs and/or damages will not exceed our available resources, or that such obligations will not have a long-term, material adverse effect on our consolidated financial position, liquidity or results of operations. If we are not successful in managing the completion of the remaining remedial work at OU1 and/or should the United States seek to enforce the UAO for OU2-5 against us which requires us either to perform directly or to contribute significant amounts towards the performance of that work, those developments could have a material adverse effect on our consolidated financial position, liquidity and results of operations and might result in a default under our loan covenants.


GLATFELTER

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16. SEGMENT INFORMATION
     The following table sets forth financial and other information by business unit for the periods indicated:
                                                                         
Business Unit Performance   For the three months ended June 30
Dollars in thousands   Specialty Papers   Composite Fibers   Other and Unallocated   Total
    2009     2008   2009     2008   2009     2008   2009     2008
                             
Net sales
  $ 184,364       $ 207,296     $ 94,615       $ 112,928     $       $     $ 278,979       $ 320,224  
Energy sales, net
    2,131         2,743                                   2,131         2,743  
                             
Total revenue
    186,495         210,039       94,615         112,928                     281,110         322,967  
Cost of products sold
    178,817         196,948       82,730         96,462       (39,438 )       (2,841 )     222,109         290,569  
                             
Gross profit
    7,678         13,091       11,885         16,466       39,438         2,841       59,001         32,398  
SG&A
    14,085         13,772       8,299         9,689       4,164         1,916       26,548         25,377  
Reversal of shutdown and restructuring charges
                                        (856 )             (856 )
Losses on dispositions of plant, equipment and timberlands
                                27         16       27         16  
                             
Total operating income (loss)
    (6,407 )       (681 )     3,586         6,777       35,247         1,765       32,426         7,861  
Nonoperating income (expense)
                                (4,722 )       (4,367 )     (4,722 )       (4,367 )
                             
Income (loss) before income taxes
  $ (6,407 )     $ (681 )   $ 3,586       $ 6,777     $ 30,525       $ (2,602 )     27,704       $ 3,494  
                             
 
                                                                       
Supplementary Data
                                                                       
Net tons sold
    171,293         182,700       20,073         22,356                     191,366         205,056  
Depreciation, depletion and amortization
  $ 8,882       $ 8,980     $ 5,740       $ 6,968     $       $     $ 14,622       $ 15,948  
Capital expenditures
    3,436         7,751       2,705         8,399       100               6,241         16,150  
                         
                                                                         
Business Unit Performance   For the six months ended June 30
Dollars in thousands   Specialty Papers   Composite Fibers   Other and Unallocated   Total
    2009     2008   2009     2008   2009     2008   2009     2008
                             
Net sales
  $ 383,971       $ 408,242     $ 186,560       $ 217,480             $ 1     $ 570,531       $ 625,723  
Energy sales, net
    4,062         4,727                                   4,062         4,727  
                             
Total revenue
    388,033         412,969       186,560         217,480               1       574,593         630,450  
Cost of products sold
    350,147         374,224       160,376         184,858       (38,245 )       (5,288 )     472,278         553,794  
                             
Gross profit
    37,886         38,745       26,184         32,622       38,245         5,289       102,315         76,656  
SG&A
    25,925         27,979       17,122         19,709       8,014         1,824       51,061         49,512  
Reversal of shutdown and restructuring charges
                                        (856 )             (856 )
Gains on dispositions of plant, equipment and timberlands
                                (672 )       (14,502 )     (672 )       (14,502 )
                             
Total operating income
    11,961         10,766       9,062         12,913       30,903         18,823       51,926         42,502  
Nonoperating income (expense)
                                (9,123 )       (8,840 )     (9,123 )       (8,840 )
                             
Income (loss) before income taxes
  $ 11,961       $ 10,766     $ 9,062       $ 12,913     $ 21,780       $ 9,983     $ 42,803       $ 33,662  
                             
 
                                                                       
Supplementary Data
                                                                       
Net tons sold
    356,354         364,911       39,264         43,695                     395,618         408,606  
Depreciation, depletion and amortization
  $ 17,749       $ 17,612     $ 11,301       $ 13,054     $       $     $ 29,050       $ 30,666  
Capital expenditures
    7,018         10,446       4,357         14,961       100               11,475         25,407  
                         
     Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the business unit are primarily allocated based on an estimated utilization of support area services or are included in “Other and Unallocated” in the table above.
     Management evaluates results of operations of the business units before pension income or expense, alternative fuel mixture credits, charges related to the Fox River environmental reserves, 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 papermaking 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 the Company’s performance is evaluated internally and by the Company’s Board of Directors.
GLATFELTER

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17. 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, GLT International Finance, LLC, Glatfelter Holdings, LLC and Glatfelter Holdings II, 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, 2009

                                         
    Parent           Non   Adjustments/    
In thousands   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
Net sales
  $ 184,364     $ 10,766     $ 94,615     $ (10,766 )   $ 278,979  
Energy sales — net
    2,131                         2,131  
     
Total revenues
    186,495       10,766       94,615       (10,766 )     281,110  
Costs of products sold
    140,350       9,733       82,789       (10,763 )     222,109  
     
Gross profit
    46,145       1,033       11,826       (3 )     59,001  
Selling, general and administrative expenses
    17,495       529       8,524             26,548  
Losses on dispositions of plant, equipment and timberlands, net
    27                         27  
     
Operating income
    28,623       504       3,302       (3 )     32,426  
Non-operating income (expense)
                                       
Interest expense
    (4,384 )           (760 )           (5,144 )
Interest income
    (263 )     1,298       (28 )     (450 )     557  
Other income (expense) — net
    (1,852     1,403       (234 )     548     (135 )
     
Total other income (expense)
    (6,499     2,701       (1,022 )     98     (4,722 )
     
Income (loss) before income taxes
    22,124       3,205       2,280       95     27,704  
Income tax provision (benefit)
    2,254       1,215       4,535       (170 )     7,834  
     
Net income (loss)
  $ 19,870     $ 1,990     $ (2,255 )   $ 265   $ 19,870  
     
 
Condensed Consolidating Statement of Income for the
three months ended June 30, 2008
 
    Parent           Non   Adjustments/    
In thousands   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
Net sales
  $ 207,296     $ 10,566     $ 112,928     $ (10,566 )   $ 320,224  
Energy sales — net
    2,743                         2,743  
     
Total revenues
    210,039       10,566       112,928       (10,566 )     322,967  
Costs of products sold
    194,143       10,637       96,577       (10,788 )     290,569  
     
Gross profit
    15,896       (71 )     16,351       222       32,398  
Selling, general and administrative expenses
    14,853       554       9,970             25,377  
Reversal of shutdown and restructuring charges
    (856 )                       (856 )
Losses on dispositions of plant, equipment and timberlands, net
    2       14                   16  
     
Operating income
    1,897       (639 )     6,381       222       7,861  
Non-operating income (expense)
                                       
Interest expense
    (4,983 )           (844 )           (5,827 )
Interest income
    (1,239 )     3,143       (547 )           1,357  
Other income (expense) — net
    5,989       181       (208 )     (5,859 )     103  
     
Total other income (expense)
    (233 )     3,324       (1,599 )     (5,859 )     (4,367 )
     
Income (loss) before income taxes
    1,664       2,685       4,782       (5,637 )     3,494  
Income tax provision (benefit)
    (1,492 )     998       740       92       338  
     
Net income (loss)
  $ 3,156     $ 1,687     $ 4,042     $ (5,729 )   $ 3,156  
     
GLATFELTER

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Condensed Consolidating Statement of Income for the six
months ended June 30, 2009
                                         
    Parent           Non   Adjustments/    
In thousands   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
Net sales
  $ 383,971     $ 22,489     $ 186,560     $ (22,489 )   $ 570,531  
Energy sales — net
    4,062                         4,062  
     
Total revenues
    388,033       22,489       186,560       (22,489 )     574,593  
Costs of products sold
    313,984       20,448       160,493       (22,647 )     472,278  
     
Gross profit
    74,049       2,041       26,067       158       102,315  
Selling, general and administrative expenses
    32,324       1,073       17,664             51,061  
(Gains) Losses on dispositions of plant, equipment and timberlands, net
    28       (700 )                 (672 )
     
Operating income
    41,697       1,668       8,403       158       51,926  
Non-operating income (expense)
                                       
Interest expense
    (8,719 )     (6 )     (1,545 )           (10,270 )
Interest income
    (485 )     2,908       (108 )     (1,050 )     1,265  
Other income (expense) — net
    7,125       1,230       (179 )     (8,294 )     (118 )
     
Total other income (expense)
    (2,079 )     4,132       (1,832 )     (9,344 )     (9,123 )
     
Income (loss) before income taxes
    39,618       5,800       6,571       (9,186 )     42,803  
Income tax provision (benefit)
    8,210       2,239       1,279       (333 )     11,395  
     
Net income (loss)
  $ 31,408     $ 3,561     $ 5,292     $ (8,853 )   $ 31,408  
     
Condensed Consolidating Statement of Income for the six
months ended June 30, 2008
                                         
    Parent           Non   Adjustments/    
In thousands   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
Net sales
  $ 408,243     $ 21,993     $ 217,480     $ (21,993 )   $ 625,723  
Energy sales — net
    4,727                         4,727  
     
Total revenues
    412,970       21,993       217,480       (21,993 )     630,450  
Costs of products sold
    369,727       21,214       185,683       (22,830 )     553,794  
     
Gross profit
    43,243       779       31,797       837       76,656  
Selling, general and administrative expenses
    27,893       1,017       20,602             49,512  
Reversal of shutdown and restructuring charges
    (856 )                       (856 )
(Gains) Losses on dispositions of plant, equipment and timberlands, net
    127       (14,604 )     (25 )           (14,502 )
     
Operating income
    16,079       14,366       11,220       837       42,502  
Non-operating income (expense)
                                       
Interest expense
    (10,289 )     (11 )     (1,672 )           (11,972 )
Interest income
    19,346       6,293       (1,078 )     (21,600 )     2,961  
Other income (expense) — net
    6,359       559       (395 )     (6,352 )     171  
     
Total other income (expense)
    15,416       6,841       (3,145 )     (27,952 )     (8,840 )
     
Income (loss) before income taxes
    31,495       21,207       8,075       (27,115 )     33,662  
Income tax provision (benefit)
    8,664       8,353       1,844       (8,030 )     10,831  
     
Net income (loss)
  $ 22,831     $ 12,854     $ 6,231     $ (19,085 )   $ 22,831  
     
GLATFELTER

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Condensed Consolidating Balance Sheet as of June 30, 2009

                                         
    Parent                   Adjustments/    
In thousands   Company   Guarantors   Non Guarantors   Eliminations   Consolidated
 
Assets
                                       
Current assets
                                       
Cash and cash equivalents
  $ 43,364     $ 285     $ 34,555     $     $ 78,204  
Other current assets
    284,180       287,547       222,732       (450,641 )     343,818  
Plant, equipment and timberlands — net
    266,932       7,046       210,376             484,354  
Other assets
    515,187       176,006       73,426       (631,159 )     133,460  
     
Total assets
  $ 1,109,663     $ 470,884     $ 541,089     $ (1,081,800 )   $ 1,039,836  
     
 
                                       
Liabilities and Shareholders’ Equity
                                       
Current liabilities
  $ 353,610     $ 45,985     $ 217,687     $ (439,890 )   $ 177,392  
Long-term debt
    214,946             43,324             258,270  
Deferred income taxes
    53,975       15,717       27,013       (13,801 )     82,904  
Other long-term liabilities
    106,393       13,928       9,225       10,985       140,531  
     
Total liabilities
    728,924       75,630       297,249       (442,706 )     659,097  
Shareholders’ equity
    380,739       395,254       243,840       (639,094 )     380,739  
     
Total liabilities and shareholders’ equity
  $ 1,109,663     $ 470,884     $ 541,089     $ (1,081,800 )   $ 1,039,836  
     
 
Condensed Consolidating Balance Sheet as of December 31, 2008
 
    Parent           Non   Adjustments/    
In thousands   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
Assets
                                       
Current assets
                                       
Cash and cash equivalents
  $ 8,860     $ 756     $ 22,618     $     $ 32,234  
Other current assets
    266,899       256,834       88,288       (252,436 )     359,585  
Plant, equipment and timberlands — net
    277,215       7,470       208,879             493,564  
Other assets
    510,144       175,927       (29,767 )     (484,378 )     171,926  
     
Total assets
  $ 1,063,118     $ 440,987     $ 290,018     $ (736,814 )   $ 1,057,309  
     
 
                                       
Liabilities and Shareholders’ Equity
                                       
Current liabilities
  $ 336,182     $ 17,072     $ 85,668     $ (248,820 )   $ 190,102  
Long-term debt
    222,965             70,695             293,660  
Deferred income taxes
    53,976       24,615       26,272       (14,705 )     90,158  
Other long-term liabilities
    107,288       13,838       8,941       10,615       140,682  
     
Total liabilities
    720,411       55,525       191,576       (252,910 )     714,602  
Shareholders’ equity
    342,707       385,462       98,442       (483,904 )     342,707  
     
Total liabilities and shareholders’ equity
  $ 1,063,118     $ 440,987     $ 290,018     $ (736,814 )   $ 1,057,309  
     
GLATFELTER

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Condensed Consolidating Statement of Cash Flows for
the six months ended June 30, 2009
                                         
    Parent           Non   Adjustments/    
In thousands   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
Net cash provided (used) by
                                       
Operating activities
  $ 57,559     $ 3,131     $ 5,227     $ (1,050 )   $ 64,867  
Investing activities
                                       
Purchase of plant, equipment and timberlands
    (7,063 )     (55 )     (4,357 )           (11,475 )
Proceeds from disposal plant, equipment and timberlands
          728                   728  
Proceeds from installment note receivable
                37,850             37,850  
Repayments from (advances of) intercompany loans, net
    1,109       1,000             (2,109 )      
     
Total investing activities
    (5,954 )     1,673       33,493       (2,109 )     27,103  
Financing activities
                                       
Net (repayments of) proceeds from indebtedness
    (8,829 )           (30,756 )           (39,585 )
Payment of dividends to shareholders
    (8,272 )                       (8,272 )
(Repayments) borrowings of intercompany loans, net
          (4,225 )     2,116              
Payment of intercompany dividends
          (1,050 )           1,050        
     
Total financing activities
    (17,101 )     (5,275 )     (28,640 )     3,159       (47,857 )
Effect of exchange rate on cash
                1,857             1,857  
     
Net increase (decrease) in cash
    34,504       (471 )     11,937             45,970  
Cash at the beginning of period
    8,860       736       22,618             32,234  
     
Cash at the end of period
  $ 43,364     $ 285     $ 34,555     $     $ 78,204  
     
Condensed Consolidating Statement of Cash Flows for
the six months ended June 30, 2008
                                         
    Parent           Non   Adjustments/    
In thousands   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
Net cash provided (used) by
                                       
Operating activities
  $ 14,431     $ 2,200     $ 1,922     $ (21,600 )   $ (3,047 )
Investing activities
                                       
Purchase of plant, equipment and timberlands
    (9,308 )     (1,139 )     (14,960 )           (25,407 )
Proceeds from disposal plant, equipment and timberlands
    1       14,996                   14,997  
Repayments from (advances of) intercompany loans, net
    4,000       (16,778 )     (9,158 )     21,936        
Return (contributions) of intercompany capital, net
          26,597             (26,597 )      
     
Total investing activities
    (5,307 )     23,676       (24,118 )     (4,661 )     (10,410 )
Financing activities
                                       
Net (repayments of) proceeds from indebtedness
    (30,001 )           38,991             8,990  
Payment of dividends to shareholders
    (8,220 )                       (8,220 )
(Repayments) borrowings of intercompany loans, net
    28,536       (4,000 )     (2,600 )     (21,936 )      
Return of intercompany capital, net
                (26,597 )     26,597        
Payment of intercompany dividends
          (21,600 )           21,600        
Proceeds from stock options exercised
    642                         642  
     
Total financing activities
    (9,043 )     (25,600 )     9,794       26,261       1,412  
Effect of exchange rate on cash
    (92 )           915             823  
     
Net increase (decrease) in cash
    (11 )     276       (11,487 )           (11,222 )
Cash at the beginning of period
    6,693       162       22,978             29,833  
     
Cash at the end of period
  $ 6,682     $ 438     $ 11,491     $     $ 18,611  
     
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Glatfelter’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2008 Annual Report on Form 10-K.
     Forward-Looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future consolidated financial position or results of operations, made in this Report on Form 10-Q are forward looking. We use words such as “anticipates”, “believes”, “expects”, “future”, “intends” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from such expectations. The following discussion includes forward-looking statements regarding expectations of, among others, net sales, costs of products sold, environmental costs, capital expenditures and liquidity, all of which are inherently difficult to predict. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Accordingly, we identify the following important factors, among others, which could cause our results to differ from any results that might be projected, forecasted or estimated in any such forward-looking statements:
i.   variations in demand, including the impact of any unplanned market-related downtime, for, or the pricing of, our products;
 
ii.   changes in the cost or availability of raw materials we use, in particular pulpwood, market pulp, pulp substitutes, caustic soda and abaca fiber;
 
iii.   changes in energy-related costs and commodity raw materials with an energy component;
iv.   our ability to develop new, high value-added Specialty Papers and Composite Fibers products;
 
v.   our ability to renew our electricity sales agreement at acceptable margins in relation to our current coal supply contract;
 
vi.   the impact of competition, changes in industry paper production capacity, including the construction of new mills, the closing of mills and incremental changes due to capital expenditures or productivity increases;
 
vii.   the impairment of financial institutions as a result of the current credit market conditions and any resulting impact on us, our customers or our vendors;
 
viii.   the gain or loss of significant customers and/or on-going viability of such customers;
 
ix.   cost and other effects of environmental compliance, cleanup, damages, remediation or restoration, or personal injury or property damages related thereto, such as the costs of natural resource restoration or damages related to the presence of polychlorinated biphenyls (“PCBs”) in the lower Fox River on which our former Neenah mill was located;
 
x.   risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates;
 
xi.   geopolitical events, including war and terrorism;
 
xii.   enactment of adverse state, federal or foreign tax or other legislation or changes in government policy or regulation;
 
xiii.   adverse results in litigation; and
 
xiv.   our ability to finance, consummate and integrate future acquisitions.


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     Introduction We manufacture, both domestically and internationally, a wide array of specialty papers and engineered products. Substantially all of our revenue is earned from the sale of our products to customers in numerous markets, including book publishing, envelope & converting, carbonless papers and forms, food & beverage filter papers, decorative laminates for furniture and flooring, metallized papers and other highly technical niche markets.
     Overview Our results of operations for the first six months of 2009 when compared with the same period of 2008 were significantly and adversely impacted by the weak global economic conditions. Overall volumes shipped by Specialty Papers declined 2.3% and Composite Fibers declined 10.1% in the period-to-period comparison. As a result of the soft demand for most of our products and our efforts to reduce inventory, we incurred significant market-related downtime at many of our facilities which adversely affected results of operations. However, we generated $64.9 million of cash from operations, including alternative fuel mixture credits, by reducing inventories, controlling costs and deferring discretionary capital spending. During the first half of 2009, we registered two of our facilities with the U.S. Internal Revenue Service as alternative fuel mixers based on their use of black liquor as an alternative fuel source. Our results of operations in the first half of 2009 included, on a pre-tax basis, $40.8 million of alternative fuel mixture credits, of which $29.7 million was received in cash. We intend to realize remaining credits in the form of non-taxable income tax credits.
     Specialty Papers’ operating income totaled $12.0 million and $10.8 million for the first half of 2009 and 2008, respectively. The weak economic environment adversely affected demand in all markets served by Specialty Papers. As a result of weak demand and our efforts to reduce inventory, during the second quarter of 2009, this unit incurred market related downtime totaling 14,400 tons of paper, or 8% of its total quarterly capacity. We reduced Specialty Papers’ inventories by 14.4% during the second quarter of 2009.
     Our Composite Fibers business unit’s operating income declined to $9.1 million from $12.9 million in the first half of 2008. Volumes shipped during the first half of 2009 declined 10.1% compared to 2008 as a result of the weak economic environment and our customers’ actions to reduce their inventory levels. Demand for tea and coffee filter papers, this unit’s largest product line, declined by 1.4% primarily due to weak order patterns and customers’ inventory destocking primarily in Russia, Eastern Europe and
other related regions. As a result of weak demand and our inventory reduction efforts, during the second quarter we incurred unscheduled downtime totaling 3,380 tons of paper, or 22% of the unit’s total quarterly capacity. We reduced inventory in this business unit by 12.2% during the second quarter of 2009.
     In addition, our after-tax consolidated results of operations were adversely affected by $13.8 million of lower gains in 2009 from the sale of timberlands. We also recorded $3.7 million of pension expense in the first six months of 2009 compared with pension income of $8.0 million in the year-earlier quarter.
RESULTS OF OPERATIONS
Six Months Ended June 30, 2009 versus the
Six Months Ended June 30, 2008
     The following table sets forth summarized results of operations:
                   
    Six months ended June 30
In thousands, except per share   2009     2008
       
Net sales
  $ 570,531       $ 625,723  
Gross profit
    102,315         76,656  
Operating income
    51,926         42,502  
Net income
    31,408         22,831  
Diluted earnings per share
    0.69         0.50  
       
     The consolidated results of operations for the six months ended June 30, 2009 include the following significant items:
                 
    After-tax   Diluted EPS
In thousands, except per share   Gain (loss)        
 
2009
               
Alternative fuel mixing credit
  $ 30,418     $ 0.67  
 
               
2008
               
Timberland sales
  $ 8,656     $ 0.19  
Reversal of shutdown and restructuring charges
    532       0.01  
Acquisition integration related costs
    (588 )     (0.01 )
     The above items increased earnings by $30.4 million, or $0.67 per diluted share, in the first six months of 2009. In the comparable period a year ago, the above items increased earnings by $8.6 million, or $0.19 per diluted share.


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    For the six months ended June 30
Dollars In thousands   Specialty Papers   Composite Fibers   Other and Unallocated   Total
    2009     2008   2009     2008   2009     2008   2009     2008
                             
Net sales
  $ 383,971       $ 408,242     $ 186,560       $ 217,480             $ 1     $ 570,531       $ 625,723  
Energy sales, net
    4,062         4,727                                   4,062         4,727  
                             
Total revenue
    388,033         412,969       186,560         217,480               1       574,593         630,450  
Cost of products sold
    350,147         374,224       160,376         184,858       (38,245 )       (5,288 )     472,278         553,794  
                             
Gross profit
    37,886         38,745       26,184         32,622       38,245         5,289       102,315         76,656  
SG&A
    25,925         27,979       17,122         19,709       8,014         1,824       51,061         49,512  
Shutdown and restructuring charges
                                        (856 )             (856 )
Gains on dispositions of plant, equipment and timberlands
                                (672 )       (14,502 )     (672 )       (14,502 )
                             
Total operating income
    11,961         10,766       9,062         12,913       30,903         18,823       51,926         42,502  
Nonoperating income (expense)
                                  (9,123 )       (8,840 )     (9,123 )       (8,840 )
                             
Income (loss) before income taxes
  $ 11,961       $ 10,766     $ 9,062       $ 12,913     $ 21,780       $ 9,983     $ 42,803       $ 33,662  
                             
 
                                                                       
Supplementary Data
                                                                       
Net tons sold
    356,354         364,911       39,264         43,695                     395,618         408,606  
Depreciation, depletion and amortization
  $ 17,749       $ 17,612     $ 11,301       $ 13,054     $       $     $ 29,050       $ 30,666  
Capital expenditures
    7,018         10,446       4,357         14,961       100               11,475         25,407  
                             

Business Units Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the business unit are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the table above.
     Management evaluates results of operations of the business units before pension income or expense, alternative fuel mixture credits, charges related to the Fox River environmental reserves, 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 papermaking 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 the Company’s performance is evaluated internally and by the Company’s Board of Directors.
     Sales and Costs of Products Sold
                           
    Six months ended    
    June 30    
In thousands   2009     2008   Change
       
Net sales
  $ 570,531       $ 625,723     $ (55,192 )
Energy sales — net
    4,062         4,727       (665 )
           
Total revenues
    574,593         630,450       (55,857 )
Costs of products sold
    472,278 (1)       553,794       (81,516 )
           
Gross profit
  $ 102,315       $ 76,656     $ 25,659  
           
Gross profit as a percent of Net sales
    17.9 %       12.3 %        
       
 
(1)   Includes $40.8 million of alternative fuel mixture credits, net of related expenses.
     The following table sets forth the contribution to consolidated net sales by each business unit:
                   
    Percent of Total
    2009     2008
       
Business Unit
                 
Specialty Papers
    67.3 %       65.2 %
Composite Fibers
    32.7         34.8  
           
Total
    100.0 %       100.0 %
       
     Net sales totaled $570.5 million for the first six months of 2009, a decrease of $55.2 million, or 8.8%, compared to the same period a year ago.
     In the Specialty Papers business unit, net sales for the first six months of 2009 decreased $24.3 million to $384.0 million. Operating income totaled $12.0 million, an increase of $1.2 million, or 11.1%, over the same period a year ago. The improved operating income is primarily due to increases in average selling prices outpacing increases in input costs and improved operating efficiencies. Higher average selling prices contributed $7.6 million of the increase in operating profit. These price increases were


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partially offset by lower volumes and expected mix changes between carbonless papers and uncoated papers. In addition, this business unit’s results were adversely impacted by $2.0 million of higher input costs, largely driven by caustic soda and coal. Unplanned downtime at the Spring Grove and Chillicothe facilities further reduced operating results by approximately $8.5 million in the first six months of 2009 compared to the same period of 2008.
     In Composite Fibers, net sales were $186.6 million for the first six months of 2009, a decline of $30.9 million from the year-earlier period. Operating income declined by $3.9 million in the comparison to $9.1 million. Total volumes shipped by this business unit declined 10.1% led by lower shipments of composite laminates and metallized products, which declined 26.3% and 9.3%, respectively, and, to a lesser extent, a 1.4% decline in food & beverage paper product shipments. The translation of foreign currencies adversely impacted net sales by $26.6 million; however, higher average selling prices contributed $6.8 million.
     Energy and raw material costs in the Composite Fibers business unit were $8.2 million higher in the first six months of 2009 than in the same period a year ago. Market-related downtime adversely impacted operating results by $5.3 million in the first half of 2009 compared to the first half of 2008.
     Alternative Fuel Mixture Credits The U.S. Internal Revenue Code provides a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses. The credit, equal to $0.50 per gallon of alternative fuel contained in the mixture, is refundable to the taxpayer. The accompanying consolidated statement of income for the six months ended June 30, 2009 includes a credit of $40.8 million recorded in cost of products sold representing alternative fuel mixture credits earned through June 30, 2009, net of associated expenses.
     We began mixing black liquor and diesel fuel in late February 2009 and filed an application to be registered as an alternative fuel mixer with the Internal Revenue Service in March 2009. On May 11, 2009, the Company was notified by the Internal Revenue Service that its application to be registered as an alternative fuel mixer was approved. We subsequently filed an excise tax refund claim for the alternative fuel mixture consumed at its Spring Grove, PA and Chillicothe, OH facilities during the period February 20, 2009 through May 17, 2009 (the “First Refund Claim”). We received a payment from the Internal Revenue Service (“IRS”) on June 30, 2009 in the amount of $29.7 million related to the First Refund Claim. In addition, for the period May 18, 2009 through June 30, 2009, we earned an additional $12.8 million of alternative fuel mixture credits for which a claim has yet to be submitted to the IRS. We intend to realize the balance of
the credits in the form of a non-taxable income tax credit in connection with the filing of our 2009 federal corporate income tax return.
     According to the Internal Revenue Code, the tax credit is scheduled to expire on December 31, 2009. However, there can be no assurances that the incentive program for alternative fuel mixtures will continue in effect or that its provisions, including taxes applicable to the credits, will not be changed, or that we will be successful in receiving future credits under the program.
     Pension Expense/Income Pension expense or income results from the over-funded status of our pension plans. The following summarizes the amounts of pension expense or income recognized for the first six months of 2009 compared to the same period of 2008:
                           
    Six months ended    
    June 30    
In thousands   2009     2008   Change
       
Recorded as:
                         
Costs of products sold
  $ 2,502       $ (5,465 )   $ 7,967  
SG&A expense
    1,203         (2,500 )     3,703  
           
Total
  $ 3,705       $ (7,965 )   $ 11,670  
       
     The amount of pension expense or income recognized each year is determined using various actuarial assumptions and certain other factors, including the fair value of our pension assets as of the beginning of the year. As discussed in Item 1 — Financial Statements — Note 9, the fair value of the plans’ assets declined approximately 29% during 2008. As a result, during 2009 we expect to recognize net pension expense totaling approximately $7.3 million, on a pre-tax basis. However, we do not expect to be required to make cash contributions to our qualified defined benefit pension plans in 2009.
     Selling, general and administrative (“SG&A”) expenses increased $1.5 million in the period-to-period comparison and totaled $51.1 million for the first six months of 2009. Benefits from our cost control initiatives were more than offset by $1.2 million of pension expense recorded in the first six months of 2009 compared with $2.5 million of pension income in the same period of 2008. In addition, SG&A expenses for the first six months of 2008 included a $1.5 million non-recurring benefit from a recovery in a litigation matter, net of legal fees.


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     Gain on Sales of Plant, Equipment and Timberlands During the first six months of 2009 and 2008, we completed sales of timberlands which are summarized by the following table:
                         
Dollars in thousands   Acres   Proceeds   Gain
 
2009
                       
Timberlands
    189     $ 728     $ 699  
Other
    n/a             (27 )
     
 
          $ 728     $ 672  
 
 
                       
2008
                       
Timberlands
    3,595     $ 14,997     $ 14,603  
Other
    n/a             (101 )
     
 
          $ 14,997     $ 14,502  
 
     Income taxes Our results of operations for the first six months of 2009 reflect an effective tax rate of 26.6% compared to 32.2% in the same period a year ago. The decline in the effective tax rate is primarily due to a lower proportion of timberland gains, which are taxed at a higher effective tax rate, and by $40.8 million of alternative fuel mixture credits taxed at a lower effective tax rate. In addition, approximately $12.8 million of the alternative fuel mixture credits included in pre-tax income are treated as non-taxable.
     Foreign Currency We own and operate paper and pulp mills in Germany, France, the United Kingdom and the Philippines. The local currency in Germany and France is the Euro, in the UK it is the British Pound Sterling, and in the Philippines the currency is the Peso. During the first six months of 2009, Euro functional currency operations generated approximately 19.8% of our sales and 18.8% of operating expenses and British Pound Sterling operations represented 10.2% of net sales and 10.1% of operating expenses. The translation of results from these international operations into U.S. dollars is impacted by changes in foreign currency exchange rates.
     The table below summarizes the effect from foreign currency translation on first half 2009 reported results compared to the first half 2008:
         
    Six months  
In thousands   ended June 30  
    Favorable  
    (unfavorable)  
 
Net sales
  $ (26,617 )
Costs of products sold
    25,710  
SG&A expenses
    3,267  
Income taxes and other
    (57 )
 
     
Net income
  $ 2,303  
 
     The above table only presents the financial reporting impact of foreign currency translations. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.


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Three Months Ended June 30, 2009 versus the
Three Months Ended June 30, 2008
     The following table sets forth summarized results of operations:
                   
    Three months ended
    June 30
In thousands, except per share   2009     2008
       
Net sales
  $ 278,979       $ 320,224  
Gross profit
    59,001         32,398  
Operating income
    32,426         7,861  
Net income
    19,870         3,156  
Diluted earnings per share
    0.43         0.07  
       
     The consolidated results of operations for the three months ended June 30 include the following significant items:
                 
    After-tax   Diluted EPS
In thousands, except per share   Gain (loss)        
 
2009
               
Alternative fuel mixing credit
  $ 30,418     $ 0.67  
Timberland sales and related transaction costs
    (441 )     (0.01 )
 
               
2008
               
Reversal of shutdown and restructuring charges
  $ 532     $ 0.01  
     The above items increased earnings by $30.0 million, or $0.66 per diluted share, and $0.5 million, or $0.01 per diluted share, in the second quarters of 2009 and 2008, respectively.


Business Units The following table sets forth profitability information by business unit and the composition of consolidated income before income taxes:
                                                                         
Business Unit Performance   For the three months ended June 30
Dollars in thousands   Specialty Papers   Composite Fibers   Other and Unallocated   Total
    2009     2008   2009     2008   2009     2008   2009     2008
                             
Net sales
  $ 184,364       $ 207,296     $ 94,615       $ 112,928     $       $     $ 278,979       $ 320,224  
Energy sales, net
    2,131         2,743                                   2,131         2,743  
                             
Total revenue
    186,495         210,039       94,615         112,928                     281,110         322,967  
Cost of products sold
    178,817         196,948       82,730         96,462       (39,438 )       (2,841 )     222,109         290,569  
                             
Gross profit
    7,678         13,091       11,885         16,466       39,438         2,841       59,001         32,398  
SG&A
    14,085         13,772       8,299         9,689       4,164         1,916       26,548         25,377  
Shutdown and restructuring charges
                                        (856 )             (856 )
Losses on dispositions of plant, equipment and timberlands
                                27         16       27         16  
                             
Total operating income (loss)
    (6,407 )       (681 )     3,586         6,777       35,247         1,765       32,426         7,861  
Nonoperating income (expense)
                                (4,722 )       (4,367 )     (4,722 )       (4,367 )
                             
Income (loss) before income taxes
  $ (6,407 )     $ (681 )   $ 3,586       $ 6,777     $ 30,525       $ (2,602 )     27,704       $ 3,494  
                             
 
                                                                       
Supplementary Data
                                                                       
Net tons sold
    171,293         182,700       20,073         22,356                     191,366         205,056  
Depreciation, depletion and amortization
  $ 8,882       $ 8,980     $ 5,740       $ 6,968     $       $     $ 14,622       $ 15,948  
Capital expenditures
    3,436         7,751       2,705         8,399       100               6,241         16,150  
                         
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     The following table summarizes sales and costs of products sold for the three months ended June 30, 2009 and 2008.
     Sales and Costs of Products Sold
                           
    Three months ended    
    June 30    
In thousands   2009     2008   Change
       
Net sales
  $ 278,979       $ 320,224     $ (41,245 )
Energy sales — net
    2,131         2,743       (612 )
           
Total revenues
    281,110         322,967       (41,857 )
Costs of products sold
    222,109  (1)       290,569       (68,460 )
           
Gross profit
  $ 59,001       $ 32,398     $ 26,603  
           
Gross profit as a percent of Net sales
    21.1 %       10.1 %        
       
(1)   Includes $40.8 million of alternative fuel mixture credits, net of related expenses.
     The following table sets forth the contribution to consolidated net sales by each business unit:
                   
    Percent of Total  
    2009       2008  
       
Business Unit
                 
Specialty Papers
    66.1 %       64.7 %
Composite Fibers
    33.9         35.3  
           
Total
    100.0 %       100.0 %
       
     Net sales totaled $279.0 million for the second quarter of 2009, a decrease of $41.2 million, or 12.9%, compared to the same period a year ago.
     In the Specialty Papers business unit, net sales for the three months ended June 30, 2009 totaled $184.4 million, a decrease of $22.9 million when compared with the same period of 2008. Operating loss totaled $6.4 million compared with a loss of $0.7 million in the second quarter of 2008. Average selling prices were essentially unchanged in the second quarter of 2009 compared with the same quarter of 2008 however the mix of products sold was unfavorable. The weak economic environment adversely affected demand in all markets served by Specialty Papers as volumes shipped during the second quarter declined 6.2% compared with the same period in 2008. We successfully reduced Specialty Papers’ inventories by 14.4% during the second quarter of 2009 in line with our strategies to maximize cash generated from operations by controlling inventories and other working capital uses. As a result, this unit incurred unscheduled downtime totaling 14,400 tons of paper, or 8% of its total quarterly capacity, which adversely impacted results by $7.0 million, pre-tax.
     Lower input costs, primarily related to purchased pulps, energy and wood partially offset by higher costs for caustic soda and starch, benefitted operating results by $1.3 million in the comparison.
     In Composite Fibers, net sales were $94.6 million for the second quarter of 2009, a decline of $18.3 million from the year-earlier quarter. Operating income declined by $3.2 million in the comparison to $3.6 million. Volumes shipped during the quarter declined 10.2% compared with 2008 as a direct result of the weak economic environment and our customers’ actions to reduce their inventory levels. Demand for tea and coffee filter papers, this unit’s largest product line, declined by 7.3% primarily due to weak order patterns in developing markets such as Russia and other Eastern European countries. In addition, demand was off from prior year levels by 21.9% in composite laminate papers and 17.5% in technical specialty products. As a result of weak demand, we incurred unscheduled downtime totaling 3,380 tons of paper, or 22% of the unit’s total quarterly capacity, adversely impacting results by $3.8 million. On a constant currency basis, higher average selling prices contributed approximately $2.6 million to net sales; however, the translation of foreign currencies unfavorably affected net sales by approximately $12.3 million.
     The Composite Fibers business unit was adversely impacted by higher energy and raw material costs totaling approximately $3.6 million.
     Alternative Fuel Mixture Credits The accompanying consolidated statement of income for the three months ended June 30, 2009 includes a credit of $40.8 million recorded in cost of products sold representing alternative fuel mixture credits earned through June 30, 2009, net of associated expenses.
     Pension Expense/Income Pension expense or income results from the over-funded status of our pension plans. The following summarizes the amounts of pension expense or income recognized for the second quarter of 2009 compared to the same period of 2008:
                           
    Three months ended    
    June 30    
In thousands   2009     2008   Change
       
Recorded as:
                         
Costs of products sold
  $ 1,314       $ (2,925 )   $ 4,239  
SG&A expense
    709         (1,271 )     1,980  
           
Total
  $ 2,023       $ (4,196 )   $ 6,219  
       
     The amount of pension expense or income recognized each year is determined using various actuarial assumptions and certain other factors, including the fair value of our pension assets as of the beginning of the year.
     Selling, general and administrative (“SG&A”) expenses increased by $1.2 million in the quarter-to-quarter comparison and totaled $26.5 million in the second quarter of 2009. The increase was primarily due to recording pension expense in 2009 compared with pension


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income in 2008 together with legal and professional fees associated with the alternative fuel mixture credits and with the unwinding of the 2003 timberland installment sale.
     Income taxes For the second quarter of 2009, results of operations reflect an effective tax rate of 28.3% on pretax income of $27.7 million compared with 9.7% and $3.5 million, respectively, in the same period a year ago. The effective rate in the second quarter of 2009 benefited from approximately $12.8 million of the alternative fuel mixture credits included in pre-tax income that are treated as non-taxable. The effective tax rate in the second quarter of 2008 benefited from tax benefits recorded upon the filing of an international subsidiary’s tax return and the reversal of a tax reserve in a foreign jurisdiction where the statute expired.
     Foreign Currency We own and operate paper and pulp mills in Germany, France, the United Kingdom and the Philippines. The local currency in Germany and France 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 2009, Euro functional currency operations generated approximately 19.9% of our sales and 18.3% of operating expenses and British Pound Sterling operations represented 11.3% of net sales and 10.7% 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 the second quarter of 2009 reported results compared to the second quarter of 2008:
         
    Three months  
In thousands   ended  
    Favorable  
    (unfavorable)  
Net sales
  $ (12,340 )
Costs of products sold
    12,077  
SG&A expenses
    1,414  
Income taxes and other
    66  
 
     
Net income
  $ 1,217  
 
     The above table only presents the financial reporting impact of foreign currency translations. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.
LIQUIDITY AND CAPITAL RESOURCES
     Our business is capital intensive and requires significant expenditures for our business strategy, new or enhanced equipment, environmental compliance matters, and to support our research and development efforts. In addition we have mandatory debt service requirements of both principal and interest. The following table summarizes cash flow information for each of the periods presented:
                   
    Six months ended
    June 30
In thousands   2009     2008
       
Cash and cash equivalents at beginning of period
  $ 32,234       $ 29,833  
Cash provided by (used for)
                 
Operating activities
    64,867         (3,047 )
Investing activities
    27,103         (10,410 )
Financing activities
    (47,857 )       1,412  
Effect of exchange rate changes on cash
    1,857         823  
           
Net cash (used) provided
    45,970         (11,222 )
           
Cash and cash equivalents at end of period
  $ 78,204       $ 18,611  
       
     At the end of the 2009 second quarter, we had $78.2 million in cash and $181 million available under its revolving credit agreement which matures in April 2011. Operating cash flow improved by $67.9 million primarily due to significant reduction in inventories and accounts receivable compared to increases in the prior periods together with $29.7 million of cash from alternative fuel mixture credits.
     Net cash provided from investing activities totaled $27.3 million in the first six months of 2009 compared with a net use of $10.4 million in the first half of 2008. The improvement reflects the collection of a $37.9 million note receivable in connection with the unwinding of the 2003 timberland installment sale; and reduced capital expenditures totaling $13.9 million in connection with the deferral of discretionary capital expenditures.
     During the first six months of 2009 and 2008, cash dividends paid on common stock totaled $8.3 million and $8.2 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.
     During the first six months of 2009, net debt, defined as total debt less cash balances and term notes secured by letters of credit decreased by $49.7 million to $160.7 million.


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     The following table sets forth our outstanding long-term indebtedness:
                   
    June 30,     Dec. 31,
In thousands   2009     2008
       
Revolving credit facility, due April 2011
  $ 13,334       $ 6,724  
Term Loan, due April 2011
    22,000         30,000  
Term Loan, due January 2013
    36,695         36,695  
Note payable, due March 2013
            34,000  
71/8% Notes, due May 2016
    200,000         200,000  
           
Total long-term debt
    272,029         307,419  
Less current portion
    (13,759 )       (13,759 )
           
Long-term debt, net of current portion
  $ 258,270       $ 293,660  
       
     The significant terms of the debt obligations are set forth in Item 1 — Financial Statements — Note 12. As of June 30, 2009, we had $181 million of borrowing capacity available under our revolving credit agreement. Although we do not have immediate intentions to make additional use of the facility, we believe this agreement, and the banks that are party to it, provides us with ready access to liquidity should we need it.
     Alternative Fuel Mixture Credits We filed an excise tax refund claim for the alternative fuel mixture consumed at our Spring Grove, PA and Chillicothe, OH facilities during the period February 20, 2009 through May 17, 2009 (the “First Refund Claim”). We received a payment from the Internal Revenue Service (“IRS”) on June 30, 2009 in the amount of $29.7 million related to the First Refund Claim.
     In addition, for the period May 18, 2009 through June 30, 2009, we earned an additional $12.8 million of alternative fuel mixture credits for which a claim has yet to be submitted. We intend to claim this amount as a non-taxable income tax credit in connection with the filing of our 2009 federal corporate income tax return.
     As a result of the collapse of the installment sale transaction, approximately $11.0 million of long-term deferred tax liability that was recorded in connection with the March 2003 sale of timberlands became currently payable on or prior to September 15, 2009. However, we intend to satisfy this tax liability with the income tax credits discussed above.
     We are subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of mills we operate, or have operated. To comply with environmental laws and regulations, we have incurred substantial capital and operating expenditures in past years. We anticipate that environmental regulation of our operations will continue to become more burdensome and that capital and operating expenditures necessary to comply with environmental regulations will continue, and perhaps increase, in the future. In addition, we may incur
obligations to remove or mitigate any adverse effects on the environment resulting from our operations, including the restoration of natural resources and liability for personal injury and for damages to property and natural resources. See Item 1 — Financial Statements — Note 15 for a summary of significant environmental matters.
     We expect to meet all of our near- and longer-term cash needs from a combination of operating cash flow, cash and cash equivalents, our existing credit facility or other bank lines of credit and other long-term debt. However, as discussed in Item 1 — Financial Statements — Note 15, an unfavorable outcome of various environmental matters could have a material adverse impact on our consolidated financial position, liquidity and/or results of operations.
     Our credit agreement, as amended, contains a number of customary compliance covenants. A breach of these requirements, of which we were not aware of any at June 30, 2009, would give rise to certain remedies under the credit agreement as amended, among which are the termination of the agreement and accelerated repayment of the outstanding borrowings plus accrued and unpaid interest under the credit facility. In addition, the 71/8% Notes contain a cross default provision that in the event of a default under the credit agreement, the 71/8% Notes would become payable immediately.
     Off-Balance-Sheet Arrangements As of June 30, 2009 and December 31, 2008, we had not entered into any off-balance-sheet arrangements.
     Outlook For Specialty Papers, we expect volumes in the third quarter of 2009 to be higher than the second quarter by approximately 10% and that selling prices for most products will be relatively in line with the second quarter of 2009. Further, we expect downtime to be significantly reduced as a result of our current inventory position and increased order rates.
     In the Composite Fibers business unit, we anticipate shipping volumes to be approximately 5% higher than the second quarter due primarily to seasonality. Selling prices and input costs are expected to be in line with the second quarter. Paper machine downtime in this business unit is expected to be reduced by approximately 50% compared to the second quarter due to the current inventory position and the seasonal increase in shipments.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
                                                         
    Year Ended December 31   At June 30, 2009
Dollars in thousands   2009   2010   2011   2012   2013   Carrying Value   Fair Value
 
Long-term debt
                                                       
Average principal outstanding
                                                       
At fixed interest rates — Bond
  $ 200,000     $ 200,000     $ 200,000     $ 200,000     $ 200,000     $ 200,000     $ 163,404  
At variable interest rates
    68,590       58,270       41,478       36,695       1,407       72,029       76,300  
                                             
 
                                          $ 272,029     $ 239,704  
                                             
Weighted-average interest rate
                                                       
On fixed rate debt – Bond
    7.13 %     7.13 %     7.13 %     7.13 %     7.13 %                
On variable rate debt
    2.57       2.77       3.29       3.52       3.52                  
 
     The table above presents average principal outstanding and related interest rates for the next five years. 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, 2009, we had long-term debt outstanding of $272.0 million, of which $72.0 million or 26.5% was at variable interest rates.
     Variable-rate debt outstanding represents borrowings under (i) credit facility that incur interest based on the domestic prime rate or a Eurocurrency rate, at our option, plus a margin; (ii) the term loan that matures in April 2011, under which we are required to make quarterly repayments and (iii) the 2008 Term Loan that bears interest at a six-month reserve adjusted LIBOR plus a margin rate of 1.2% per annum. At June 30, 2009, the weighted average interest rate paid on variable rate debt was 2.57%. A hypothetical 100 basis point increase or decrease in the interest rate on variable rate debt would increase or decrease annual interest expense by $0.8 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 2009, Euro functional currency operations generated approximately 19.8% of our sales and 18.8% of operating expenses and British Pound Sterling operations represented 10.2% of net sales and 10.1% of operating expenses.
ITEM 4. CONTROLS AND PROCEDURES
     Evaluation of Disclosure Controls and Procedures Our chief executive officer and our principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2009, 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, 2009, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.


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PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of holders of Glatfelter common stock was held on April 30, 2009 at which shareholders voted on the following matters (with the indicated tabulated results).
  i.   The election of three members of the Board of Directors to serve for a term of one year expiring on the date of the 2010 Annual Meeting of Shareholders.
                 
Director Nominee     For     Withheld
 
George H. Glatfelter II
    38,127,310       2,434,352  
Ronald J. Naples
    37,608,966       2,952,696  
Richard L. Smoot
    34,571,938       5,989,724  
  ii.   A proposal to approve an increase in the number of shares of the Company’s common stock that are available to be awarded under the Company’s Amended and Restated Long-Term Incentive Plan and to approve the Amended and Restated Long-Term Incentive Plan for purposes of complying with Section 162(m) of the Internal Revenue Code.
         
For                 Against           Abstained
 
37,639,373   2,867,995   54,294
  iii.   the ratification of the appointment of Deloitte & Touche LLP as the independent registered public accounting firm for the Company for the fiscal year ending December 31, 2009.
             
For                 Against         Abstained               Broker Non Votes
 
29,610,305   6,486,515   650,603   3,814,239
ITEM 6. EXHIBITS
The following exhibits are filed herewith or incorporated by reference as indicated.
             
 
    3.1     Amended and Restated by-laws, as amended through February 18, 2009.
 
    31.1     Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
 
    31.2     Certification of John P. Jacunski, Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
 
    32.1     Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
 
    32.2     Certification of John P. Jacunski, Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
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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 7, 2009 By   /s/ David C. Elder    
    David C. Elder   
    Vice President and Corporate Controller   
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EXHIBIT INDEX
     
Exhibit    
Number   Description
3.1
  Amended and Restated by-laws as amended through February 18, 2009.
31.1
  Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 — Chief Executive Officer, filed herewith.
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 — Chief Financial Officer, filed herewith.
32.1
  Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Executive Officer, filed herewith.
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 — Chief Financial Officer, filed herewith.
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