Glatfelter Annual Report 2009

Plain-text annual report

200 9 An nual Repo rt P. H. Glatfelter Company • 96 South George Street • Suite 500 • York, PA 17401 • www.glatfelter.com G l a t f e l t e r 2 0 0 9 A n n u a l R e p o r t STRATEGY. RESULTS. MOMENTUM. © 2 01 0 Gla tfel ter Glatfelter today Our reﬂ ections on 2009 and our outlook for 2010 and beyond can be summed up in three words: STRATEGY. RESULTS. MOMENTUM. Strategy guides everything we do, our 2009 results were strong, and the momentum heading into 2010 is very real. Headquartered in York, PA, Glatfelter is a global manufacturer of specialty papers and engineered products, offering over a century of experience, technical expertise and world-class service. U.S. operations include facilities in Spring Grove, PA and Chillicothe and Fremont, OH. International operations include facilities in Germany, France, the United Kingdom, Canada and the Philippines, a representative ofﬁ ce in China and a sales and distribution ofﬁ ce in Russia. Glatfelter’s sales exceed $1 billion annually and its common stock is traded on the New York Stock Exchange under the ticker symbol GLT. OUR VISION is to become the global supplier of choice in specialty papers and engineered products. Contents 2 5 6 8 Letter to Our Shareholders Financial Highlights Strategy – Proven, Consistent Approach Drives Value Results – Delivering Enviable Performance in Challenging Times 10 Momentum – Built to Thrive in 2010 and Beyond 12 Directors and Ofﬁ cers and Corporate Information Form 10-K Directory of Locations FORWARD-LOOKING STATEMENTS Certain statements made in this annual report which pertain to future ﬁ nancial and business performance, conditions and strategies and other ﬁ nancial and business matters are “forward- looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to numerous risks, uncertainties and other unpredictable or uncontrollable factors which may cause actual results or performance to differ materially from the Company’s expectations. Some of the risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in or implied by the forward- looking statements are detailed on page 15 of the accompanying 2009 Annual Report on Form 10-K included herein. A copy of that Form, which is on ﬁ le with the Securities and Exchange Commission, is also available at www.glatfelter.com or upon request. Specialty Papers 2009 NET SALES: $791.9M 2009 TONS SOLD: ~738,841 tons 2009 AVERAGE PRICE: ~$1,072/ton Our North America-based Specialty Papers business unit focuses on producing papers for the following markets: (cid:129) CARBONLESS & FORMS: papers for credit card receipts, multi-part forms, security papers and other end-use applications (cid:129) BOOK PUBLISHING: papers for the production of high-quality hardbound books and other book publishing needs (cid:129) ENGINEERED PRODUCTS: papers for digital imaging, transfer, casting, release, postal, playing and greeting cards, and other niche specialty applications (cid:129) ENVELOPE & CONVERTING: papers for the Product Sales Mix 18% 19% 41% 22% Carbonless & Forms Book Publishing Envelope & Converting direct mail market, shopping bags and Engineered Products drawing papers Composite Fibers 2009 NET SALES: $392.1M 2009 TONS SOLD: ~80,064 tons 2009 AVERAGE PRICE: ~$4,897/ton Our Composite Fibers business unit, based in Gernsbach, Germany, serves customers globally and focuses on higher-value-added products in the following markets: (cid:129) FOOD & BEVERAGE: paper used for tea bags and coffee pads/pods (cid:129) METALLIZED: products used in the labeling of beer bottles, innerliners, gift wrap, self-adhesive labels and other consumer product applications (cid:129) COMPOSITE LAMINATES: papers used in the production of decorative laminates, furni- ture and ﬂ ooring applications (cid:129) TECHNICAL SPECIALTIES: diverse line of paper Product Sales Mix 8% 12% 21% 59% Food & Beverage Metallized Composite Laminates products used in batteries, medical masks Technical Specialties and other highly engineered applications Advanced Airlaid Materials* 2009 NET SALES: $203.0M 2009 TONS SOLD: ~70,960 tons 2009 AVERAGE PRICE: ~$2,861/ton Our Canada- and Germany-based Advanced Airlaid Materials business unit focuses on producing highly absorbent cellulose-based airlaid non-woven materials for high-growth consumer and industrial applications and markets, including: (cid:129) Highly specialized, engineered ﬁ bers for feminine hygiene and adult incontinence products Product Sales Mix 3% 12% 85% Feminine Hygiene Other Adult Incontinence * This section reﬂ ects the 2009 results of Concert Industries, which Glatfelter acquired on February 12, 2010. 1 George H. Glatfelter II Chairman and Chief Executive Ofﬁ cer DEAR FELLOW SHAREHOLDERS In my letter to you a year ago, I stated that in light of the severe macroeconomic conditions confronting the business, our goal for 2009 was to preserve the Company’s ﬁ nancial core while positioning us to take full advantage of opportunities as these conditions moderated. Our objective was to emerge a stronger Company – not just a survivor. To accomplish this objective, we focused operational success. Our performance was a the organization on three areas of our busi- testament to the soundness of our strategy, ness: 1) preserving the strength of the balance the strength and resilience of our specialized sheet by improving our cash ﬂ ow proﬁ le and business model and the commitment of driving down debt; 2) putting the needs of Glatfelter PEOPLE around the world. customers ﬁ rst by ensuring them that we For Glatfelter, the story of 2009 is one would remain a stable and secure supply of precise strategic execution, which drove partner; and 3) reminding each employee that solid results, thereby positioning our business Glatfelter PEOPLE matter, and that they can to enter 2010 with renewed momentum. Not make a difference through continuous cost many companies that I know of can make that reduction, improved business processes and claim. And I think that’s a strong statement to active collaboration. our shareholders. I am proud to report to you today The following list of key achievements that we not only achieved our goals – we conﬁ rms the progress we made throughout exceeded them. the year. I must say that I could not be more 2009 was an excellent year for Glatfelter, pleased with the results. with both strong ﬁ nancial results and notable 2 2009 Financial Highlights positioned the Company to take the next step Our Core Values • Generated free cash ﬂ ow of $138 million in its visionary journey through the acquisition • Increased adjusted EBITDA in 2009 of Concert Industries. compared to 2008 Creating indelible linkage between oper- • Expanded EBITDA margins to 10.6 percent ating strategy and business results – that is the from 10.0 percent in 2008 reason Glatfelter is a stronger Company today • Improved operating proﬁ t for Specialty than when I last wrote to you one year ago. Papers by 13.6 percent to $55.9 million Looking Ahead • Improved working capital management to generate $47 million of cash ﬂ ow • Reduced net debt by $128 million As for the upcoming year, it seems to me that much of the economic chaos that deﬁ ned 2009 is behind us. At the same time, recovery In many ways, the results speak for is likely to be an extended and rather choppy Virtually every day we rely on our values to frame a decision, develop a strategy or guide us in other ways. We believe our values, combined with our business model and our PEOPLE, allow us to continue to generate sustainable value creation. Our core values are clear and consistent: Integrity: We are ethical and responsible in all of our business endeavors, all the time. themselves. We not only protected the balance experience. Regardless, I am excited about Financial Discipline: We are responsible sheet, we improved it. We capitalized on non- 2010 because I believe Glatfelter has several for the prudent management of the traditional cash generating activities, generating value drivers in place that will be of beneﬁ t resources entrusted to us and for the $30 million of cash from the use of alternative to shareholders. fuels under the Alternative Fuel Mixture (AFM) First and foremost, I expect to be able legislation and $5 million through the sale to sustain our strong cash flow throughout of Renewable Energy Credits. In the face of the year – thanks, in large part, to the steady uncertain sales demand, we developed more performance of our U.S.-based Specialty generation of ﬁ nancial value for all constituents. Mutual Respect: We treat each other with honesty and respect. We recognize that what we have and what we will than 60,000 tons of new business through Papers Business Unit and supplemented by an achieve is through the efforts of our aggressive prospecting and leveraging the new additional $58 million of cash from AFM employees. We will strive to provide product capabilities and operational ﬂ exibility credits. We also expect strengthening demand them with rewarding challenges and of the organization. This capability allowed in markets served by our Europe-based opportunities for advancement. Glatfelter to keep its North American sales Composite Fibers Business Unit to contribute to volume virtually ﬂ at on a year-over-year basis our top-line growth, which we will bring to the despite volume in the markets served by the bottom line. From a balance sheet perspective, Company declining by 16 percent. a primary focus will be to utilize the strong Finally, and perhaps most signiﬁ cantly, cash generation profile of the business, as well while others were internally focused and as potential additional sales of our remaining distracted, Glatfelter had the management 32,250 acres of timberland, to further enhance capacity, ﬁ nancial ﬂ exibility and courage to our financial flexibility. seek out opportunities to further advance our Similarly, I am excited about the addition long-term strategy. We moved forward to open of Concert Industries, a target of ours for many a sales and distribution ofﬁ ce in Moscow, years given our ongoing interest in the global Russia for our Food and Beverage and airlaid non-wovens market. I believe we bought Metallized customers in that region. And we this business at the right time and for the Customer Focus: We are dedicated to understanding and anticipating the needs of our customers and helping them to achieve their business objectives. Environmental Responsibility: We recognize that our business impacts the environment. We are committed to continuous environmental improvement and the prevention of pollution. We will be in compliance with all environmental laws and regulations. Social Responsibility: We recognize our responsibility to contribute to the betterment of the communities in which we operate and the world in which we live. 3 right price. Concert is viewed as the innova- sustainable organization is found in its ability tion leader in the highly defensible, technically to survive and grow stronger through genera- demanding feminine hygiene and adult incon- tional challenges. 2009 was yet another step tinence market segments. The acquisition will in our journey. immediately rebalance the Glatfelter product In summary, while external inﬂ uences portfolio to growth markets and substantially caused us to modify our operating strategy expand our global footprint. The acquisition is early in 2009, the results we generated simply expected to be modestly accretive to earnings could not have happened without the solid in 2010 and deliver $0.20 to $0.25 per diluted performance and deep commitment of share of earnings accretion in 2011. We view Glatfelter PEOPLE everywhere. Most rewarding Concert as a well-run business that is prepared to me is that our success in large part resulted to make the next step. Glatfelter has the scale, from improved business processes and know-how and ﬁ nancial strength to make that principles of continuous improvement that next step a reality. I believe our businesses are now embedded in the organization. By are a perfect ﬁ t. implementing the operating strategy to drive results, we not only delivered strong ﬁ nancial “...we not only achieved our goals – we exceeded them.” performance in 2009, but also emerged with Long-Term View 2009 was a great test for Glatfelter and its PEOPLE, one that I believe we passed with ﬂ ying colors. And, while 2009 was a watershed year for us in many ways, I believe it is also just another example of our Company’s enduring resiliency and strength of conviction. In this re- spect, it may be helpful to reﬂ ect for a moment upon Glatfelter’s heritage. Our Company was founded in 1864. The battle of Gettysburg had just been fought 20 miles to the west of our founding location. In our 146-year history, this clear momentum for our future. On the following pages, I invite you to read more about Glatfelter’s proven strategy, strong results and powerful momentum. We hope you’ll agree that this Company has come a long way over the past 12 months and, in so doing, has created signiﬁ cantly more growth opportunities for the future. On behalf of my fellow Directors, our man- agement team and the PEOPLE of Glatfelter, I thank you for your ongoing interest and investment in our Company. I look forward to updating you on our progress moving forward. Company has survived the Great Depression, two World Wars, innumerable military, social Sincerely, and political upheavals and even disco music. Our business culture is based upon sustain- ability. And we know that uncertain times offer George H. Glatfelter II unique opportunity for organizations focused Chairman and Chief Executive Ofﬁ cer upon a clear plan. 2009 was not the toughest year we’ve ever faced and it won’t be the March 10, 2010 last tough year to come. The hallmark of a 4 FINANCIAL HIGHLIGHTS Selected Consolidated Financial Data (In thousands, except per share data) As of or for the year ended December 31, Net sales Gross proﬁ t Gross proﬁ t % Reversal of (Shutdown and restructuring charges) — Gains on disposition of PP&E and timberlands, 2009 2008 2007 2006 2005 $1,184,010 $1,263,850 $1,148,323 $986,411 $579,121 269,764* 177,782 156,312 105,294 97,176 23% 14% 856 14% 11% 17% (35) (30,318) (1,564) insurance recoveries 898 18,468 78,685 17,599 42,204 Net income (loss) Diluted EPS Adjusted EPS** Balance sheet information: Total assets Total debt 123,442 57,888 63,472 (12,236) 38,609 2.70 0.64 1.27 1.04 1.40 0.81 (0.27) 0.55 0.87 0.35 1,190,294 1,057,309 1,287,067 1,225,643 1,044,977 254,583 313,285 313,185 397,613 207,073 Shareholders’ equity 510,704 342,707 476,068 388,368 432,312 4 6 2 , 1 $ 4 8 1 , 1 $ 8 4 1 , 1 $ Net Sales (in millions) 6 8 9 $ 9 7 5 $ 4 0 . 1 $ 1 8 . 0 $ 4 6 . 0 $ Adjusted Earnings Per Share** 5 5 . 0 $ 5 3 . 0 $ Cash Flow from Operations (in millions) 9 . 3 6 1 $ 3 . 0 0 1 $ 4 . 3 5 $ 9 . 2 4 $ ) 4 . 8 2 $ ( 05 06 07 08 09 05 06 07 08 09 05 06 07 08 09 *Includes $107.8 million of alternative fuel mixture credits. **Adjusted earnings per share is a non-GAAP ﬁ nancial measure as it excludes the impact of certain items. It is used by the Company to evaluate the performance of its core paper making operations. Adjusted earnings per share excludes the following items, all on an after-tax per share basis: Alternative fuel mixture credits in 2009 of $2.09; gains from timberland sales and other asset sales in 2008 through 2005 of $0.24, $0.97, $0.20 and $0.25, respectively; shutdown, restructuring charges and asset writedowns in 2008 of $(0.01) and $0.79 and $0.02, in 2006 and 2005, respectively; acquisition integration costs of $0.04, $0.02, $0.03 and $0.19 in 2009 through 2006, respectively; reserves for environmental matters of $0.35 in 2007; insurance recoveries of $0.29 in 2005; and debt redemption costs of $0.04 in 2006. 5 forward, enduring business At Glatfelter, we have a straight- sustainable value for our inves- tors, our customers and our PEOPLE – we offer strategy that enables us to create New product development remains criti- improved productivity, asset utilization and cal to the implementation of our strategy in deployment of continuous improvement the business units. In 2009, 53 percent of our methodology. Early in the year, in response to gross revenues were derived from new product market choppiness and inventory destocking development – the sixth straight year that we by certain customers, we reduced our paper a broad and diverse product line of value- have exceeded our goal of at least 50 percent inventory by 15 percent and accelerated the added products and superb customer service contribution from products developed, en- timing of planned machine downtime for to higher-margin or growing niche markets. hanced or improved within the last ﬁ ve years. maintenance – which allowed us to more 2009 was further validation of the strategy and During 2009, Specialty Papers launched closely match demand. An experienced an opportunity to extend our reach into new CleanPress™ CF, a new technology for management team with a track record of product categories and additional markets, carbonless rolls that is cleaner, greener and success and commitment to a strong balance while continuing to proﬁ tably operate the core longer-running while maintaining high imaging sheet was instrumental in managing the level of our business. quality. CleanPress builds on the environmental and timing of these adjustments. At the business unit level, innovation and values we have established, and end users Inherent in our strategy are our time- speed to market are the primary drivers of the appreciate the greener chemistry and the tested Core Values, which guide our actions strategy. In the Specialty Papers Business Unit, reduction in energy, waste and cleanup. and how we treat the PEOPLE closest to us – we are focused on managing our product Composite Fibers added to its portfolio of our employees, shareholders, customers and mix and volume by developing new, value- new products for the food and beverage other partners in the marketplace. Our six adding products, leveraging our asset ﬂ exibility industry, including higher-performance tea core values are: Integrity, Financial Discipline, and providing superior customer service. In bag papers, and expanded adoption of its Mutual Respect, Customer Focus, Environ- Composite Fibers, we are working to generate new line of pasting papers for automobile mental Responsibility and Social Responsibility. top-line growth through expanded positions batteries and similar applications. With those values as our moral compass, we in growth markets, new product development To ensure we effectively translate our top- execute our strategy to drive strong results. The and opportunistic acquisitions. Both business line performance into bottom-line growth, our beneﬁ ts of staying true to our values were very units continue to hold leading market share strategy also includes a disciplined approach to evident in our results for 2009, as you’ll read positions in their key product lines. cost containment, including an emphasis on in the next section. 6 Glatfelter Value Drivers (cid:129) Broad and diverse product line (cid:129) Leading market positions (cid:129) Successful business strategy (cid:129) Flexible operating platform (cid:129) Strong balance sheet STRATEGY Proven, Consistent Approach Drives Value T his year provided a strong validation of Glatfelter’s business strategy. Despite severe challenges in the global economy and many of our niche markets, the Company was able to we developed more than 60,000 tons of new alternative fuel mixture credits. Since we began deliver strong ﬁ nancial results, which included business by expanding our customer base, mixing and burning eligible alternative fuels, net sales of $1,184 million, net income of deepening our customer relationships, leverag- we have earned approximately $107.8 million $123.4 million, or $2.70 per diluted share, and ing our new product capabilities and expand- of alternative fuel mixture credits, of which adjusted earnings (a non-GAAP measure) of ing in adjacent markets and new geographies. nearly $30 million has been received in cash, $29.4 million. In Specialty Papers, operating income for $20.1 million was used to reduce estimated Those numbers are just the beginning the year increased 13.6 percent, even though interim tax payments, and $58.0 million will be of the story, however. While delivering these net sales were down 5.0 percent. Fourth- claimed as future refundable income tax credits ﬁ nancial results, we were also able to create quarter operating income of $23.1 million, (which are expected to be realized in cash additional ﬁ nancial ﬂ exibility by reducing net a 48 percent increase over the prior year, primarily during the ﬁ rst half of 2010). We also debt by $128 million. In addition, aggressive was indicative of the results and momentum generated $5 million of cash through the sale working capital management initiatives and Glatfelter was building at year-end. The fourth of Renewable Energy Credits. disciplined management of capital expendi- quarter was also strong for Composite Fibers, We believe the 2009 results, coupled with tures generated free cash ﬂ ow of $138 million as net sales increased 6.2 percent, gross the free cash ﬂ ow generation, demonstrate the for the year. margins grew to 15.8 percent (from 13 percent strength and resiliency of our business model Our ﬁ nancial performance is directly a year ago), and operating income increased and the dedication of Glatfelter PEOPLE around attributable to the value-added products and 91.7 percent. the world. And they have generated signiﬁ cant services of our operating segments. All told, In addition, the 2009 full-year results momentum for 2010 and beyond, which we even in the face of uncertain sales demand, include, on an after-tax basis, $95.8 million for discuss in the next section. 8 RESULTS Delivering Enviable Performance in Challenging Times Results the Right Way While we are acutely focused on delivering results for our investors, we are equally vigilant in conducting our business in a manner that addresses the long-term needs of all of our stakeholders. We take seriously our responsibility to our employees, our customers, our communities and the ever-changing world – as evidenced by our ongoing environmental and safety initiatives, as well as our commitment to the highest corporate governance standards. For more information on our latest efforts to produce results the right way, please visit www.glatfelter.com/sustainability. threefold – continued execution of T he Glatfelter story of 2009 was recession, and, last but not least, the cultiva- the proven strategy, solid ﬁ nancial results in the face of a far-reaching annual rate of approximately 5 percent for the such as Asia, Central and Eastern Europe, next four years. This will provide us another and South America. Glatfelter expects the platform to generate sustained organic growth acquisition will be modestly accretive to over the long term. earnings in 2010 and contribute $0.20 to Already a successful and growing busi- $0.25 earnings per share in 2011. tion of institutional momentum that has set ness, Concert is poised for signiﬁ cant growth The acquisition of Concert is Glatfelter’s the stage for sustainable growth in 2010 in 2010 and beyond. The majority of its fourth since 2006. Previous transactions have and beyond. The momentum is coming from production technology and manufacturing similarly spurred the Company’s ability to grow organic growth and acquired growth, from equipment is less than 10 years old, and, in in the food and beverage, metallized products current and new customers, and from adjacent 2009, the Company began operating a new and other specialized niche application markets. markets and fast-growing geographies. $70 million production line at its facility in These markets, along with the steady success In addition to the numerous ﬁ nancial and Germany. Glatfelter plans to operate the new of our Specialty Papers business in outperform- operational successes detailed on the previous Advanced Airlaid Materials as a third business ing the uncoated free sheet market overall, are pages, perhaps the most visible accelerator unit, along with its Specialty Papers and critical momentum builders for 2010. In both of our pace forward was the acquisition of Composite Fibers business units. businesses, we continue to derive signiﬁ cant Concert Industries, which was announced on Like Specialty Papers and Composite organic growth from new product development January 5, 2010 and completed on February Fibers, Advanced Airlaid Materials holds and steady market share gains. In addition, in 12, 2010. Concert is a leading global supplier number-one or number-two market positions early 2010, we announced the opening of a of highly absorbent cellulose-based airlaid in its key product categories. It utilizes tech- new sales and distribution center in Moscow, non-woven materials, used to manufacture nologies that Glatfelter is familiar with and which will enhance service to Composite Fibers a diverse range of consumer and industrial broadens our relationship with premier customers in Russia and the region. products for growing global end-use markets, multinational consumer products companies As proud as we are of our performance including feminine hygiene and adult inconti- such as The Procter & Gamble Company, in 2009, we are even more excited about nence products, specialty wipes and food pads. Johnson & Johnson, SCA and Kimberly-Clark. the opportunities ahead. The strategy is Approximately 85 percent of Concert’s Advanced Airlaid Materials is particularly working, the results are gratifying and the sales come from the feminine hygiene market, well positioned to serve developing markets momentum is real. which is expected to grow at a compound 10 “We view Concert as a natural ﬁ t for our business and right in line with our growth strategy. Like Glatfelter’s existing business units, Concert Industries holds leading market share positions, excels in building long-term customer relationships, and has a well-earned reputation for innovation and its ability to quickly bring new products to market.” – George H. Glatfelter II, Chairman and Chief Executive Ofﬁ cer MOMENTUM Built to Thrive in 2010 and Beyond DIRECTORS AND OFFICERS Executive Ofﬁ cers George H. Glatfelter II Chairman and Chief Executive Ofﬁ cer David C. Elder Vice President and Corporate Controller Martin Rapp Vice President and General Manager, Composite Fibers Business Unit Dante C. Parrini Thomas G. Jackson Mark A. Sullivan Executive Vice President and Vice President, General Counsel Vice President Chief Operating Ofﬁ cer and Corporate Secretary Global Supply Chain John P. Jacunski Senior Vice President and Chief Financial Ofﬁ cer Debabrata Mukherjee William T. Yanavitch II Vice President and General Manager, Vice President Specialty Papers Business Unit Human Resources and Administration Directors Kathleen A. Dahlberg Founder, President and Chief Executive Ofﬁ cer Open Vision Partners and Chief Executive Ofﬁ cer 2Unify LLC Nicholas DeBenedictis J. Robert Hall Chief Executive Ofﬁ cer Ardale Enterprises, LLC Richard C. Ill Richard L. Smoot Retired Regional Chairman PNC Bank, NA Philadelphia/South Jersey Markets President and Chief Executive Ofﬁ cer Lee C. Stewart Triumph Group, Inc. Financial Consultant Chairman and Chief Executive Ofﬁ cer Ronald J. Naples Aqua America Corporation Chairman of Pennsylvania Stimulus Oversight Commission and George H. Glatfelter II Chief Accountability Ofﬁ cer for Chairman and Chief Executive Ofﬁ cer Commonwealth of Pennsylvania CORPORATE INFORMATION World Headquarters P. H. Glatfelter Company Annual Meeting of Shareholders Information Sources For the latest quarterly business results 96 S. George Street Suite 500 York, PA 17401 ph: 717-225-4711 fax: 717-846-7208 www.glatfelter.com Stock Exchange New York Stock Exchange Stock Symbol GLT May 5, 2010 10:00 a.m. EST or other information, York Expo Center, visit www.glatfelter.com or contact: 334 Carlisle Avenue, York, PA Investor Relations P. H. Glatfelter Company 96 S. George Street, Suite 500 York, PA 17401 ph: 717-225-4711 E-mail: ir@glatfelter.com Transfer Agent, Dividend Disbursing Agent and Registrar BNY Mellon Shareowner Services 480 Washington Boulevard Jersey City, NJ 07310-1900 Toll free #: 800-756-3353 12 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ¥ n ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2009 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-03560 P. H. Glatfelter Company (Exact name of registrant as specified in its charter) Pennsylvania (State or other jurisdiction of incorporation or organization) 96 South George Street, Suite 500 York, Pennsylvania 17401 (Address of principal executive offices) 23-0628360 (IRS Employer Identification No.) (717) 225-4711 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on which registered Common Stock, par value $.01 per share New York Stock Exchange Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Yes n No ¥. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Yes n No ¥. Act. Act. 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 the past 90 days. Yes ¥ No n. 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes n No n Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. n Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer n Accelerated filer ¥ Non-accelerated filer n (Do not check if a smaller reporting company) Smaller reporting company n Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes n No ¥. Based on the closing price as of June 30, 2009, the aggregate market value of the Common Stock of the Registrant held by non-affiliates was $404.7 million. Common Stock outstanding on March 12, 2010 totaled 45,751,906 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in this Annual Report on Form 10-K: Proxy Statement to be dated on or about March 29, 2010 (Part III). P. H. GLATFELTER COMPANY ANNUAL REPORT ON FORM 10-K For the Year Ended DECEMBER 31, 2009 Table of Contents Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings [Reserved] Executive Officers Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Financial Statements and Supplementary Data Changes in and Disagreements With Accountants on Accounting and Financial Disclosures Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits, Financial Statement Schedules Page 1 6 11 11 12 12 12 13 14 15 24 25 57 57 57 57 57 57 57 57 58 61 62 64 PART I Item 1 Item 1A Item 1B Item 2 Item 3 Item 4 PART II Item 5 Item 6 Item 7 Item 7A Item 8 Item 9 Item 9A Item 9B PART III Item 10 Item 11 Item 12 Item 13 Item 14 PART IV Item 15 SIGNATURES CERTIFICATIONS SCHEDULE II PART I ITEM 1 BUSINESS Overview Glatfelter began operations in 1864 and today, we believe we are one of the world’s leading manufacturers of specialty papers and fiber-based engi- neered products. Headquartered in York, Pennsylvania, we own and operate manufacturing facilities located in Pennsylvania, Ohio, Germany, the United Kingdom, France, the Philippines and Canada. We manufacture a broad and diverse line of prod- ucts serving customers in numerous markets. Many of the markets in which we operate are characterized by higher- value-added products and, in some cases, by higher growth prospects and lower cyclicality than commodity paper markets. Examples of some of our markets and product applications include: (cid:129) papers for carbonless and forms products and specialized envelopes (cid:129) filtration papers for the tea and coffee industry (cid:129) book publishing papers Acquisitions Over the past four years we com- pleted the following additional acquisitions: Dollars in millions Date Business Location Purchase Price Est Annual Revenue Primary Paper Products Lydney, England Mar ’06 $65.0 $ 75.0 Chillicothe, Ohio Caerphilly, Wales Apr ’06 Nov ’07 83.3 12.6 440.0 53.4 Tea bags & coffee papers Carbonless & forms Metallized These strategic acquisitions significantly increased our revenues and provided us with additional operating scale, increased production capacity, and an expansion of our geographic reach. Our Business Units Prior to the completion of the Concert acquisition, we managed our business as two distinct units: (i) the North America-based Specialty Papers business unit; and (ii) the Europe-based Compos- ite Fibers business unit. Consolidated net sales and the relative net sales contribution of each of our business units for the past three years are summarized below: Dollars in thousands 2009 2008 2007 Net sales Business unit contribution Specialty Papers Composite Fibers $1,184,010 $1,263,850 $1,148,323 66.9% 33.1 66.0% 34.0 69.9% 30.1 Total 100.0% 100.0% 100.0% (cid:129) metallized papers for packaging and bottled bev- Net tons sold by each business unit for the past erage labels three years were as follows: (cid:129) overlay papers for decorative laminate, flooring and furniture applications (cid:129) papers for a wide variety of other specialty products including postage stamps, playing cards, greeting cards, digital imaging papers and FDA grades Recent Developments On February 12, 2010, we completed the acquisition of Concert Industries Corp. (“Concert”), a privately-held, leading supplier of airlaid non-woven fabric-like material, for $234.4 million based on the currency exchange rates on the closing date. Concert, with approximately 590 employees, has opera- tions located in Gatineau, Quebec, Canada and Falkenha- gen, Brandenburg, Germany. Annual revenues totaled $203.0 million in 2009. Concert manufactures highly absorbent cellulose based airlaid non-woven material used in products such as feminine hygiene and adult incontinence products, baby wipes, pre-moistened cleaning wipes, napkins and tablecloths, and food pads. Specialty Papers Composite Fibers Total 2009 2008 2007 738,841 80,064 743,755 85,599 726,657 72,855 818,905 829,354 799,512 Specialty Papers Our North America-based Spe- cialty Papers business unit focuses on producing papers for the following markets: (cid:129) Carbonless & forms papers for credit card receipts, multi-part forms, security papers and other end-user applications; (cid:129) Book publishing papers for the production of high quality hardbound books and other book publishing needs; (cid:129) Envelope and converting papers for the direct mail market, shopping bags, and other converting applications; and (cid:129) Engineered products for digital imaging, trans- fer, casting, release, postal, playing card and other niche specialty applications. The markets in which Specialty Papers competes have undergone significant and rapid consolidation over the past several years resulting in fewer, more globally Glatfelter 2009 Annual Report 1 focused producers. Over 80% of the North American market share is now served by five paper companies, of which Glatfelter is one. Specialty Papers’ revenue compo- sition by market consisted of the following for the years indicated: In thousands 2009 2008 2007 Carbonless & forms Book publishing Envelope & converting Engineered products Other $320,088 176,646 146,812 143,490 4,879 $338,067 201,040 138,293 149,372 7,127 $345,785 185,343 116,797 136,785 17,583 Total $791,915 $833,899 $802,293 We believe we are one of the leading suppliers of book publishing papers in the United States and the second leading carbonless paper producer. Although the market for carbonless papers in North America is declin- ing approximately 8% to 10% per year, and in 2009, in part due to the recession, this decline was greater, we have been successful in executing our strategy to replace this lost volume with products such as envelope and converting papers, forms and other products. Specialty Papers also produces paper that is converted into special- ized envelopes in a wide array of colors, finishes and capabilities. This market is generally more mature and declining. However, we compete on our customer service capabilities and have grown our market share in each of the last three years. Specialty Papers’ highly technical engineered prod- ucts include those designed for multiple end uses, such as papers for pressure-sensitive postage stamps, greeting and playing cards, conical cups, digital imaging applica- tions and for release paper applications. Such products comprise an array of distinct business niches that are in a continuous state of evolution. Many of these products are utilized by demanding, specialized customer and end- user applications. Some of our products are new and higher growth while others are more mature and further along in the product life cycle. Because many of these products are technically complex and involve substantial customer-supplier development collaboration, they typi- cally command higher per ton prices and generally exhibit greater pricing stability relative to commodity grade paper products. 2 Composite Fibers Our Composite Fibers busi- ness unit, based in Gernsbach, Germany, serves custom- ers globally and focuses on higher-value-added products in the following markets: (cid:129) Food & Beverage paper used for tea bags and coffee pods/pads; (cid:129) Metallized products used in the labeling of beer bottles, innerliners, gift wrap, self-adhesive labels and other consumer products applications; (cid:129) Composite Laminates papers used in produc- tion of decorative laminates, furniture and floor- ing applications; and (cid:129) Technical Specialties is a diverse line of paper products used in batteries, medical masks and other highly engineered applications. We believe this business unit maintains a market leadership position in the tea bag and coffee pods/pads and filters market and the composite laminates market. Since the completion of the Caerphilly acquisition, we have the second largest market share for metallized products globally. Composite Fibers’ revenue composition by market consisted of the following for the years indicated: In thousands 2009 2008 2007 Food & beverage Metallized Composite laminates Technical specialties and other $233,899 81,388 46,442 30,366 $252,545 85,719 58,705 32,983 $218,961 45,426 52,972 28,671 Total $392,095 $429,952 $346,030 Our focus on products made from abaca pulp has made us the world’s largest producer of tea bag and coffee pods/pads filter papers. Many of this unit’s papers are technically sophisticated. Most of the papers pro- duced in the Composite Fibers business unit, except for metallized papers, are extremely lightweight and require very specialized fibers. Our engineering capabilities, spe- cifically designed papermaking equipment and customer orientation position us well to compete in these global markets. Additional financial information for each of our business units is included in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 8 – Financial State- ments and Supplementary Data, Note 22. We intend to manage the operations of Concert Industries as a separate business unit to be known as Advanced Airlaid Materials. Our Competitive Strengths Since commencing operations over 145 years ago, we believe that Glatfelter has developed into one of the world’s leading manufacturers of specialty papers and engineered prod- ucts. We believe that the following competitive strengths have contributed to our success: used by this business unit. The Philippine mill produces approximately 80% of the annual abaca pulp required for Composite Fibers’ production requirements. (cid:129) Broad and diverse product portfolio. We manu- facture a very large portfolio of specialized paper products which diversifies our revenue base, enabling us to access a variety of end-markets and to pursue a wide range of customers. We have the ability to shift production in order to capitalize on market opportunities. The breadth and global reach of our product range help cushion the impact of external economic influ- ences on us. (cid:129) Leading market positions in higher-value, niche segments. We have focused our resources to achieve market-leading positions in certain higher-value, niche segments. Our products include various highly specialized paper products designed for technically demanding end uses. Consequently, many of our products achieve pre- mium pricing relative to that of commodity paper grades. In each of the past three years, approxi- mately 77%, 81% and 81% respectively, of our sales were derived from these higher-value, niche products. The specialized nature of these products generally provides greater pricing stability relative to commodity paper products. (cid:129) Integrated and flexible production. As a nearly fully integrated producer, we are able to mitigate adverse fluctuations in the costs of certain raw materials and energy. In Specialty Papers, our Spring Grove and Chillicothe facilities are verti- cally integrated operations producing in excess of 85% of the annual pulp required for their paper production. Our Spring Grove and Chillicothe facilities also generate 100% of the steam and substantially all of the electricity required for their operations. The flexible operating platform of our Specialty Papers business offers the following unique benefits: (cid:129) the capability to manufacture a broad and diverse product portfolio; (cid:129) the ability to shift manufacturing capacity among product lines; (cid:129) the flexibility to maximize manufacturing efficien- cies in response to changing market dynamics; and (cid:129) support for our New Product Development initiatives. In Composite Fibers, our Philippine mill processes abaca fiber to produce abaca pulp, a key raw material (cid:129) Customer-centric business focus. We offer a unique and diverse product line that can be customized to serve the individual needs of our customers. This allows us to develop close rela- tionships with our key customers and to be adaptable in our product development, manufac- turing, sales and marketing practices to meet changing customer needs. We believe that this approach has led to the development of excellent customer relationships, defensible market posi- tions, and increased pricing stability relative to commodity paper producers. Additionally, our customer-centric focus has been a key driver to our success in new product development. (cid:129) Significant investment in product development. In order to keep up with our customers’ ever- changing needs, we continually enhance our product offerings through significant investment in product development. In each of the past three years, we invested approximately $8 million in product development activities. We derive a sig- nificant portion of our revenue from products developed, enhanced or improved as a result of these activities. Revenue generated from products developed, enhanced or improved within the five previous years as a result of these activities represented in excess of 50% of net sales in each of the past three years ended December 31, 2009. Our Business Strategy Our vision is to become the global supplier of choice in specialty papers and engineered products. We are continuously developing and refining our strategies to strengthen our business and position it for the future. Execution of our strategies is dependent on our customer relationships, technology, operational flexibility and our new product development efforts. Components of our strategy include: Specialty Papers The North American uncoated free sheet market has been challenged by a supply and demand imbalance, particularly for commodity-like prod- ucts. While the industry has narrowed the supply-demand gap by eliminating capacity, the imbalance continues. To be successful in the current market environment, our strategy is focused on: (cid:129) leveraging our flexible operating platform to opti- mize product mix by shifting production among facilities to more closely match output with changing demand trends; Glatfelter 2009 Annual Report 3 (cid:129) employing our new product development capabil- ities to meet changing customer demands and to replace declining carbonless volumes; (cid:129) employing a low-cost approach to our manufac- turing activities and continuously implementing cost reduction initiatives; and (cid:129) improving business processes and deploying con- tinuous improvement capabilities to maintain superior customer service. Composite Fibers The markets served by this business unit are characterized by long-term growth opportunities. To take advantage of this, our strategy is focused on: (cid:129) capturing world-wide growth in Composite Fibers’ core markets of food & beverage, compos- ite laminates and metallized papers; (cid:129) enhancing product mix across all of the business unit’s markets by utilizing new product develop- ment capabilities; and (cid:129) implementing cost reduction initiatives including, among others, work-force efficiencies and improved supply chain management. Balance Sheet We are focused on prudent finan- cial management and the maintenance of a conservative capital structure. By aggressively managing working cap- ital to maximize cash flow from operations, making disciplined capital expenditure decisions and monetizing the value of our timberland assets, we are able to maintain a strong balance sheet, thereby preserving the flexibility to pursue strategic opportunities that will bene- fit our shareholders. Acquisitions We have a demonstrated ability to establish leading market positions through the successful acquisition and integration of complementary businesses. Since 2006, we have successfully completed and fully integrated three acquisitions. In November 2007, we expanded our growth platform in metallized products and created a major increase in our European production scale through our acquisition of Metallised Products Limited and its facility located in Caerphilly, United Kingdom. Our acquisition of the carbonless business operations of NewPage Corporation in April 2006 permit- ted us to take advantage of that operation’s scale and efficient manufacturing environment to expand our higher-value-added Specialty Papers business unit. Lastly, our acquisition of the Lydney mill from J R Crompton Ltd. in March 2006 further strengthened our leading position in tea bags and coffee filter papers. We expect that our purchase of Concert will enable us to grow with the industry leaders in feminine hygiene and adult inconti- nence products and complements our long-term strategy 4 of driving growth in our markets in part through acquisitions. Raw Material and Energy The following table provides an overview of the estimated amount of princi- pal raw materials (“PRM”) expected to be used in 2010 by each of our manufacturing facilities: Estimated Annual Quantity (short tons) Percent of PRM Purchased Specialty Papers Spring Grove Pulpwood(1) Wood – and other pulps Chillicothe(1) Pulpwood Wood – and other pulps Composite Fibers Abaca fiber Wood- and other pulps Abaca pulp Synthetic fiber Metallized base stock 1,051,000 272,800 1,270,000 384,900 17,000 40,200 16,000 10,200 33,000 92 16 100 10 100 100 13 100 100 (1) Pulpwood is used to produce woodpulp. (2) The information set forth above does not include the raw material needs of Concert Industries which was acquired on February 12, 2010. Our Spring Grove, Pennsylvania and Chillicothe, Ohio mills are vertically integrated operations producing in excess of 85% of the combined annual pulp required for paper production. The principal raw material used to produce this pulp is pulpwood, including both hardwoods and softwoods. Hardwoods are available within a rela- tively short distance of our mills. Softwoods are obtained from a variety of locations including the states of Pennsylvania, Maryland, Delaware, Virginia, Kentucky, Tennessee and South Carolina. To protect our sources of pulpwood, we actively promote conservation and forest management among suppliers and woodland owners. In addition to sourcing the pulpwood in the open market, we have long-term supply contracts that provide access to timber at market prices. In addition to integrated pulp making, both the Spring Grove and Chillicothe facilities generate 100% of the steam and 100% and 80%, respectively, of their electricity needs. Principal fuel sources vary by facility and include over 600,000 tons of coal, 870,000 MMBTUs of natural gas, as well as recycled pulping chemicals, bark, wood waste, and fuel oil. Spring Grove’s coal needs are met under a three year contract that expires at the end of 2012 and Chillicothe’s coal needs are supplied under two contracts that expire in the fourth quarter of 2010. Energy and related sales activities The Spring Grove facility produces more electricity than it requires. Excess electricity is sold to the local power company under a long-term co-generation contract expiring March 31, 2010. Anticipating the 2010 expiration of our co-generation contract, we became a member of PJM Interconnection, a federally regulated regional transmis- sion organization that coordinates the movement and ensures reliability of wholesale electricity in its region. As a member, we are committed to providing capacity to the high-voltage electricity grid and agree to sell excess power at market prices. Accordingly, our margin earned from energy sales will be subject to market volatility associated with price at which energy is sold together with volatility in input costs, primarily related to coal. The Gernsbach, Scaër and Lydney facilities generate all of the steam required for their operations. The Gernsbach facility generated approximately 19.5% of its 2009 electricity needs and purchased the balance. The Scaër and Lydney facilities purchased 100% of their 2009 electric power requirements. Natural gas was used to produce substan- tially all internally generated energy at the Gernsbach, Scaër and Lydney facilities during 2009. Our mill in the Philippines processes abaca fiber to produce a specialized pulp. This abaca pulp production provides a unique advantage by supplying a key raw material used by our Composite Fibers business unit. The supply of abaca fiber was somewhat constrained in 2008. As a result, the Composite Fibers business unit slowed its paper machines and used substitute grades of abaca and substitute fibers to meet customer demands. In addition, events may arise from the relatively unstable political and economic environment in which the Philip- pine facility operates that could interrupt the production of abaca pulp. Management periodically evaluates the availability of abaca pulp for our Composite Fibers busi- ness unit. Any extended interruption of the Philippine operation could have a material impact on our consoli- dated financial position and/or results of operations. We target to have approximately one month of fiber supply in stock and one month of fiber supply at sea available to us. In addition, we have established contingency plans for alternative sources of abaca pulp. However, the cost of obtaining abaca pulp from such alternative sources, if available, would likely be much higher. AlternativeFuelMixtureCredits The U.S. Inter- nal 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. 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. Since we began mixing and burning eligible alternative fuels, we earned $107.8 million of alternative fuel mixture credits. According to the Internal Revenue Code, the tax credit expired on December 31, 2009. Accordingly, we do not expect to be eligible for additional credits. Based on information currently available, we believe that we will continue to have ready access, for the foreseeable future, to all principal raw materials used in the production of our products. The cost of our raw materials is subject to significant change, including, but not limited to, the costs of wood, pulp products, certain commodity chemicals and energy. Concentration of Customers For each of the past three years, no single customer represented more than 10% of our consolidated net sales. Competition Our industry is highly competitive. We compete on the basis of product quality, customer service, product development, price and distribution. We offer our products throughout the United States and globally in approximately 85 countries, exclusive of the Concert acquisition. Competition in the markets in which we participate comes from companies of various sizes, some of which have greater financial and other capital resources than we do. There are a number of companies in the United States that manufacture printing and converting papers. We believe we are one of the leading producers of book publishing papers and compete in these markets with, among others, Domtar and Fraser. In the envelope sector we compete with, among others, International Paper, Domtar and Blue Ridge. In the carbonless paper and forms market, we compete with Appleton Papers and, to a lesser extent, Nekoosa Papers, Inc. In our Specialty Papers’ engineered products markets and for the Com- posite Fibers business unit’s markets, competition is product line specific as the necessity for technical exper- tise and specialized manufacturing equipment limits the number of companies offering multiple product lines. We compete with specialty divisions of large companies such as, among others, Ahlstrom, International Paper, Sappi and Stora Enso. Service, product performance, technolog- ical advances and product pricing are important compet- itive factors with respect to all our products. We believe our reputation in these areas continues to be excellent. Glatfelter 2009 Annual Report 5 Capital Expenditures Our business is capital intensive and requires extensive expenditures for new and enhanced equipment. These capital investments are nec- essary for environmental compliance, normal upgrades or replacements, business strategy and research and devel- opment. For 2010, we expect capital expenditures to total approximately $45 million to $50 million, inclusive of Concert. Environmental Matters We are subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of our mills. To comply with environmental laws and regulations, we have incurred substantial capital and operating expendi- tures in past years. For a discussion of environmental matters, see Item 8 – Financial Statements and Supple- mentary Data – Note 21. Employees The following table summarizes our workforce as of December 31, 2009: Location(3) U.S. Total Hourly Salaried Start End Union Contract Period Corporate/Spring Grove 943 581(1) 362 Jan. 2008 Jan. 2011 Chillicothe/Fremont International Gernsbach Scaër Lydney Caerphilly Philippines 1,424 1,073(1) 351 Aug. 2009 Aug. 2012 579 118 278 112 92 222(1) 357 69(1) 213(1) 82(1) 61(1) 49 65 30 31 (2) (2) (2) (2) (2) Total worldwide employees 3,546 2,301 1,245 United Steelworkers International Union and the Office and Professional Employees International Union, Industriegewerkschaft Bergbau, Chemie, Energie-IG BCE Confederation Generale des Travailleurs & Force Ouvriere Unite the Union General Maintenance & Boiler’s Newtech Pulp Workers Union (1) Generally, the majority of the hourly employees included in the table above are covered by terms and conditions of the collective bargaining agree- ments with the respective labor organization indicated. (2) Employees of these facilities are generally covered by one-year labor agreements. Negotiations to renew the agreements are underway at various times during the year. The terms and conditions of the existing agreements will remain in effect until new agreements are reached. (3) The data does not include Concert, which employs approximately 590 people. We consider the overall relationship with our employees to be satisfactory. Available Information On our investor relations page of our Corporate website at www.glatfelter.com we make available free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and other related information as soon as reasonably practical after they are filed with the Securities and Exchange Commission. In addition, our website includes a Corporate Governance page consisting of, among others, our Governance Principles and Code of Business Conduct, and biographies of our Board of Directors and Executive Officers, Audit, Compensation, Finance and Nominating Committees of the Board of Directors and their respective Charters, Code of Business Ethics for the CEO and Senior Financial Officers of Glatfelter, our “whistle-blower” policy and other related material. We satisfy the disclosure requirement for any future amendments to, or waivers from, our Code of Business Conduct or Code of Business Ethics for the CEO and Senior Financial Officers by posting such information on our website. We will provide a copy of the Code of Business Conduct or Code of Business Ethics for the CEO and Senior Financial Officers, without charge, to any person who requests one, by calling (717) 225-2724. 6 ITEM 1A RISK FACTORS Our business and financial performance may be adversely affected by the adverse global eco- nomic environment or downturns in the target markets that we serve. Demand for our products in the markets we serve is primarily driven by demand for our customers’ products, which is often affected by general economic conditions. Downturns in our target markets could result in decreased demand for our products. In particular, our businesses may continue to be adversely affected by the global economic downturn and by softness in targeted markets. Our results could be adversely affected if eco- nomic conditions further weaken or fail to continue to improve. Also, there may be periods during which demand for our products is insufficient to enable us to operate our production facilities in an economical man- ner. The economic impact may cause customer insolven- cies which may result in their inability to satisfy their financial obligations to us. These conditions are beyond our ability to control and may have a significant impact on our sales and results of operations. In addition to fluctuations in demand for our prod- ucts in the markets we serve, the markets for our paper products are also significantly affected by changes in industry capacity and output levels. There have been periods of supply/demand imbalance in the pulp and paper industry, which have caused pulp and paper prices to be volatile. The timing and magnitude of price increases or decreases in the pulp and paper market have generally varied by region and by product type. A sustained period of weak demand or excess supply would likely adversely affect pulp and paper prices. This could have a material adverse affect on our operating and financial results. The cost of raw materials and energy used to manufacture our products could increase and the availability of certain raw materials could become constrained. We require access to sufficient and reasonably priced quantities of pulpwood, purchased pulps, pulp substitutes, abaca fiber and certain other raw materials. Our Spring Grove and Chillicothe locations are vertically integrated manufacturing facilities that generate in excess of 85% of their annual pulp requirements. However, as a result of selling timberlands over the past two years, purchased timber will represent a larger source of the total pulpwood used in our operations. Our Philippine mill purchases abaca fiber to produce abaca pulp, which we use to manufacture our tea bag and coffee pods/pads and filter paper products at our Gernsbach, Scaër and Lydney facilities. However, in the past the supply of abaca fiber has been constrained unexpectedly due to severe weather related damage to the source crop as well as selection by land owners of alternative uses of land in lieu of fiber producing activi- ties. As a result of supply constraints, pricing pressure persists. The cost of many of our production materials and costs, including petroleum based chemicals and freight charges, are influenced by the cost of oil. In addition, coal is a principal source of fuel for both the Spring Grove and Chillicothe facilities and natural gas is used as a source of fuel for our Chillicothe and Composite Fibers’ business unit facilities. Also, in prior years other input costs such as caustic, starch and others, have exhibited extreme upward pricing pressure. In addition, our ven- dors’ liquidity may be impacted by the economy creating supply shortages. We may not be able to pass increased raw materi- als or energy costs on to our customers if the market will not bear the higher price or where existing agreements with our customers limit price increases. If price adjust- ments significantly trail increases in raw materials or energy prices our operating results could be adversely affected. Our industry is highly competitive and increased competition could reduce our sales and profitability. In recent years, the global paper industry in which we compete has been adversely affected by paper pro- ducing capacity exceeding the demand for products and by declining uncoated free sheet demand. As a result, the uncoated free sheet industry has taken steps to reduce underperforming capacity. However, slowing demand or increased competition could force us to lower our prices or to offer additional services at a higher cost to us, which could reduce our gross margins and net income. The greater financial resources of certain of our competitors may enable them to commit larger amounts of capital in response to changing market conditions. Certain competitors may also have the ability to develop product or service innovations that could put us at a competitive disadvantage. Some of the factors that may adversely affect our ability to compete in the markets in which we participate include: (cid:129) the entry of new competitors into the markets we serve, including foreign producers; (cid:129) the willingness of commodity-based paper pro- ducers to enter our specialty markets when they are unable to compete or when demand softens in their traditional markets; (cid:129) the aggressiveness of our competitors’ pricing strategies, which could force us to decrease prices in order to maintain market share; (cid:129) our failure to anticipate and respond to changing customer preferences; (cid:129) the impact of emerging electronic-based substi- tutes for certain of our products such as book publishing and envelope; (cid:129) our inability to develop new, improved or enhanced products; and (cid:129) our inability to maintain the cost efficiency of our facilities. If we cannot effectively compete in the markets in which we operate, our sales and operating results would be adversely affected. We may not be able to develop new products acceptable to our customers. Our business strategy is market focused and includes investments in developing new products to meet the changing needs of our customers and to maintain our market share. Our success will depend in large part on our ability to develop and introduce new and enhanced products that keep pace with introductions by Glatfelter 2009 Annual Report 7 our competitors and changing customer preferences. If we fail to anticipate or respond adequately to these factors, we may lose opportunities for business with both current and potential customers. The success of our new product offerings will depend on several factors, including our ability to: (cid:129) anticipate and properly identify our customers’ needs and industry trends; (cid:129) price our products competitively; (cid:129) develop and commercialize new products and applications in a timely manner; (cid:129) differentiate our products from our competitors’ products; and (cid:129) invest in research and development activities efficiently. Our inability to develop new products could adversely impact our business and ultimately harm our profitability. We are subject to substantial costs and poten- tial liability for environmental matters. We are subject to various environmental laws and regulations that govern our operations, including dis- charges into the environment, and the handling and disposal of hazardous substances and wastes. We are also subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment. To comply with environ- mental laws and regulations, we have incurred, and will continue to incur, substantial capital and operating expenditures. We anticipate that environmental regulation of our operations will continue to become more burden- some and that capital and operating expenditures neces- sary to comply with environmental regulations will continue, and perhaps increase, in the future. Because environmental regulations are not consistent worldwide, our ability to compete globally may be adversely affected by capital and operating expenditures required for envi- ronmental compliance. In addition, we may incur obliga- tions to remove or mitigate any adverse effects on the environment, such as air and water quality, resulting from mills we operate or have operated. Potential obligations include compensation for the restoration of natural resources, personal injury and property damages. We have exposure to liability for remediation and other costs related to the presence of polychlorinated biphenyls in the lower Fox River on which our former Neenah, Wisconsin mill was located. In December 2009, the United States District Court for the Eastern District of Wisconsin issued a favorable order in the pending litiga- tion relating to the Fox River site that while not fully 8 resolving our liability at the site, essentially dismissed the plaintiffs’ claims against the defendants. The plaintiffs have filed a notice of appeal of this order. There can be no assurance that we will be able to successfully defend against such appeal. We have financial reserves for environmental matters, including the Fox River site, but we cannot be certain that those reserves will be ade- quate to provide for future obligations related to these matters, that our share of costs and/or damages for these matters will not exceed our available resources, or that such obligations will not have a long-term, material adverse effect on our consolidated financial position, liquidity or results of operations. Our environmental issues are complicated and should be reviewed in context; please see a more detailed discussion of these matters in Item 8 – Financial Statements and Supplementary Data – Note 21. We may not be able to successfully integrate the Concert acquisition or realize the potential benefits of the acquisition, which could have a material adverse effect on our results of operations. We may not be able to combine successfully the operations of Concert with our operations. The integra- tion of Concert with our operations will require signifi- cant attention from management and may impose substantial demands for other resources. Acquisitions inherently involve risks, including those associated with assimilating and integrating different business operations, corporate cultures, personnel, infrastructures and technol- ogies or products and increasing the scope, geographic diversity and complexity of our operations. There may be additional costs or liabilities that are not currently antic- ipated, including unexpected loss of key employees or customers of Concert and hiring additional management and other critical personnel. The acquisition may also be disruptive to our ongoing business and may not be successfully received by our customers. The purchase of Concert also involved a significant capital commitment, and the return that we achieve on any capital invested may be less than the return that we would achieve on our other projects or investments. Any of these factors could adversely affect our operations, financial results and liquidity. Furthermore, we may not realize the potential ben- efits of the acquisition. Historically, Concert has been dependent upon a limited number of customers and product markets for a significant portion of its net sales. One customer accounted for the majority of Concert’s net sales for the three years ended December 31, 2009. The loss of a significant customer could have a material adverse effect on Concert’s operating results. In addition, Concert’s sales in the feminine hygiene market accounted for over three-fourths of its net sales in 2009. A decline in Concert’s sales of feminine hygiene products or in sales of feminine hygiene products generally could have a material adverse effect on Concert’s operating results. Customers in the airlaid non-woven fabric material mar- ket, including the feminine hygiene market, may also switch to less expensive products or otherwise reduce demand for Concert’s products, thus reducing the size of the markets in which Concert currently sells its products. Any of the foregoing could result in our failing to realize the benefits of the acquisition, which could have a material adverse effect on our financial performance and business prospects. Our operations may be impaired and we may be exposed to potential losses and liability as a result of natural disasters, acts of terrorism or sabotage or similar events. Natural disasters, such as earthquakes, flooding or fire, and acts of terrorism or sabotage affecting our operating activities and major facilities could materially and adversely affect our operations, our operating results and financial condition. In particular, we own and oper- ate four dams in York County, Pennsylvania that were built to ensure a steady supply of water for the operation of our paper mill in Spring Grove, Pennsylvania, which is a primary manufacturing location for our book publishing papers and engineered products. Each of these dams is classified as “high hazard” by the Commonwealth of Pennsylvania because they are located in close proximity to inhabited areas and sudden failure would endanger occupants or residential, commercial or industrial struc- tures. Failure or breach of any of the dams, including as a result of natural disaster or act of terrorism or sabotage, could cause significant personal injuries and damage to residential and commercial property down- stream for which we may be liable. The failure of a dam could also be extremely disruptive and result in damage to or the shutdown of our Spring Grove mill. Any losses or liabilities incurred due to the failure of one of our dams may not be fully covered by our insurance policies or may substantially exceed the limits of our policies, and could materially and adversely affect our operating results and financial condition. In addition, many of our paper making operations requires a reliable and abundant supply of water. Such mills rely on a local water body or water source for its water needs and, therefore, is particularly impacted by drought conditions or other natural or manmade interrup- tions to its water supplies. At various times and for differing periods, each of our mills has had to modify operations due to water shortages or low flow conditions in its principal water supplies. Any interruption or curtailment of operations at any of our paper mills due to drought or low flow conditions at the principal water source or another cause could materially and adversely affect our operating results and financial condition. In addition, our pulp mill in Lanao del Norte on the Island of Mindanao in the Republic of the Philippines is located along the Pacific Rim in the world’s hazard belt. By virtue of its geographic location, this mill is subject to, among other types of natural disasters, floods, droughts, cyclones, typhoons, earthquakes, windstorms and volcanic activity. Moreover, the area of Lanao del Norte has been a target of terrorist activities, including bombings, by suspected members of the al-Qaeda-linked Islamist groups in the Philippines, such as the Abu Sayyaf and the Rajah Solaiman Group and other Islamic militant groups, most notably the Moro Islamic Liberation Front. The most common bomb targets in Lanao del Norte to date have been power transmission towers. Our pulp mill in Mind- anao is located in a rural portion of the island and is susceptible to attacks or power interruptions. The Mind- anao mill supplies approximately 80% of the abaca pulp that is used by our Composite Fibers business unit to manufacture our coffee and tea bag filter papers. Any interruption, loss or extended curtailment of operations at our Mindanao mill could materially and adversely affect our operating results and financial condition. We have operations in a potentially politically and economically unstable location. Our pulp mill in the Philippines is located in a region that is unstable and subject to political unrest. As discussed above, our Philippine pulp mill produces abaca pulp, a significant raw material used by our Composite Fibers business unit and is currently our main provider of abaca pulp. There are limited suitable alternative sources of readily available abaca pulp in the world. In the event of a disruption in supply from our Philippine mill, there is no guarantee that we could obtain adequate amounts of abaca pulp from alternative sources at a reasonable price or at all. As a consequence, any civil disturbance, unrest, political instability or other event that causes a disruption in supply could limit the availability of abaca pulp and would increase our cost of obtaining abaca pulp. Such occurrences could adversely impact our sales volumes, revenues and operating results. Our international operations pose certain risks that may adversely impact sales and earnings. We have significant operations and assets located in Germany, France, the United Kingdom, the Philippines and as a result of the recent completion of the Concert Industries acquisition, in Canada. Our international sales and operations are subject to a number of special risks, Glatfelter 2009 Annual Report 9 market price for coal is approximately 10% higher than the fixed price we pay under the contract. In addition, because our Spring Grove facility produces more electric- ity than it requires, we have historically sold the excess electricity to the local power company under a long-term co-generation contract, which expires March 31, 2010. The fixed price we receive for electricity under this contract is approximately 30% higher than current for- ward prices for electricity. We are unable to renew this co-generation contract upon its expiration on March 31, 2010 and will, instead, sell our excess electricity at market prices prevailing at the time of sale. Market prices for electricity have historically been volatile and may continue to be substantially lower than the price we currently receive under our expiring co-generation contract. Our cost of coal, as well as the costs incurred for natural gas and other fuels used to generate electricity, have a major impact on the net revenue and overall profitability of our Specialty Paper business unit. By selling our excess electricity at market prices prevailing at the time of sale, we may not be able to continue to sell excess electricity at acceptable margins in relation to the prices under our coal supply contract, if at all. A reduc- tion in these margins or an inability to sell our excess electricity could reduce the net revenues and overall profitability of our Specialty Papers business unit, which would have a material adverse affect on our consolidated financial position and results of operations. The impairment of financial institutions may adversely affect us. We, our customers and our vendors, have transac- tions and borrowing arrangements with U.S. and foreign commercial banks, and other financial institutions, some of whom may be exposed to ratings downgrade, bank- ruptcy, liquidity, default or similar risks, especially in connection with recent financial market turmoil. A ratings downgrade, bankruptcy, receivership, default or similar event involving such institutions may adversely affect the counterparty’s performance under letters of credit, limit our access to capital, impact the ability of our suppliers to provide us with raw materials needed for our produc- tion, impact our customers’ ability to meet obligations to us, or adversely affect our liquidity position, future business and results of operations. in addition to the risks in our domestic sales and operations, including differing protections of intellectual property, trade barriers, labor unrest, exchange controls, regional economic uncertainty, differing (and possibly more stringent) labor regulation, risk of governmental expropriation, domestic and foreign customs and tariffs, differing regulatory environments, difficulty in managing widespread operations and political instability. These factors may adversely affect our future profits. Also, in some foreign jurisdictions, we may be subject to laws limiting the right and ability of entities organized or operating therein to pay dividends or remit earnings to affiliated companies unless specified conditions are met. Any such limitations would restrict our flexibility in using funds generated in those jurisdictions. Foreign currency exchange rate fluctuations could adversely affect our results of operations. We own and operate paper and pulp mills in Germany, France, the United Kingdom and the Philippines and as a result of the recent completion of the Concert acquisition, in Canada. The majority of our business is transacted in U.S. dollars, however, a substantial portion of business is transacted in Euros, British Pound Sterling and Canadian dollars. With respect to the Euro and Canadian dollar, we generate substantially greater cash inflow in these currencies than we do outflow. However, with respect to the British Pound Sterling, we have greater outflows than inflows of this currency. As a result of these positions, we are exposed to changes in currency exchange rates. Our ability to maintain our products’ price compet- itiveness is reliant, in part, on the relative strength of the currency in which the product is denominated compared to the currency of the market into which it is sold and the functional currency of our competitors. Changes in the rate of exchange of foreign currencies in relation to the U.S. dollar, and other currencies, may adversely impact our results of operations and our ability to offer products in certain markets at acceptable prices. Substantially lower and more volatile market prices for sales of excess electricity compared to the price we currently receive may prevent us from achieving the historical margins on our sales of excess electricity in relation to our coal supply contract, which could have a material adverse affect on our consolidated financial position and results of operations. We generate electricity at our Spring Grove facility using a variety of fuels, including coal. We purchase coal for this facility under a long-term, fixed price supply contract, which expires at the end of 2012. The current 10 An IRS audit of our 2009 tax return could result in a change in the tax treatment of the alterna- tive fuel mixture credits we claimed in 2009, which could have a material adverse effect on our results of operations and financial position. The U.S. Internal Revenue Code, or the Code, provided a tax credit for companies that used alternative fuel mixtures to produce energy to operate their busi- nesses on or prior to December 31, 2009. During 2009, we registered two of our facilities with the IRS as alternative fuel mixers based on their use of black liquor as an alternative fuel source. For the year ended Decem- ber 31, 2009, we will have substantial alternative fuel mixture credits relating to these facilities. Our results of operations in 2009 included, on a pre-tax basis, $107.8 million of alternative fuel mixture credits of which $29.7 million has been received in cash, $20.1 million was used to reduce estimated interim tax payments and $58.0 million will be claimed as refundable income tax credits and is expected to be realized in cash primarily in the first half of 2010. In the event that the IRS audits our tax return for the year ended December 31, 2009, the IRS may conclude that some or all of the credits claimed are subject to federal income taxes, which would subject us to additional tax liabilities and could have a material adverse effect on our results of operations and financial position. In the event any of the above risk factors impact our business in a material way or in combination during the same period, we may be unable to generate sufficient cash flow to simul- taneously fund our operations, finance capital expenditures, satisfy obligations and make divi- dend payments on our common stock. In addition to debt service obligations, our business is capital intensive and requires significant expenditures for equipment maintenance, new or enhanced equipment, environmental compliance, and research and development to support our business strategies. We expect to meet all of our near and long-term cash needs from a combina- tion of operating cash flow, cash and cash equivalents, our existing credit facility and other long-term debt. If we are unable to generate sufficient cash flow from these sources, we could be unable to meet our near and long- term cash needs or make dividend payments. ITEM 1B UNRESOLVED STAFF COMMENTS None. ITEM 2 PROPERTIES Our leased corporate offices are located in York, Pennsylvania. In addition, we lease office space for a sales and distribution office in Moscow, Russia. As of December 31, 2009, we owned and operated paper mills located in Pennsylvania; Ohio; the United Kingdom; Ger- many; and France. Our metallized paper production facil- ity located in Caerphilly, Wales leases the building and land associated with its operations. We also own and operate a pulp mill in the Philippines. Substantially all of the equipment used in our papermaking and related operations is also owned. All of our properties, other than those that are leased, are free from any material liens or encumbrances. We consider all of our buildings to be in good structural condition and well maintained and our properties to be suitable and adequate for present operations. The following table summarizes the estimated pro- duction capacity of each of our facilities as of Decem- ber 31, 2009: Estimated Annual Production Capacity (short tons) Specialty Papers Spring Grove Chillicothe Composite Fibers Gernsbach Scaër Lydney Caerphilly Philippines 332,000 68,000 400,000 7,500 40,000 11,800 6,000 16,800 17,000 13,000 Uncoated Coated Uncoated Coated Lightweight Metallized Lightweight Lightweight Metallized Abaca pulp The Spring Grove facility includes five uncoated paper machines that have been rebuilt and modernized from time to time with the capacity to produce 332,000 tons. It has an off-line combi-blade coater and a Specialty Coater (“S-Coater”), which together yield a potential annual production capacity for coated paper of approxi- mately 68,000 tons. Since uncoated paper is used in producing coated paper, this is not additional capacity. We view the S-Coater as an important asset that allows us to expand our engineered paper products business. The Spring Grove facility also includes a pulpmill that has a production capacity of approximately 650 tons of bleached pulp per day. Glatfelter 2009 Annual Report 11 The Chillicothe facility operates four paper machines which together yield a potential annual production capac- ity of uncoated and carbonless paper of approximately 400,000 tons. In addition, this location produces 7,500 tons per year of other coated paper. This facility also includes a pulpmill that has a production capacity of approximately 955 tons of bleached pulp per day. The Composite Fibers business unit’s four facilities operate a combined ten papermaking machines with the capacity to produce approximately 60,700 tons of light- weight paper on an annual basis. In addition, the business unit has the capacity to produce an aggregate of 27,500 tons of metallized papers from its lacquering and metallizing operations in Gernsbach, Germany and Caerphilly, Wales. Our facility in the Philippines consists of a pulpmill that supplies a majority of the abaca pulp requirements of the Composite Fibers paper mills. Concert, which was acquired in February 2010, has annual rated capacity totaling approximately 84,000 met- ric tons of airlaid products. ITEM 3 LEGAL PROCEEDINGS We are involved in various lawsuits that we con- sider to be ordinary and incidental to our business. The ultimate outcome of these lawsuits cannot be predicted with certainty; however, we do not expect such lawsuits individually or in the aggregate, will have a material adverse effect on our consolidated financial position, liquidity or results of operations. For a discussion of commitments, legal proceedings and related contingencies, see Item 8 – Financial State- ments and Supplementary Data – Note 21. ITEM 4 [RESERVED] 12 EXECUTIVE OFFICERS The following table sets forth certain information with respect to our executive officers as of March 15, 2010. Name Age Office with the Company George H. Glatfelter II Dante C. Parrini John P. Jacunski David C. Elder Thomas G. Jackson Debabrata Mukherjee Martin Rapp Mark A. Sullivan William T. Yanavitch II 58 45 44 41 44 40 50 55 49 Chairman and Chief Executive Officer Executive Vice President and Chief Operating Officer Senior Vice President and Chief Financial Officer Vice President and Corporate Controller Vice President General Counsel and Corporate Secretary Vice President and General Manager, Specialty Papers Business Unit Vice President and General Manager, Composite Fibers Business Unit Vice President Global Supply Chain Vice President Human Resources and Administration Officers are elected to serve at the pleasure of the Board of Directors. Except in the case of officers elected to fill a new position or a vacancy occurring at some other date, officers are generally elected at the organiza- tional meeting of the Board of Directors held immediately after the annual meeting of shareholders. George H. Glatfelter II is our Chairman and Chief Executive Officer, positions he has held since Febru- ary 2001. Mr. Glatfelter joined our company in January 1977. He also serves as a director of Met-Pro Corporation. Dante C. Parrini became Executive Vice President and Chief Operating Officer in February 2005. Prior to this, Mr. Parrini was Senior Vice President and General Manager, a position he held beginning in January 2003. Mr. Parrini previously was Vice President responsible for Sales and Marketing. John P. Jacunski became Senior Vice President & Chief Financial Officer in July 2006. From October 2003 until July 2006, he was Vice President and Corporate Controller. Mr. Jacunski was previously Vice President and Chief Financial Officer at WCI Steel, Inc. from June 1999 to October 2003. Prior to joining WCI, Mr. Jacunski was with KPMG, an international accounting and consulting firm, where he served in various capacities. David C. Elder was appointed Vice President in March 2009 and has served as Corporate Controller and Chief Accounting Officer since July 2006. Prior to joining us in January 2006, Mr. Elder was Corporate Controller for YORK International Corporation, a position he held since December 2003. Prior thereto, he was the Director, Financial Planning and Analysis for YORK International Corporation from August 2000 to December 2003. Thomas G. Jackson became Vice President, Gen- PART II ITEM 5 MARKETFORREGISTRANT’SCOMMON EQUITY, RELATEDSTOCKHOLDERMATTERS AND ISSUERPURCHASESOFEQUITY SECURITIES Common Stock Prices and Dividends Declared Information The following table shows the high and low prices of our common stock traded on the New York Stock Exchange under the symbol “GLT” and the dividend declared per share for each quarter during the past two years. Quarter 2009 Fourth Third Second First 2008 Fourth Third Second First High Low Dividend $12.58 12.14 11.59 9.80 $ 13.69 15.76 15.76 15.44 $10.01 7.91 6.00 4.57 $ 7.50 12.51 13.51 12.85 $0.09 0.09 0.09 0.09 $ 0.09 0.09 0.09 0.09 As of March 12, 2010, we had 1,515 shareholders of record. eral Counsel and Secretary in June 2008. Since joining us in November 2006, Mr. Jackson has held various posi- tions in our legal department including Assistant General Counsel, Assistant Secretary and Director of Compliance. Prior to joining our company, Mr. Jackson was Director of Business Development at C&D Technologies, Inc. from August 2005 to September 2006 and prior to that was Deputy General Counsel at C&D Technologies from Octo- ber 1999 to August 2005. Debabrata Mukherjee was appointed Vice Presi- dent & General Manager – Specialty Papers Business Unit in April 2008. Dr. Mukherjee joined our Company in 1998 and since then has held various operational, sales and technical leadership positions within the Specialty Papers Business Unit. From March 2006 through March 2008, Dr. Mukherjee served as Division Vice President, Engineered & Converting Products. From February 2004 through February 2006, Dr. Mukherjee served as Director, Engineered Products. Prior to joining Glatfelter, Dr. Mukherjee served in various capacities with Felix Schoeller, a German based global specialty paper manufacturer. Martin Rapp joined Glatfelter in August 2006 and serves as Vice President and General Manager – Compo- site Fibers Business Unit. Prior to this, Mr. Rapp was Vice President and General Manager of Avery Dennison’s Roll Materials Business in Central and Eastern Europe since August 2002. Mark A. Sullivan was appointed Vice President, Global Supply Chain in February 2005. Mr. Sullivan joined our company in December 2003, as Chief Procurement Officer. His experience includes a broad array of opera- tions and supply chain management responsibilities dur- ing 20 years with the DuPont Company. William T. Yanavitch II rejoined the Company in May 2005 as Vice President Human Resources and Administration. Mr. Yanavitch served as Vice President Human Resources from July 2000 until his resignation in January 2005 at which time he became Corporate Human Resources Manager of Constellation Energy. Glatfelter 2009 Annual Report 13 STOCK PERFORMANCE GRAPH The following graph compares the cumulative 5-year total return of our common stock with the cumulative total returns of both a peer group and a broad market index. For the year ended December 31, 2009, as a result of changes in our industry, including the bank- ruptcy of certain companies previously included in the old peer group, we now compare our stock performance to the S&P Small Cap 600 Paper Products index. This peer index is comprised of Buckeye Technologies Inc., Clear- water Paper Corp., Neenah Paper Inc., Schweitzer-Maud- uit International and Wausau Paper Corp. The old peer group consisted of AbitibiBowater, Inc., Neenah Paper, Inc., Schweitzer-Mauduit International and Wausau Paper Corp. In addition, the chart includes a comparison to the Russell 2000, which we believe is an appropriate bench- mark index for stocks such as ours. The graph assumes that the value of the investment in our common stock, in each index, and in each of the peer groups (including reinvestment of dividends) was $100 on December 31, 2004 and charts it through December 31, 2009. $140 $120 $100 $80 $60 $40 $20 $0 12/04 12/05 12/06 12/07 12/08 12/09 Glatfelter Russell 2000 Old Peer Group S&P SmallCap 600 Paper Products *$100 Invested on December 31, 2004 in stock or index, Including reinvestment of dividends. Fiscal year ending December 31. Copyright©2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved. ITEM 6 SELECTED FINANCIAL DATA As of or for the year ended December 31 Dollars in thousands, except per share Net sales Energy sales, net Total revenue Reversal of (shutdown and restructuring charges and unusual items) Gains on dispositions of plant, equipment and timberlands, net Gains from insurance recoveries Net income (loss) Earnings (loss) per share Basic Diluted Total assets Total debt Shareholders’ equity Cash dividends declared per common share Shares outstanding Capital expenditures Depreciation and amortization Tons sold Number of employees 2009(1) 2008 2007 2006 2005 $1,184,010 13,332 $1,263,850 9,364 $1,148,323 9,445 $ 986,411 10,726 $ 579,121 10,078 1,197,342 — 898 — 123,442 2.70 2.70 1,190,294 254,583 510,704 0.36 45,706 26,257 61,256 818,905 3,546 1,273,214 856 18,468 — 57,888 1.28 1.27 1,057,309 313,285 342,707 0.36 45,434 52,469 60,611 829,354 3,633 1,157,768 (35) 78,685 — 63,472 1.41 1.40 1,287,067 313,185 476,068 0.36 45,141 28,960 56,001 799,512 3,854 997,137 (30,318) 17,394 205 (12,236) (0.27) (0.27) 1,225,643 397,613 388,368 0.36 44,821 44,460 50,021 721,892 3,704 589,199 (1,564) 22,053 20,151 38,609 0.88 0.87 1,044,977 207,073 432,312 0.36 44,132 31,024 50,647 498,593 1,958 (1) During 2009, we recognized $107.8 million of alternative fuel mixture credits, all of which were recorded as a reduction to cost of products sold. 14 ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future consolidated financial position or results of operations, made in this Report on Form 10-K are forward looking. We use words such as “antic- ipates”, “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 state- ments regarding expectations of, among others, net sales, costs of products sold, non-cash pension expense, envi- ronmental 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 expecta- tions. 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. ii. iii. iv. v. vi. variations in demand for our products including the impact of any unplanned market-related downtime, or variations in product pricing; changes in the cost or availability of raw materials we use, in particular pulpwood, market pulp, pulp substitutes, caustic soda and abaca fiber; changes in energy-related costs and commodity raw materials with an energy component; our ability to develop new, high value-added Spe- cialty Papers and Composite Fibers products; our inability to renew our electricity sales agree- ment resulting in market pricing that is currently below historical margins in relation to our current coal supply contract; the impact of competition, changes in industry paper production capacity, including the construc- tion of new mills, the closing of mills and incre- mental 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. ix. x. xi. xii. xiii. the gain or loss of significant customers and/or on- going viability of such customers; 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; risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates; geopolitical events, including war and terrorism; disruptions in production and/or increased costs due to labor disputes; enactment of adverse state, federal or foreign tax or other legislation or changes in government policy or regulation; xiv. adverse results in litigation; and xv. our ability to finance, consummate and integrate current or future acquisitions. Introduction We manufacture, both domestically and internationally, a wide array of specialty papers and 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 & bever- age filter papers, decorative laminates for furniture and flooring, metallized papers and other highly technical niche markets. Overview Our results of operations for 2009 when compared with 2008 were impacted by the weak global economic conditions. Overall volumes shipped by Specialty Papers declined slightly and Composite Fibers declined 6.5% in the year-to-year comparison. As a result of the soft demand for most of our products and our efforts to reduce inventory, during the second quarter of 2009, we incurred significant market-related downtime at many of our facilities which adversely affected results of operations. This downtime continued within our Compos- ite Fibers business unit into the third quarter, although to a lesser extent. For 2009, we generated $163.9 million of cash from operations, including alternative fuel mixture credits, as a result of improved operations, inventory reductions and effective working capital management initiatives. During 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 Glatfelter 2009 Annual Report 15 alternative fuel source. Our 2009 results of operations included, on a pre-tax basis, $107.8 million of alternative fuel mixture credits, of which $29.7 million was received in cash and another $20.1 million was used to offset interim estimated tax payments. We expect to realize the remaining $58.0 million of credits in the form of non- taxable refundable income tax credits. Specialty Papers’ operating income totaled $55.9 million and $49.2 million for 2009 and 2008, respectively. The improvement in operating income was led by productivity improvements and cost reduction initiatives and sales of renewable energy credits, partially offset by the adverse impact of lower volumes and selling prices. During 2009, the weak economic environment adversely affected demand in all markets served by Specialty Papers. As a result of weak demand in the first half of the year and our efforts to reduce inventory, this unit incurred market related downtime totaling 33,019 tons of paper. During the year, we reduced Specialty Papers’ inventories by 13.3%. Our Composite Fibers business unit’s operating income declined to $21.9 million from $25.0 million in 2008. Volumes shipped during 2009 declined 6.5% compared to 2008 as a result of the weak economic environment and our customers’ actions to reduce their inventory levels. As a result of weak demand and our inventory reduction efforts, during 2009 we incurred unscheduled downtime totaling approximately 6,480 tons of paper, or 9.4% of the unit’s total capacity for the period. In addition, our pre-tax results of operations in 2009 included $17.7 million of lower gains from the sale of timberlands than what was realized in 2008. We also recorded $7.0 million of pension expense in 2009 com- pared with pension income of $16.1 million in 2008. RESULTS OF OPERATIONS 2009 versus 2008 The following table sets forth summarized results of operations: Year Ended December 31 2009 2008 $1,184,010 269,764 160,405 123,442 2.70 $1,263,850 177,782 99,209 57,888 1.27 In thousands, except per share Net sales Gross profit Operating income Net income Earnings per diluted share 16 The consolidated results of operations for 2009 and 2008 include the following items not considered to be part of our core business operations: In thousands, except per share 2009 Alternative fuel mixture credits Acquisition related costs 2008 Gains on sale of timberlands Reversal of shutdown and restructuring charges Acquisition integration costs After-tax Income (loss) Diluted EPS $95,764 (1,768) $ 2.09 (0.04) $ 10,984 $ 0.24 517 (889) 0.01 (0.02) These items increased earnings by $94.0 million, or $2.05 per diluted share in 2009. Comparatively, the items identified above increased earnings in 2008 by $10.6 million, or $0.23 per diluted share. Business Units Results of individual business units are presented based on our management account- ing practices and management structure. There is no comprehensive, authoritative body of guidance for man- agement 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 esti- mated utilization of support area services or are included in “Other and Unallocated” in the Business Unit Perfor- mance table. Management evaluates results of operations of the business units before pension income or expense, alterna- tive 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 our performance is evaluated internally and by our Board of Directors. Business Unit Performance In thousands, except tons Net sales Energy sales, net Total revenue Cost of products sold Gross profit (loss) SG&A Reversal of shutdown and restructuring charges Gains on dispositions of plant, equipment and timberlands Total operating income (loss) Non operating income (expense) Year Ended December 31 Specialty Papers 2009 2008 Composite Fibers 2009 2008 Other and Unallocated 2008 2009 Total 2009 2008 $791,915 13,332 $833,899 9,364 $392,095 – $429,952 – $ – – (1) – $1,184,010 13,332 $1,263,850 9,364 805,247 693,949 111,298 55,408 – – 55,890 – 843,263 739,481 103,782 54,596 – – 49,186 – 392,095 334,378 57,717 35,779 – 429,952 366,791 63,161 38,206 – – (100,749) 100,749 19,070 – (1) (10,840) 10,839 5,095 (856) 1,197,342 927,578 1,273,214 1,095,432 269,764 110,257 – 177,782 97,897 (856) – – (898) (18,468) (898) (18,468) 21,938 – 24,955 – 82,577 (17,259) 25,068 (18,183) 160,405 (17,259) 99,209 (18,183) Income (loss) before income taxes $ 55,890 $ 49,186 $ 21,938 $ 24,955 $ 65,318 $ 6,885 $ 143,146 $ 81,026 Supplementary Data Net tons sold Depreciation, depletion and amortization Capital expenditures 738,841 $ 37,520 14,077 743,755 $ 35,010 20,878 80,064 $ 23,736 12,080 85,599 $ 25,601 31,591 $ – – 100 $ – – – $ 818,905 61,256 26,257 $ 829,354 60,611 52,469 Sales and Costs of Products Sold In thousands Year Ended December 31 2009 2008 Change Net sales Energy and related sales – net $1,184,010 13,332 $1,263,850 9,364 $ (79,840) 3,968 Total revenues Costs of products sold (1) 1,197,342 927,578 1,273,214 1,095,432 (75,872) (167,854) Gross profit $ 269,764 $ 177,782 $ 91,982 We sell excess power generated by the Spring Grove, PA facility pursuant to a long-term contract that expires March 31, 2010. The following table summarizes this activity for each of the past two years: In thousands Energy sales Costs to produce Net 2009 2008 Change $ 20,128 (11,883) $ 19,731 (10,367) $ 397 (1,516) 8,245 5,087 9,364 – (1,119) 5,087 Gross profit as a percent of Net sales 22.8% 14.1% Renewable energy credits (1) Includes $107.8 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: Business Unit Specialty Papers Composite Fibers Total Percent of total 2009 2008 66.9% 66.0% 33.1 34.0 100.0% 100.0% Net sales totaled $1,184.0 million for 2009, a decrease of $79.8 million, or 6.3%, compared to 2008. In the Specialty Papers business unit, 2009 net sales decreased $42.0 million to $791.9 million. Operating income increased $6.7 million in the year over year comparison and totaled $55.9 million in 2009. The improvement in operating income was primarily due to $12.2 million of productivity efficiencies and cost reduc- tion initiatives and $4.5 million of lower input costs. These favorable factors were offset by $7.6 million of lower volumes and mix impact and $2.1 million of lower selling prices. Operating income was also adversely impacted by the costs of unplanned downtime at the Spring Grove and Chillicothe facilities totaling approxi- mately $6.6 million in 2009 compared to 2008. Total $ 13,332 $ 9,364 $ 3,968 Renewable energy credits (“RECs”) represent sales of certified credits earned related to burning renewable sources of energy such as black liquor and wood waste. The market for such certificates is an emerging and somewhat illiquid market. The extent and value of future revenues from REC sales is dependent on many factors outside of management’s control. Therefore, we may not be able to generate additional sales of RECs in future periods. In addition, the certification by the Public Utility Commission of Ohio of our Chillicothe, OH facility as a renewable energy generator was appealed by a consumer advocacy group. While we believe the certification will be upheld, we are unable to predict its ultimate outcome. In Composite Fibers, 2009 net sales were $392.1 million, a decline of $37.9 million from 2008. Operating income declined by $3.0 million in the compar- ison to $21.9 million. Total volumes shipped by this business unit declined 6.5% led by lower shipments of composite laminates and food & beverage paper prod- ucts, which declined 18.5% and 5.5%, respectively. The translation of foreign currencies adversely impacted net sales by $23.0 million; however, higher average selling prices contributed $6.2 million. Glatfelter 2009 Annual Report 17 Energy and raw material costs in the Composite Fibers business unit were $3.9 million higher in 2009 than in 2008. Market-related downtime adversely impacted operating results by $7.4 million in 2009 compared to 2008. Alternative Fuel Mixture Credits The U.S. Inter- nal 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. On May 11, 2009, we were notified by the Internal Revenue Service that our applica- tion to be registered as an alternative fuel mixer was approved. We received a payment from the Internal Revenue Service on June 30, 2009 in the amount of $29.7 million 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. Since we began mixing and burning eligible alter- native fuels, we have earned $107.8 million of alternative fuel mixture credits of which $29.7 million has been received in cash, $20.1 million was used to reduce estimated interim tax payments and $58.0 million will be claimed as refundable income tax credits and is expected to be realized in cash primarily in the first half of 2010. We record all alternative fuel mixture credits as a reduc- tion to cost of goods sold. According to the Internal Revenue Code, the tax credit expired on December 31, 2009. Pension Expense/Income The following table summarizes the amounts of pension expense or income recognized for 2009 compared to 2008: In thousands 2009 2008 Change Year Ended December 31 Recorded as: Costs of products sold SG&A expense $(4,936) (2,097) $11,067 4,995 $(16,003) (7,092) Total $(7,033) $16,062 $(23,095) The amount of pension expense or income recog- nized 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 8 – Financial Statements – Note 11, the fair value of the plans’ assets declined approximately 29% during 2008. As a result, during 2009 we recognized net pension expense totaling approximately $7.0 million, on a pre-tax basis. However, we were not required to make cash contributions to our qualified defined benefit pension plans in 2009. Selling, general and administrative (“SG&A”) SG&A expenses increased $12.4 million in the year-to-year comparison and totaled $110.3 million for 18 2009. In 2009, SG&A included $2.1 million of pension expense compared with $5.0 million of pension income in 2008. In addition, we incurred higher legal and professional fees related to the Fox River environmental matter and the Concert Industries acquisition. Gain on Sales of Plant, Equipment and Tim- berlands During the years ended December 31, 2009 and 2008, we completed sales of timberlands which are summarized by the following table: Dollars in thousands Acres Proceeds Gain 2009 Timberlands Other Total 2008 Timberlands Other Total 319 n/a $ 951 – $ 906 (8) $ 951 $ 898 4,561 n/a $19,279 – $18,649 (181) $19,279 $18,468 In connection with each of the asset sales set forth above, we received cash proceeds. Income taxes Our results of operations for 2009 reflect an effective tax rate of 13.8% compared to 28.6% a year ago. The lower tax rate in 2009 was primarily due to a tax benefit of $27.1 million due to nontaxable alternative fuel mixture credits, and from a lower proportion of timberland gains, which are taxed at a higher effective tax rate. Foreign Currency In 2009, we owned and oper- ated paper and pulp mills in Germany, France, the United Kingdom and the Philippines. The functional currency in Germany and France is the Euro, in the UK it is the British Pound Sterling, and in the Philippines it is the Peso. During 2009, Euro functional currency operations generated approximately 19.8% of our sales and 18.9% of operating expenses and British Pound Sterling opera- tions represented 10.6% of net sales and 10.8% of operating expenses. The translation of the results from international operations into U.S. dollars is subject to changes in foreign currency exchange rates. The table below summarizes the translation impact on reported results that changes in currency exchange rates had on our non-U.S. based operations from the conversion of these operation’s results: In thousands Net sales Costs of products sold SG&A expenses Income taxes and other Net income Year Ended December 31, 2009 Favorable (unfavorable) $(22,975) 24,116 3,233 883 $ 5,257 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-cur- rency markets. The consolidated results of operations for the years ended December 31, 2008 and 2007 include the follow- ing non-routine items: RESULTS OF OPERATIONS 2008 versus 2007 The following table sets forth summarized results of operations: In thousands, except per share 2008 Gains on sale of timberlands Reversal of shutdown and restructuring charges Acquisition integration costs 2007 Gains on sale of timberlands Environmental remediation Acquisition integration costs After-tax Income (loss) Diluted EPS $ 10,984 $ 0.24 517 (889) $ 44,052 (15,979) (1,569) 0.01 (0.02) $ 0.97 (0.35) (0.03) These items increased earnings by $10.6 million, or $0.23 per diluted share in 2008. Comparatively, the items identified above increased earnings in 2007 by $26.5 million, or $0.59 per diluted share. Year Ended December 31 2008 2007 $1,263,850 177,782 99,209 57,888 1.27 $1,148,323 156,312 118,818 63,472 1.40 In thousands, except per share Net sales Gross profit Operating income Net income Earnings per diluted share Business Unit Performance In thousands, except tons Net sales Energy sales, net Total revenue Cost of products sold Gross profit (loss) SG&A Shutdown and restructuring charges Gains on dispositions of plant, equipment and timberlands Total operating income (loss) Non operating income (expense) Income (loss) before income taxes Supplementary Data Net tons sold Depreciation, depletion and amortization Capital expenditures Year Ended December 31 Specialty Papers 2008 2007 Composite Fibers 2008 2007 Other and Unallocated Total 2008 2007 2008 2007 $833,899 9,364 843,263 739,481 103,782 54,596 – – 49,186 – $ 49,186 $802,293 9,445 811,738 721,216 90,522 56,561 – – 33,961 – $ 33,961 $429,952 – 429,952 366,791 63,161 38,206 – – 24,955 – $ 24,955 $346,030 – 346,030 287,606 58,424 32,541 – – 25,883 – $ 25,883 $ (1) – (1) (10,840) 10,839 5,095 (856) (18,468) 25,068 (18,183) $ 6,885 $ – – – (7,366) 7,366 27,042 35 (78,685) 58,974 (24,884) $ 34,090 743,755 $ 35,010 20,878 726,657 $ 34,882 17,395 85,599 $ 25,601 31,591 72,855 $ 21,119 11,565 $ – – – $ – – – $1,263,850 9,364 1,273,214 1,095,432 177,782 97,897 (856) (18,468) 99,209 (18,183) 81,026 829,354 60,611 52,469 $ $ $1,148,323 9,445 1,157,768 1,001,456 156,312 116,144 35 (78,685) 118,818 (24,884) 93,934 799,512 56,001 28,960 $ $ Sales and Costs of Products Sold In thousands Net sales Energy sales – net Year Ended December 31 2008 2007 Change $1,263,850 9,364 $1,148,323 9,445 $115,527 (81) Total revenues Costs of products sold 1,273,214 1,095,432 1,157,768 1,001,456 115,446 93,976 Gross profit $ 177,782 $ 156,312 $ 21,470 Gross profit as a percent of Net sales 14.1% 13.6% The following table sets forth the contribution to consolidated net sales by each business unit: Business Unit Specialty Papers Composite Fibers Total Percent of total 2007 2008 66.0% 34.0 69.9% 30.1 100.0% 100.0% Net sales totaled $1,263.9 million for the year ended December 31, 2008, an increase of $115.5 million, or 10.1%, compared to the previous year. In the Specialty Papers business unit, net sales for 2008 increased $31.6 million to $833.9 million and operating income totaled $49.2 million, an increase of $15.2 million over the previous year. The improved operating income is primarily due to progress achieved in executing Chillicothe’s profit improvement initiatives and improved operating efficiencies. Higher average selling prices contributed $36.4 million of the increase in net sales and volumes shipped increased 2.4%. These price and volume increases were partially offset by expected mix changes between carbonless papers and uncoated papers, as well as lower sales of scrap paper. The benefits of higher average selling prices were offset by $37.7 million of higher costs, largely driven by fiber and energy. Unplanned operating downtime at the Spring Grove and Chillicothe facilities also reduced operating results by $4.3 million in 2008 compared to 2007. In Composite Fibers, net sales were $430.0 million for 2008, an increase of $83.9 million from the previous year. The completion of the November 30, 2007 Caer- philly acquisition accounted for $40.9 million of the increase in net sales, the translation of foreign currencies Glatfelter 2009 Annual Report 19 benefited net sales by $14.4 million and higher average selling prices contributed $16.3 million. Total volumes shipped by this business unit increased 17.5%, including a 4.3% increase in Food & Beverage paper product shipments. Shipments of Composite Laminates were down 1.5% primarily due to the weak housing and related markets. Energy and raw material costs in the Composite Fibers business unit were $17.1 million higher than a year ago, increasing at a rate faster than average selling prices. Operating income for Composite Fibers declined $0.9 million in the comparison and totaled $25.0 million for 2008. During 2008, this unit’s results were adversely impacted by an aggregate of $6.2 million due to operat- ing issues, market related downtime and accelerated depreciation related to completed or planned machine upgrades. Non-Cash Pension Income Non-cash pension income resulted from the over-funded status of our pension plans. The following summarizes non-cash pen- sion income for 2008 compared to 2007: In thousands Recorded as: Costs of products sold SG&A expense Total Year Ended December 31 2008 2007 Change $11,067 4,995 $16,062 $ 8,846 4,050 $12,896 $2,221 945 $3,166 The amount of pension income recognized each year is determined using various actuarial assumptions and certain other factors, including the fair value of our pension assets as of the beginning of the year. As discussed in Item 8 – Financial Statements and Supple- mentary Data – Note 11, the fair value of the plans’ assets has declined approximately 29% since the begin- ning of 2008. SG&A expenses decreased $18.2 million in the year-to-year comparison and totaled $97.9 million in 2008 compared to $116.1 million a year ago. The decrease was primarily due to a $26.0 million charge for the Fox River environmental matter in 2007 partially offset by the inclusion in 2008 of a full year’s result for the Caerphilly acquisition. Gain on Sales of Plant, Equipment and Timberlands During 2008 and 2007, we completed sales of timberlands which are included in the following table: Dollars in thousands Acres Proceeds Gain 2008 Timberlands Other Total 2007 Timberlands Other Total 20 4,561 n/a 37,448 n/a $19,279 – $19,279 $84,409 377 $84,786 $18,649 (181) $18,468 $78,958 (273) $78,685 We received cash proceeds in connection with each of the asset sales set forth above, with the exception of the sale of approximately 26,000 acres of timberland completed in November 2007. In connection with that transaction, we formed GPW Virginia Timberlands LLC (“GPW Virginia”) as an indirect, wholly owned and bankruptcy-remote subsidiary of ours. GPW Virginia received as consideration for the timberland sold in that transaction a $43.2 million, interest-bearing note that matures in 2027 from the buyer, Glawson Investments Corp. (“Glawson”), a Georgia corporation, and GIC Investments LLC, a Delaware limited liability company owned by Glawson. The Glawson note receivable is fully secured by a letter of credit issued by The Royal Bank of Scotland plc. In January 2008, GPW Virginia monetized the Glawson note receivable by entering into a $36.7 mil- lion term loan agreement (the “2008 Term Loan”) with a financial institution. The 2008 Term Loan is secured by all of the assets of GPW Virginia, including the Glawson note receivable, the related letter of credit and additional notes with an aggregate principal amount of $9.2 million that we issued in favor of GPW Virginia (the “Company Note”). The 2008 Term Loan bears interest at a six month reserve adjusted LIBOR rate plus a margin rate of 1.20% per annum. Interest on the 2008 Term Loan is payable semiannually. The principal amount of the 2008 Term Loan is due on January 15, 2013, but GPW Virginia may prepay the 2008 Term Loan at any time, in whole or in part, without premium or penalty. During 2009, GPW Virginia received aggregate interest payments of $1.5 mil- lion under the Glawson note receivable and the Company Note and, in turn, made interest payments of $1.1 million under the 2008 Term Loan. Income taxes During 2008, we recorded income tax expense totaling $23.1 million on pre-tax income of $81.0 million. The comparable amounts in 2007 were income taxes of $30.5 million on a taxable income of $93.9 million. The effective rate in 2007 included a $5.7 million deferred income tax benefit related to the reduction of German corporate income tax rates passed into law July 2007. Overall, the decline in the effective tax rate from 2007 to 2008 was primarily due to higher gains from timberland sales in the prior year which are taxed at a higher rate. Foreign Currency In 2008, we owned and oper- ated paper and pulp mills in Germany, France, the United Kingdom and the Philippines. The functional currency in Germany and France is the Euro, in the UK it is the British Pound Sterling, and in the Philippines it is the Peso. During 2008, Euro functional currency operations generated approximately 20.6% of our sales and 19.9% of operating expenses and British Pound Sterling opera- tions represented 10.6% of net sales and 11.2% of operating expenses. The translation of the results from international operations into U.S. dollars is subject to changes in foreign currency exchange rates. The table below summarizes the translation impact on reported results that changes in currency exchange rates had on our non-U.S. based operations from the conversion of these operation’s results: In thousands Net sales Costs of products sold SG&A expenses Income taxes and other Net income Year Ended December 31, 2008 Favorable (unfavorable) $ 14,360 (10,435) (855) (1,033) $ 2,037 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 signifi- cant expenditures for new or enhanced equipment, for environmental compliance matters including, but not limited to, the Clean Air Act, to support our research and develop- ment efforts and for our business strategy. In addition, we have mandatory debt service requirements of both principal and interest. The following table summarizes cash flow information for each of the years presented: In thousands Cash and cash equivalents at beginning of period Cash provided by (used for) Operating activities Investing activities Financing activities Effect of exchange rate changes on cash Net cash provided Year Ended December 31 2009 2008 $ 32,234 $ 29,833 163,868 12,544 (75,329) 2,103 53,425 (33,190) (12,879) (4,955) 103,186 2,401 Cash and cash equivalents at end of period $135,420 $ 32,234 At the end of the 2009, we had $135.4 million in cash and cash equivalents and $194.3 million available under our revolving credit agreement, which matures in April 2011. Operating cash flow improved by $110.4 million primarily due to cash generated from working capital management initiatives including $28.2 million of cash in 2009 from reduced inventory compared with a use of $10.0 million in 2008 and $16.5 million from lower accounts receivable in 2009 compared with a $17.7 million use in 2008. In addition, $29.7 million of cash was received from alternative fuel mixture credits. In January 2009, we used $6.5 million to satisfy a commitment we had to fund certain Fox River environmental remediation activities. Net cash provided from investing activities totaled $12.5 million in 2009 compared with a net use of $33.2 million in 2008. The improvement reflects the collection of a $37.9 million note receivable in connec- tion with the unwinding of the 2003 timberland install- ment sale, and $26.2 million from reduced capital expenditures in connection with the deferral of discretion- ary capital expenditures. Net cash used for financing activities totaled $75.3 million in 2009, primarily reflecting reductions of debt including $34.0 million repaid in connection with the above referenced unwinding of the 2003 timberland installment sale, term loan principal repayments of $16.0 million and reduced usage under our revolving credit facility. During 2009 and 2008, cash dividends paid on common stock totaled $16.6 million and $16.5 million, respectively. Our Board of Directors determines what, if any, dividends will be paid to our shareholders. Dividend pay- ment decisions are based upon then-existing factors and conditions and, therefore, historical trends of dividend payments are not necessarily indicative of future payments. The following table sets forth our outstanding long- term indebtedness: In thousands Revolving credit facility, due April 2011 Term loan, due April 2011 71⁄8% Notes, due May 2016 2008 Term Loan, due January 2013 Note payable, due March 2013 Total long-term debt Less current portion December 31 2009 2008 $ – 14,000 200,000 36,695 – $ 6,724 30,000 200,000 36,695 34,000 250,695 (13,759) 307,419 (13,759) Long-term debt, excluding current portion $236,936 $293,660 The significant terms of the debt instruments are more fully discussed in Item 8 – Financial Statements and Supplementary Data – Note 17. We are subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmen- tal impact of mills we operate, or have operated. To comply with environmental laws and regulations, we have incurred substantial capital and operating expendi- tures in past years. We anticipate that environmental regulation of our operations will continue to be burden- some and that capital and operating expenditures neces- sary to comply with environmental regulations will continue, and perhaps increase, in the future. In addition, we may incur obligations to remove or mitigate any adverse effects on the environment resulting from our operations, including the restoration of natural resources and liability for personal injury and for damages to property and natural resources. See Item 8 – Financial Glatfelter 2009 Annual Report 21 Statements and Supplementary Data – Note 21 for a summary of significant environmental matters. On February 5, 2010, we and certain of our subsid- iaries (the “Guarantors”) issued and sold $100 million in aggregate principal amount of 71⁄8% Senior Notes due 2016 (the “Notes”). The Notes were issued at 95.0% of the principal amount. We used the net proceeds from the sale, along with borrowings under our revolving credit facility and cash on hand, to fund the acquisition of Concert Industries Corp. See Item 8 – Financial Statements and Supplementary Data – Note 24 for a summary of these transactions. We will pay interest on the Notes on May 1 and November 1 of each year, beginning on May 1, 2010. The Notes will mature on May 1, 2016. The Notes are senior unsecured obligations and will rank equally with our other and future senior unsecured obligations. The Notes are guaranteed, jointly and severally, on a senior unsecured basis, by certain of our current and future domestic subsidiaries. We may redeem some or all of the notes at any time and from time to time on or after May 1, 2011 at the applicable redemption price plus accrued and unpaid interest to the date of redemption. We have the option to redeem the Notes in whole, but not in part, prior to May 1, 2011 at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest and a make-whole premium. We expect to meet all of our near and long-term cash needs from a combination of operating cash flow, cash and cash equivalents, and our existing credit facili- ties. However, as discussed in Item 8 – Financial State- ments and Supplementary Data – Note 21, 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. In addition, both the Notes and our previously issued $200 million in aggregate principal amount of 71⁄8% Senior Notes due 2016 contain cross default provisions that could result in all such notes becoming due and payable in the event of a failure to repay debt outstanding under the credit agreement at maturity or a default under the credit agreement, that accelerates the debt outstanding there- under. As of December 31, 2009, we met all of the requirements of our debt covenants. Off-Balance-Sheet Arrangements As of Decem- ber 31, 2009 and 2008, we had not entered into any off- balance-sheet arrangements. Financial derivative instru- ments to which we are a party and guarantees of indebt- edness, which solely consist of obligations of subsidiaries and a partnership, are reflected in the condensed consoli- dated balance sheets included herein in Item 8 – Financial Statements and Supplementary Data. Contractual Obligations The following table sets forth contractual obligations as of December 31, 2009: In millions Long-term debt(1) Operating leases(2) Purchase obligations(3) Other long term obligations (4),(5) Total Payments Due During the Year Ended December 31, 2011 to 2012 2013 to 2014 2015 and beyond $ 30 5 69 20 $124 $66 3 – 26 $95 $219 7 – 47 $273 Total 2010 $344 20 163 104 $ 29 5 94 11 $631 $139 (1) Represents principal and interest payments due on long-term debt. At December 31, 2009, we had $200.0 million of debt maturing in May 2016 and bearing a fixed rate of interest at 71⁄8%, payable semiannually, a $36.7 million note maturing in January 2013 bearing interest at six-month reserve adjusted LIBOR plus a margin rate of 1.20% per annum, and a $34.0 million note maturing in March 2013 and bearing a fixed rate of interest of 3.10%. The amounts set forth above do not include the $100 million Notes issued in February 2010 scheduled to mature in 2016. (2) Represents rental agreements for various land buildings, and computer and office equipment. (3) Represents open purchase order commitments and other obligations, primarily for raw material forward purchases and pulpwood contracts with min- imum annual purchase obligations. In certain situations, prices are subject to variations based on market prices. In such situations, the information above is based on prices in effect at December 31, 2009 or expectations based on historical experience and/or current market conditions. (4) Primarily represents expected benefits to be paid pursuant to medical retirement plans and nonqualified pension plans over the next ten years and expected costs of asset retirement obligations. (5) Since we are unable to reasonably estimate the timing of ultimate payment, the amounts set forth above do not include any payments that may be made related to uncertain tax positions, including potential interest, accounted for in accordance with ASC 740-10-20. As discussed in more detail in Item 8 – Financial Statements, Note 9, “Income Taxes”, such amounts totaled $40.1 million at December 31, 2009. 22 Critical Accounting Policies and Estimates The preceding discussion and analysis of our consolidated financial position and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles gener- ally accepted in the United States of America. The prepa- ration of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our esti- mates, including those related to inventories, long-lived assets, pension and post-retirement obligations, environ- mental liabilities and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following represent the most signif- icant and subjective estimates used in the preparation of our consolidated financial statements. Inventory Reserves We maintain reserves for excess and obsolete inventories to reflect our inventory at the lower of its stated cost or market value. Our estimate for excess and obsolete inventory is based upon our assumptions about future demand and market conditions. If actual conditions are less favorable than those we have projected, we may need to increase our reserves for excess and obsolete inventories. Any increases in our reserves will adversely impact our results of operations. The establishment of a reserve for excess and obsolete inventory establishes a new cost basis in the inventory. Such reserves are not reduced until the product is sold. If we are able to sell such inventory, any related reserves would be reversed in the period of sale. Long-lived Assets We evaluate the recoverability of our long-lived assets, including plant, equipment, timberlands and intangible assets periodically or when- ever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Our evalua- tions include analyses based on the cash flows generated by the underlying assets, profitability information, includ- ing estimated future operating results, trends or other determinants of fair value. If the value of an asset determined by these evaluations is less than its carrying amount, a loss is recognized for the difference between the fair value and the carrying value of the asset. Future adverse changes in market conditions or poor operating results of the related business may indicate an inability to recover the carrying value of the assets, thereby possibly requiring an impairment charge in the future. Pension and Other Post-Retirement Obligations Accounting for defined-benefit pension plans, and any curtailments thereof, requires various assumptions, including, but not limited to, discount rates, expected long-term rates of return on plan assets and future compensation growth rates. Accounting for our retiree medical plans, and any curtailments thereof, also requires various assumptions, which include, but are not limited to, discount rates and annual rates of increase in the per capita costs of health care benefits. We evaluate these assumptions at least once each year or as facts and circumstances dictate and we make changes as conditions warrant. Changes to these assumptions will increase or decrease our reported income or expense, which will result in changes to the recorded benefit plan assets and liabilities. Environmental Liabilities We maintain accruals for losses associated with environmental obligations when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing legislation and remediation technolo- gies. These accruals are adjusted periodically as assess- ment and remediation actions continue and/or further legal or technical information develops. Such undis- counted liabilities are exclusive of any insurance or other claims against third parties. Recoveries of environmental remediation costs from other parties, including insurance carriers, are recorded as assets when their receipt is assured beyond a reasonable doubt. Income Taxes We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in our balance sheets, as well as operating loss and tax credit carry forwards. These deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when such amounts are expected to reverse or be utilized. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If we are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase the valuation allowance against our deferred tax assets, which may result in a substantial increase in our effective tax rate and a material adverse impact on our reported results. Significant judgment is required in determining our worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of our business, there are many transactions and calculations Glatfelter 2009 Annual Report 23 where the ultimate tax determination is less than certain. We and our subsidiaries are examined by various Federal, State and foreign tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current liability and deferred taxes in the period in which the facts that give rise to a revision become known. Other significant accounting policies, not involving the same level of uncertainties as those discussed above, are nevertheless important to an understanding of the Consol- idated Financial Statements. Refer to Item 8 – Financial Statements and Supplementary Data – Notes to Consoli- dated Financial Statements for additional accounting policies. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Dollars in thousands Long-term debt Average principal outstanding At fixed interest rates – Bond At variable interest rates Weighted – average interest rate Fixed interest rate debt – Bond Variable interest rate debt 2010 Year Ended December 31 2012 2013 2011 At December 31, 2009 2014 Carrying Value Fair Value $200,000 43,815 $200,000 36,815 $200,000 36,695 $200,000 1,407 $200,000 – $200,000 50,695 $196,750 51,209 $250,695 $247,959 7.13% 1.57 7.13% 1.65 7.13% 1.66 7.13% 1.66 7.13% – The table above presents the average principal outstanding and related interest rates for the next five years for debt outstanding as of December 31, 2009. Fair values included herein have been determined based upon rates currently available to us for debt with similar terms and remaining maturities. The amounts set forth above do not give effect to the issuance in February 2010 of $100 million 71⁄8% senior notes due May 2016. These notes are described more fully in Item 8 – Financial Statements and Supplementary Data, Note 24. Our market risk exposure primarily results from changes in interest rates and currency exchange rates. At December 31, 2009, we had long-term debt outstanding of $250.7 million, of which $50.7 million or 20.2% was at variable interest rates. Variable-rate debt outstanding represents i) borrowings under our revolving credit facility and term loans that accrue interest based on the domestic prime rate or a Eurocurrency rate, at our option, plus a margin; and ii) cash collateralized borrowing incurred in connection with the 2007 installment timber- land sale that accrues interest based on 6 month LIBOR plus a margin. At December 31, 2009, the weighted- average interest rate paid was approximately 1.57%. A hypothetical 100 basis point increase or decrease in the interest rate on variable rate debt would increase or decrease annual interest expense by $0.4 million. We are subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. dollar. During 2009, Euro functional currency opera- tions generated approximately 19.8% of our sales and 18.9% of operating expenses and British Pound Sterling operations represented 10.6% of net sales and 10.8% of operating expenses. 24 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of P. H. Glatfelter Company (the “Company”) is responsible for establishing and maintain- ing adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the chief executive and chief financial officers to provide reason- able assurance regarding the reliability of financial report- ing and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. As of December 31, 2009, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Orga- nizations of the Treadway Commission (COSO). Manage- ment has determined that the Company’s internal control over financial reporting as of December 31, 2009 is effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles gener- ally accepted in the United States. The Company’s internal control over financial report- ing includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accu- rately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting prin- ciples generally accepted in the United States, and that receipts and expenditures are being made only in accor- dance with authorizations of management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements. The Company’s internal control over financial report- ing as of December 31, 2009, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. The Company’s management, including the chief executive officer and chief financial officer, does not expect that our internal control over financial reporting will prevent or detect all errors and all frauds. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstate- ments due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circum- vented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projec- tions of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Glatfelter 2009 Annual Report 25 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of P. H. Glatfelter Company We have audited the internal control over financial reporting of P. H. Glatfelter Company and subsidiaries (the “Company”) as of December 31, 2009, based on criteria established in Internal Control – Integrated Frame- work issued by the Committee of Sponsoring Organiza- tions of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Man- agement’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assur- ance about whether effective internal control over finan- cial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circum- stances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial offi- cers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regard- ing the reliability of financial reporting and the prepara- tion of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposi- tions of the assets of the company; (2) provide 26 reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) pro- vide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal con- trol over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inade- quate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial state- ments and financial statement schedule as of and for the year ended December 31, 2009 of the Company and our report dated March 16, 2010 expressed an unqualified opinion on those financial statements and financial state- ment schedule. /s/ DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 16, 2010 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of P. H. Glatfelter Company We have audited the accompanying consolidated balance sheets of P. H. Glatfelter Company and subsidiar- ies (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assur- ance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclo- sures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial state- ments present fairly, in all material respects, the financial position of P. H. Glatfelter Company and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in confor- mity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the informa- tion set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Orga- nizations of the Treadway Commission and our report dated March 16, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 16, 2010 Glatfelter 2009 Annual Report 27 P. H. GLATFELTER COMPANY and SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME In thousands, except per share Net sales Energy and related sales – net Total revenues Costs of products sold Gross profit Selling, general and administrative expenses (Reversals of) Shutdown and restructuring charges Gains on disposition of plant, equipment and timberlands, net Operating income Other nonoperating income (expense) Interest expense Interest income Other – net Total other nonoperating expense Income before income taxes Income tax provision Net income Weighted average shares outstanding Basic Diluted Earnings per share Basic Diluted 2009 Year Ended December 31 2008 2007 $1,184,010 13,332 $1,263,850 9,364 $1,148,323 9,445 1,197,342 927,578 1,273,214 1,095,432 1,157,768 1,001,456 269,764 110,257 – (898) 160,405 (19,220) 1,886 75 (17,259) 143,146 19,704 177,782 97,897 (856) (18,468) 99,209 (23,160) 4,975 2 (18,183) 81,026 23,138 156,312 116,144 35 (78,685) 118,818 (29,022) 3,933 205 (24,884) 93,934 30,462 $ 123,442 $ 57,888 $ 63,472 45,678 45,774 45,247 45,572 45,035 45,422 $ $ 2.70 2.70 $ 1.28 1.27 1.41 1.40 The accompanying notes are an integral part of the consolidated financial statements. 28 P. H. GLATFELTER COMPANY and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Dollars in thousands, except par values Assets Current assets Cash and cash equivalents Accounts receivable (less allowance for doubtful accounts: 2009 – $2,888; 2008 – $2,633) Inventories Prepaid expenses and other current assets Total current assets Plant, equipment and timberlands – net Other long-term assets Total assets Liabilities and Shareholders’ Equity Current liabilities Current portion of long-term debt Short-term debt Accounts payable Dividends payable Environmental liabilities Other current liabilities Total current liabilities Long-term debt Deferred income taxes Other long-term liabilities Total liabilities Commitments and contingencies Shareholders’ equity Common stock, $.01 par value; authorized – 120,000,000 shares; issued – 54,361,980 shares (including shares in treasury: 2009 – 8,655,826; 2008 – 8,928,004) Capital in excess of par value Retained earnings Accumulated other comprehensive income (loss) Less cost of common stock in treasury Total shareholders’ equity Total liabilities and shareholders’ equity December 31 2009 2008 $ 135,420 $ 32,234 119,319 168,370 96,947 520,056 470,632 199,606 132,635 193,354 33,596 391,819 493,564 171,926 $1,190,294 $1,057,309 $ 13,759 3,888 63,604 4,170 440 100,249 186,110 236,936 96,668 159,876 679,590 – $ 13,759 5,866 59,750 4,089 5,734 100,904 190,102 293,660 90,158 140,682 714,602 – 544 46,746 711,765 (119,885) 639,170 (128,466) 544 45,806 605,001 (176,133) 475,218 (132,511) 510,704 342,707 $1,190,294 $1,057,309 The accompanying notes are an integral part of the consolidated financial statements. Glatfelter 2009 Annual Report 29 P. H. GLATFELTER COMPANY and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands Operating activities Net income Adjustments to reconcile to net cash provided by operations: Depreciation, depletion and amortization Pension expense (income), net of unfunded benefits paid (Reversals of) shutdown and restructuring charges Deferred income taxes Gains on dispositions of plant, equipment and timberlands, net Share-based compensation Alternative fuel mixture credits, net of credits applied to taxes due Change in operating assets and liabilities Accounts receivable Inventories Prepaid and other current assets Accounts payable Environmental matters Accruals and other current liabilities Other Net cash provided by operations Investing activities Expenditures for purchases of plant, equipment and timberlands Proceeds from disposal of plant, equipment and timberlands Proceeds from timberland installment sale note receivable Acquisitions, net of cash acquired Net cash provided (used) by investing activities Financing activities Net repayments of revolving credit facility Net (repayments of) proceeds from other short-term debt Repayments of $100 million term loan facility (Repayments of) proceeds from borrowing under Term Loans due 2013 Payment of dividends Proceeds and excess tax benefits from stock options exercised and other Net cash used by financing activities Effect of exchange rate changes on cash Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of period Year Ended December 31 2008 2009 2007 $123,442 $ 57,888 $ 63,472 61,256 6,343 – (22,981) (898) 4,599 (57,946) 16,542 28,207 1,451 2,390 (7,728) 6,676 2,515 60,611 (16,062) (856) 3,265 (18,468) 4,350 – (17,668) (9,975) 871 4,264 (13,012) (10,557) 8,774 56,001 (12,896) 35 8,004 (78,685) 3,850 – 16,662 8,493 (2,461) (10,045) 26,000 20,408 1,494 163,868 53,425 100,332 (26,257) 951 37,850 – (52,469) 19,279 – – (28,960) 41,616 – (7,923) 12,544 (33,190) 4,733 (6,725) (2,008) (16,000) (34,000) (16,596) – (75,329) 2,103 103,186 32,234 (24,197) 2,927 (13,000) 36,695 (16,469) 1,165 (12,879) (4,955) 2,401 29,833 (30,656) (6,916) (53,000) – (16,350) 7,551 (99,371) 2,154 7,848 21,985 Cash and cash equivalents at the end of period $135,420 $ 32,234 $ 29,833 Supplemental cash flow information Cash paid for Interest Income taxes $ 17,338 16,634 $ 21,243 20,011 $ 28,498 2,614 The accompanying notes are an integral part of the consolidated financial statements. 30 P. H. GLATFELTER COMPANY and SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the Years Ended December 31, 2009, 2008 and 2007 In thousands Balance at January 1, 2007 Net income Foreign currency translation adjustments Change in benefit plans’ net funded status, net of tax benefit of $7,167 Other comprehensive income Comprehensive income Cumulative effect of adopting of FIN 48 Tax effect on employee stock options exercised Cash dividends declared ($0.36 per share) Share-based compensation expense – RSU Delivery of treasury shares Performance Shares 401(k) plans Director compensation Employee stock options exercised – net Balance at December 31, 2007 Comprehensive income Net income Foreign currency translation adjustments Change in benefit plans’ net funded status, net of tax benefit of $92,570 Other comprehensive income Comprehensive income Cumulative effect of adopting of FIN 48 Tax effect on employee stock options exercised Cash dividends declared ($0.36 per share) Share-based compensation expense Delivery of treasury shares RSUs 401(k) plans Director compensation Employee stock options exercised – net Balance at December 31, 2008 Comprehensive income Net income Foreign currency translation adjustments Change in benefit plans’ net funded status, net of taxes of $27,164 Other comprehensive income Comprehensive income Cash dividends declared ($0.36 per share) Share-based compensation expense Delivery of treasury shares RSUs 401(k) plans Director compensation Common Stock Capital in Excess of Par Value $ 544 $ 42,288 Retained Earnings $ 519,489 63,472 Accumulated Other Comprehensive Income (Loss) Treasury Stock $ (32,337) $ (141,616) Total Shareholders’ Equity $ 388,368 63,472 24,966 11,432 36,398 36,398 99,870 (2,974) 89 (16,379) 2,348 3,134 163 1,449 3,049 162 1,563 (2,974) (16,379) 89 2,348 85 1 (114) 544 44,697 563,608 4,061 (136,842) 476,068 (32,029) (148,165) (180,194) 57,888 (16,495) 38 3,244 (1,739) (248) (43) (143) 57,888 (180,194) (122,306) 38 (16,495) 3,244 (339) 1,520 163 814 1,400 1,768 206 957 544 45,806 605,001 (176,133) (132,511) 342,707 123,442 (16,678) 11,941 44,307 56,248 3,502 (1,483) (995) (84) 123,442 56,248 179,690 (16,678) 3,502 (203) 1,522 164 1,280 2,517 248 Balance at December 31, 2009 $544 $46,746 $711,765 $(119,885) $(128,466) $510,704 The accompanying notes are an integral part of the consolidated financial statements. Glatfelter 2009 Annual Report 31 P. H. GLATFELTER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION P. H. Glatfelter Company and subsidiaries (“Glatfel- ter”) is a manufacturer of specialty papers and engi- neered products. Headquartered in York, Pennsylvania, our manufacturing facilities are located in Spring Grove, Pennsylvania; Chillicothe and Freemont, Ohio; Gloucester- shire (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 mer- chants, brokers and agents or directly to customers. 2. ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Glatfelter and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. Accounting Estimates The preparation of finan- cial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assump- tions that affect the reported amounts of assets and liabilities and disclosures of contingencies as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Management believes the estimates and assumptions used in the preparation of these consolidated financial statements are reasonable, based upon currently available facts and known circumstances, but recognizes that actual results may differ from those estimates and assumptions. Cash and Cash Equivalents We classify all highly liquid instruments with an original maturity of three months or less at the time of purchase as cash equivalents. Inventories Inventories are stated at the lower of cost or market. Raw materials, in-process and finished inventories of our domestic manufacturing operations are valued using the last-in, first-out (LIFO) method, and the supplies inventories are valued principally using the aver- age-cost method. Inventories at our foreign operations are valued using a method that approximates average cost. Plant, Equipment and Timberlands For finan- cial reporting purposes, depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. 32 The range of estimated service lives used to calcu- late financial reporting depreciation for principal items of plant and equipment are as follows: Buildings Machinery and equipment Other 10 – 45 Years 7 – 35 Years 4 – 40 Years Maintenance and Repairs Maintenance and repairs costs are charged to income and major renewals and betterments are capitalized. At the time property is retired or sold, the net carrying value is eliminated and any resultant gain or loss is included in income. Valuation of Long-lived Assets, Intangible Assets and Goodwill We evaluate long-lived assets for impairment when a specific event indicates that the carrying value of an asset may not be recoverable. Recoverability is assessed based on estimates of future cash flows expected to result from the use and eventual disposition of the asset. If the sum of expected undis- counted cash flows is less than the carrying value of the asset, the asset’s fair value is estimated and an impair- ment loss is recognized for any deficiencies. Goodwill is reviewed for impairment on a discounted cash flow basis at least annually. Impairment losses, if any, are recog- nized for the amount by which the carrying value of the asset exceeds its fair value. Asset Retirement Obligations In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 410, Asset Retirement and Environmental Obligations, we accrue asset retirement obligations, if any, in the period in which obligations relating to future asset retirements are incurred and when a reasonable estimate of fair value can be determined. Under these standards, costs are to be accrued at estimated fair value, and a related long-lived asset is capitalized. Over time, the liability is accreted to its settlement value and the capitalized cost is depreciated over the useful life of the related asset for which the obligation exists. Upon settlement of the liability, we recognize a gain or loss for any difference between the settlement amount and the liability recorded. Income Taxes Income taxes are determined using the asset and liability method of accounting for income taxes in accordance with FASB ASC 740 Income Taxes (“ASC 740”). Under ASC 740, tax expense includes U.S. and international income taxes plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested. Tax credits and other incentives reduce tax expense in the year the credits are claimed. Certain items of income and expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported in deferred income taxes. Deferred tax assets are recognized if it is more likely than not that the assets will be realized in future years. We establish a valuation allowance for deferred tax assets for which realization is not more likely than not. Effective January 1, 2007, income tax contingencies are accounted for in accordance with FASB ASC 740-10- 20 Income Taxes (formerly FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes–an inter- pretation of FASB Statement No. 109”). Significant judg- ment is required in determining our worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of our business, there are many transactions and calculations where the ulti- mate tax determination is less than certain. We and our subsidiaries are examined by various Federal, State and foreign tax authorities. We regularly assess the potential outcomes of these examinations and any future examina- tions for the current or prior years in determining the adequacy of our provision for income taxes. We continu- ally assess the likelihood and amount of potential adjust- ments and record any necessary adjustments in the period in which the facts that give rise to a revision become known. Treasury Stock Common stock purchased for treasury is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on the weighted-average cost basis. Foreign Currency Translation Our subsidiaries outside the United States use their local currency as the functional currency. Accordingly, translation gains and losses and the effect of exchange rate changes on transactions designated as hedges of net foreign invest- ments are included as a component of other comprehen- sive income (loss). Transaction gains and losses are included in income in the period in which they occur. Revenue Recognition We recognize revenue on product sales when the customer takes title and assumes the risks and rewards of ownership. We record revenue net of an allowance for customer returns and rebates. Revenue from energy sales is recognized when electricity is delivered to the customer. Certain costs associated with the production of electricity, such as fuel, labor, depreciation and maintenance are netted against energy sales for presentation on the Consolidated State- ments of Income. Our current contract to sell electricity generated in excess of our own use expires in the year 2010 and requires that the customer purchase all of our excess electricity up to a certain level. The price for the electricity is determined pursuant to a formula and varies depending upon the amount sold in any given year. Revenue from renewable energy credits is recog- nized when all risks, rights and rewards to the certificate are transferred to the counterparty. Environmental Liabilities Accruals for losses associated with environmental obligations are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing legislation and remediation technolo- gies. Costs related to environmental remediation are charged to expense. These accruals are adjusted periodi- cally as assessment and remediation actions continue and/or further legal or technical information develops. Such undiscounted liabilities are exclusive of any insur- ance or other claims against third parties. Environmental costs are capitalized if the costs extend the life of the asset, increase its capacity and/or mitigate or prevent contamination from future operations. Recoveries of envi- ronmental remediation costs from other parties, including insurance carriers, are recorded as assets when their receipt is assured beyond a reasonable doubt. Accumulated Other Comprehensive Income The amounts reported on the consolidated Statement of Shareholders’ Equity for Accumulated Other Comprehen- sive Income at December 31, 2009 consisted of a loss of $136.3 million from additional defined benefit liabilities, net of tax, and $16.4 million of gains from foreign currency translation adjustments. Earnings Per Share Basic earnings per share are computed by dividing net income by the weighted-aver- age common shares outstanding during the respective periods. Diluted earnings per share are computed by dividing net income by the weighted-average common shares and common share equivalents outstanding during the period. The dilutive effect of common share equiva- lents is considered in the diluted earnings per share computation using the treasury stock method. Fair Value of Financial Instruments Under the accounting for fair value measurements and disclosures, a fair value hierarchy was established that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). A finan- cial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Glatfelter 2009 Annual Report 33 We use the following valuation techniques to mea- sure fair value for our assets and liabilities: 165 people at the time of the acquisition and had 2007 revenues of approximately $53.4 million. Level 1 Quoted market prices in active markets for identical assets or liabilities; Level 2 Significant other observable inputs (e.g. quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs); and Level 3 Unobservable inputs for the asset or liability, which are valued based on management’s esti- mates of assumptions that market participants would use in pricing the asset or liability. The amounts reported on the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, other assets, and short-term debt approximate fair value. 3. RECENT PRONOUNCEMENTS In June 2009, the FASB issued Statement of Finan- cial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of GAAP, a replacement of SFAS No. 162” (“SFAS 168”) as codified under ASC 105 “Generally Accepted Accounting Principles.” SFAS No. 168 became the source of authori- tative GAAP recognized by the FASB. SFAS No. 168 was effective for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date of SFAS No. 168, the ASC superseded all then-existing non-SEC accounting and reporting stan- dards. The issuance of SFAS No. 168 requires references to authoritative US GAAP to coincide with the appropri- ate section of the ASC. Accordingly, this standard did not have an impact on our financial condition or results of operations. 4. ACQUISITIONS Metallised Products Limited On November 30, 2007, through Glatfelter-UK Limited (“GLT-UK”), a wholly-owned subsidiary, we completed our acquisition of Metallised Products Limited (“MPL”), a privately owned company that manufactures a variety of metallized paper products for consumer and industrial applications. MPL is based in Caerphilly, Wales. Under terms of the agreement, we agreed to purchase the stock of MPL for $7.2 million cash and assumed $5.8 million of debt in addition to $1.4 million of transaction costs. The acquisition was financed from our existing cash balance. This facility employed about 34 The following table summarizes the allocation of the purchase price to assets acquired and liabilities assumed: In thousands Assets Cash Accounts receivable Inventory Property and equipment Other assets Goodwill Total Liabilities Acquisition related liabilities including accounts payable and accrued expenses Long term debt Total Total purchase price $ 730 7,718 4,731 9,663 903 2,239 25,984 11,783 5,830 17,613 $ 8,371 5. ALTERNATIVE FUEL MIXTURE CREDITS The U.S. Internal Revenue Code provided 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. 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 received a payment from the Internal Revenue Service on June 30, 2009 in the amount of $29.7 million 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. Since we began mixing and burning eligible alternative fuels, we have earned $107.8 million of alternative fuel mixture credits of which $29.7 million has been received in cash, $20.1 million was used to reduce estimated interim tax payments and $58.0 million will be claimed as refundable income tax credits and is expected to be realized in cash primarily in the first half of 2010. We record all alternative fuel mixture credits as a reduction to cost of goods sold and the net credit to be claimed is recorded under the caption “Prepaid and other Current Assets” in the accompanying Consolidated Balance Sheets. The alternative fuel mixture credit expired on December 31, 2009. 6. ENERGY AND RELATED SALES, NET We sell excess power generated by the Spring Grove, PA facility pursuant to a long-term contract that expires March 31, 2010. In addition we sell renewable energy credits generated by the Spring Grove, PA and Chillicothe, OH facilities representing sales of certified credits earned related to burning renewable sources of energy such as black liquor and wood waste. The following table summarizes this activity for each of the past three years: In thousands Energy sales Costs to produce Net energy sales Renewable energy credits Total energy and related sales , net 2009 2008 2007 $20,128 (11,883) 8,245 5,087 $13,332 $19,731 (10,367) 9,364 – $9,364 $19,683 (10,238) 9,445 – $9,445 7. GAIN ON DISPOSITIONS OF PLANT, EQUIP- MENT AND TIMBERLANDS During 2009, 2008 and 2007, we completed sales of timberlands. The following table summarizes these transactions: Dollars in thousands Acres Proceeds Gain 2009 Timberlands Other Total 2008 Timberlands Other Total 2007 Timberlands Other Total 319 n/a 4,561 n/a 37,448 n/a $ $ 951 – 951 $19,279 – $19,279 $84,409 377 $84,786 $ $ 906 (8) 898 $18,649 (181) $18,468 $78,958 (273) $78,685 The amounts set forth above for 2008 include a $2.9 million gain from the sale of 246 acres of timber- lands for cash consideration to George H. Glatfelter II, our chairman and chief executive officer, and his spouse. The 246 acres of timberlands had been independently appraised and marketed for public sale by the Company. Based on those appraisals and the marketing process that was pursued, the Company and its Board believed that the sale price agreed to with the Glatfelters consti- tuted fair market value for the timberland. In accordance with terms of our credit facility, we are required to use the proceeds from timberland sales to reduce amounts outstanding under our term loan. In connection with the asset sales set forth above, we received cash proceeds with the exception of the sale of approximately 26,000 acres of timberland completed in November 2007. As consideration for the timberland sold in this transaction, we received a $43.2 million, 20-year interest-bearing note due from the buyer, Glaw- son Investments Corp. (“Glawson”), a Georgia corpora- tion, and GIC Investments LLC, a Delaware limited liability company owned by Glawson. The note receivable is fully secured by a letter of credit issued by The Royal Bank of Scotland plc. 8. EARNINGS PER SHARE The following table sets forth the details of basic and diluted earnings per share (EPS): In thousands, except per share 2009 2008 2007 Net income $123,442 $57,888 $63,472 Weighted average common shares outstanding used in basic EPS Common shares issuable upon exercise of dilutive stock options, restricted stock awards and performance awards Weighted average common shares outstanding and common share equivalents used in diluted EPS Basic EPS Diluted EPS 45,678 45,247 45,035 96 325 387 45,774 $2.70 2.70 45,572 $1.28 1.27 45,422 $1.41 1.40 The following table sets forth the potential common shares outstanding for stock options and restricted stock units that were not included in the computation of diluted EPS for the period indicated, because their effect would be anti-dilutive: In thousands Potential common shares 2009 2008 2007 2,215 1,132 438 9. 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. The provision for income taxes from operations consisted of the following: In thousands Current taxes Federal State Foreign Deferred taxes and other Federal State Foreign Income tax provision Year Ended December 31 2008 2009 2007 $29,848 4,050 8,787 42,685 (23,943) 3,760 (2,798) (22,981) $19,704 $5,647 2,609 11,617 19,873 9,026 86 (5,847) 3,265 $23,138 $8,388 4,422 6,397 19,207 11,766 2,674 (3,185) 11,255 $30,462 The amounts set forth above for total deferred taxes and other included a deferred tax benefit of $23.0 million in 2009 and a deferred tax provision of $3.0 million and $8.0 million in 2008 and 2007, respectively. Other taxes totaled $0, $0.2 million, and $3.3 million in 2009, 2008 and 2007, respectively, related to uncertain tax positions expected to be taken in future tax filings. Glatfelter 2009 Annual Report 35 The following are the domestic and foreign compo- nents of pretax income from operations: various state tax credit carryforwards totaling $0.4 million, which expire between 2014 and 2027. In thousands United States Foreign Total pretax income Year Ended December 31 2008 2009 2007 $122,657 20,489 $143,146 $61,387 19,639 $81,026 $70,051 23,883 $93,934 A reconciliation between the income tax provision, computed by applying the statutory federal income tax rate of 35% to income before income taxes, and the actual income tax is as follows: Year Ended December 31 2008 2009 2007 Federal income tax provision at statutory rate State income taxes, net of federal income tax benefit Foreign income tax rate differential Change in statutory tax rates Tax credits Alternative fuel mixture credits Change in unrecognized tax benefits, net Valuation allowance release Other Total provision for income taxes 35.0% 35.0% 35.0% 0.7 (0.5) (0.3) (1.8) (26.4) 8.0 – (0.9) 13.8% 3.1 (2.5) – (5.7) – 2.5 (1.8) (2.0) 28.6% 3.5 0.2 (5.8) (2.8) – 4.0 – (1.7) 32.4% The sources of deferred income taxes were as follows at December 31: 2009 2008 In thousands Reserves Compensation Post-retirement benefits Property Pension Installment sales Inventories Other Tax carryforwards Subtotal Valuation allowance Total Current Asset (Liability) $ 7,404 3,367 1,708 12 660 (4) 438 258 – 13,843 (2,379) $11,464 Non current Asset (Liability) Current Asset (Liability) $ 9,677 3,934 19,637 (100,071) (38,000) (14,070) – 4,608 29,238 (85,047) (9,789) $ 8,983 3,292 1,619 13 781 – (803) 475 – 14,360 (2,547) $ (94,836) $11,813 Non- current Asset (Liability) $ 11,086 3,368 18,748 (107,921) (13,507) (25,148) – 6,909 28,006 (78,459) (10,215) $ (88,674) Current and non-current deferred tax assets and liabilities are included in the following balance sheet captions: In thousands Prepaid expenses and other current assets Other long term assets Other current liabilities Deferred income taxes December 31 2009 2008 $11,519 1,832 55 96,668 $14,421 1,484 2,608 90,158 At December 31, 2009, we had state and foreign tax net operating loss (“NOL”) carryforwards of $92.0 mil- lion and $37.0 million, respectively. These NOL carryfor- wards are available to offset future taxable income, if any. The state NOL carryforwards expire between 2015 and 2027; the foreign NOL carryforwards do not expire. In addition, we had federal foreign tax credit carryforwards of $0.3 million, which expire in 2013, and 36 During 2009, we claimed the alternative fuel mix- ture credits as a combination of cash refunds through excise tax refund claims and income tax credits on the federal income tax return to be filed for the 2009 tax year. For purposes of calculating federal and state income taxes, we treat the credits claimed as cash refunds of excise tax and the credits claimed on the federal income tax return as nontaxable income. In 2009, we recorded a tax benefit of $27.1 million, net of unrecognized tax benefits, due to the nontaxable nature of the alternative fuel mixture credits claimed on the federal and certain state income tax returns. We have established a valuation allowance of $12.2 million against the net deferred tax assets, prima- rily due to the uncertainty regarding the ability to utilize state tax carryforwards and certain deferred foreign tax credits. Tax credits and other incentives reduce tax expense in the year the credits are claimed. In 2009, we recorded tax credits of $2.6 million related to Research and Development credits, fuels tax, and the electricity produc- tion tax credits. In 2008 and 2007 similar tax credits of $4.7 million and $2.6 million, respectively, were recorded. At December 31, 2009 and 2008, unremitted earn- ings of subsidiaries outside the United States deemed to be permanently reinvested totaled $134.6 million and $107.4 million, respectively. Because the unremitted earnings of subsidiaries are deemed to be permanently reinvested as of December 31, 2009, no deferred tax liability has been recognized in our consolidated financial statements. As of December 31, 2009 and December 31, 2008, we had $40.1 million and $29.2 million of gross unrec- ognized tax benefits respectively. As of December 31, 2009, if such benefits were to be recognized, approxi- mately $36.1 million would be recorded as a component of income tax expense, thereby affecting our effective tax rate. A reconciliation of the beginning and ending bal- ances of the total amounts of gross unrecognized tax benefits is as follows: In millions Balance at January 1 Increases in tax positions for prior years Decreases in tax positions for prior years Increases in tax positions for current year Settlements Lapse in statute of limitations Balance at December 31 2009 2008 2007 $29.2 0.7 – 11.2 (0.8) (0.2) $26.1 0.4 – 3.2 – (0.5) $20.7 0.3 (0.5) 6.1 – (0.5) $40.1 $29.2 $26.1 The current year increase was primarily due to tax positions expected to be taken, on the U.S. federal and certain state income tax returns, related to the alternative fuel mixture credit. 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: Jurisdiction United States Federal State Germany(1) France United Kingdom Philippines Open Tax Year Examination in progress Examination not yet initiated N/A 2004 2003 – 2006 N/A N/A 2005 – 2008 2007 – 2009 2004 – 2009 2007 – 2009 2006 – 2009 2006 – 2009 2009 (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 authori- ties, which often result in proposed assessments. Man- agement 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 unfavor- able 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 reason- ably possible our gross unrecognized tax benefits balance may decrease within the next twelve months by a range of zero to $8.8 million. Substantially all of this range relates to tax positions taken in the U.S. and in Germany. We recognize interest and penalties related to uncertain tax positions as income tax expense. Interest expense recognized in 2009 and 2008, respectively, totaled $3.8 million and $2.6 million. We did not record any penalties associated with uncertain tax positions during 2009 or 2008. 10. STOCK-BASED COMPENSATION On April 29, 2009, our shareholders approved the P. H. Glatfelter Amended and Restated Long Term Incen- tive 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. As of December 31, 2009, 3,141,047 shares of common stock were available for future issuance under the 2005 Plan. During 2009, 2008 and 2007, we recognized non- cash stock-based compensation expense totaling $4.6 mil- lion, $4.4 million and $3.8 million, respectively. Since the approval of the 2005 Plan, we have issued to eligible participants restricted stock units and stock only stock appreciation rights. Restricted Stock Units (“RSU”) Awards of RSUs are made under our 2005 Plan. Under terms of the awards, the RSUs vest based solely on the passage of time on a graded scale over a three, four, and five-year period. The following table summarizes RSU activity during the past three years: Units 2009 2008 2007 Beginning balance Granted Forfeited Restriction lapsed/shares delivered Ending balance 486,988 205,360 (8,700) (119,611) 564,037 505,173 137,649 (25,214) (130,620) 486,988 411,154 127,423 (33,404) – 505,173 Dollars in thousands Compensation expense $ 1,622 $ 1,772 $ 1,768 The weighted average grant fair value per unit for awards in 2009, 2008 and 2007 was $10.11, $14.82, and $15.32, respectively. As of December 31, 2009, unrecognized compensation expense for outstanding RSUs totaled $2.9 million. The weighted average remain- ing period over which the expense will be recognized is 3.5 years. Non-Qualified Stock Options The following table summarizes the activity with respect to non-qualified stock options: Non-Qualified Options Outstanding at beginning of year Granted Exercised Canceled Outstanding and exercisable at end of year 2009 Weighted- Average Exercise Price $14.08 – – 13.46 $14.20 Shares 537,700 – – (84,650) 453,050 2008 Weighted- Average Exercise Price $13.81 – 12.64 13.08 $14.08 Shares 700,270 – (64,400) (98,170) 537,700 2007 Weighted- Average Exercise Price $14.06 13.78 17.07 Shares 906,210 – (105,190) (100,750) 700,270 $13.81 Glatfelter 2009 Annual Report 37 Non-Qualified Options $10.78 to $12.41 12.95 to 14.44 15.44 to 17.16 17.54 to 18.78 Shares 37,750 219,700 178,100 17,500 453,050 Options Outstanding Weighted- Average Remaining Contractual Life 3.9 2.2 2.0 2.3 2.2 Weighted- Average Exercise Price $11.22 13.42 15.47 17.54 Options Exercisable Weighted- Average Exercise Price $11.22 13.42 15.47 17.54 Shares 37,750 219,700 178,100 17,500 453,050 All options expire on the earlier of termination or, in some instances, a defined period subsequent to termi- nation of employment, or ten years from the date of grant. The exercise price represents the quoted market price of Glatfelter common stock on the date of grant, or the average quoted market prices of Glatfelter common stock on the first day before and after the date of grant for which quoted market price information was available if such information was not available on the date of grant. Under terms of the SOSAR, the recipients received the right to receive 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. The following table sets forth information related to outstanding SOSARS. 2009 2008 SOSARS Outstanding at Jan. 1, Granted Exercised Canceled Outstanding at Dec. 31, Exercisable at Dec. 31, Vested and expected to vest Weighted average grant date fair value per share Aggregate grant date fair value (in thousands) Black-Scholes Assumptions Dividend yield Risk free rate of return Volatility Expected life Shares 718,810 1,043,210 – – 1,762,020 390,575 1,676,227 Shares 484,800 284,240 – (50,230) 718,810 150,967 690,418 Wtd Avg Exercise Price $14.63 9.91 – – $11.84 $ 2.83 $2,957 3.63% 2.26 40.59 6 yrs Wtd Avg Exercise Price $15.30 13.49 – 14.63 $14.63 15.30 $ 3.77 $1,002 2.67% 3.71 32.09 6 yrs 11. RETIREMENT PLANS AND OTHER POST- RETIREMENT BENEFITS We have both funded and, with respect to our international operations, unfunded noncontributory defined-benefit pension plans covering substantially all of our employees. The benefits are based, in the case of certain plans, on average salary and years of service and, in the case of other plans, on a fixed amount for each year of service. U.S. Plan provisions and funding meet the 38 requirements of the Employee Retirement Income Security Act of 1974. We use a December 31-measurement date for all of our defined benefit plans. We also provide certain health care benefits to eligible retired employees. These benefits include a com- prehensive medical plan for retirees prior to age 65 and fixed supplemental premium payments to certain retirees over age 65 to help defray the costs of Medicare. The plan is partially funded and claims are paid as reported. In millions Change in Benefit Obligation Balance at beginning of year Service cost Interest cost Plan amendments Actuarial (gain)/loss Participant contributions Benefits paid Balance at end of year Change in Plan Assets Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Participant contributions Benefits paid Fair value of plan assets at end of year Funded status at end of year Pension Benefits 2009 2008 Other Benefits 2009 2008 $386.3 8.6 23.4 1.9 12.9 – (27.0) $406.1 $ 373.3 8.3 23.1 6.5 2.6 – (27.5) $ 386.3 $400.6 110.0 2.1 – (27.0) $ 603.6 (177.7) 2.2 – (27.5) $58.6 2.6 3.5 – 1.3 – (3.4) $62.6 $5.7 1.6 2.4 – (3.4) $55.3 2.1 3.2 – 2.5 0.9 (5.4) $58.6 $9.9 (2.9) 3.2 0.9 (5.4) 485.7 $ 79.6 400.6 $ 14.3 6.3 $(56.3) 5.7 $(52.9) The net prepaid pension cost for qualified pension plans is primarily included in “Other assets,” and the accrued pension cost for non-qualified pension plans and accrued post-retirement benefit costs are primarily included in “Other long-term liabilities” on the Consoli- dated Balance Sheets at December 31, 2009 and 2008. Amounts recognized in the consolidated balance sheets consist of the following as of December 31: In millions Other long-term assets Current liabilities Other long-term liabilities Net amount recognized Pension Benefits 2009 2008 Other Benefits 2009 2008 $112.9 (1.8) (31.5) $ 79.6 $ 44.5 (1.2) (29.0) $ 14.3 $– (4.6) (51.7) $(56.3) $– (4.2) (48.7) $(52.9) The components of amounts recognized as “Accu- mulated other comprehensive income” consist of the following on a pre-tax basis: In millions Pension Benefits 2009 2008 Other Benefits 2009 2008 Prior service cost/(credit) Net actuarial loss $ 16.5 189.2 $ 16.5 259.9 $ (5.3) 21.5 $ (6.5) 23.4 The accumulated benefit obligation for all defined benefit pension plans was $390.9 million and $367.3 mil- lion at December 31, 2009 and 2008, respectively. Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) were as follows: The weighted-average assumptions used in comput- ing the benefit obligations above were as follows: In millions Pension Benefits 2009 2008 Other Benefits 2009 2008 Discount rate – benefit obligation Future compensation growth rate 6.10% 4.0 6.25% 5.90% 6.25% 4.0 4.0 4.0 The discount rates set forth above were estimated based on the modeling of expected cash flows for each of our benefit plans and selecting a portfolio of high- quality debt instruments with maturities matching the respective cash flows of each plan. The resulting discount rates ranged from 5.90% to 6.20% for the pension plans and were 5.90% for the other benefit plans. Information for pension plans with an accumulated benefit obligation in excess of plan assets was as follows: In millions Projected benefit obligation Accumulated benefit obligation Fair value of plan assets 2009 $33.3 29.2 – 2008 $30.2 27.2 – Net periodic benefit cost (income) includes the following components: In millions Pension Benefits Service cost Interest cost Expected return on plan assets Amortization of prior service cost Amortization of actuarial loss Total net periodic benefit cost (income) Other Benefits Service cost Interest cost Expected return on plan assets Amortization of prior service cost Amortization of actuarial loss Total net periodic benefit cost Year Ended December 31 2008 2007 2009 $8.6 23.4 (39.8) 2.2 12.6 $7.0 $2.6 3.5 (0.5) (1.2) 2.1 $6.5 $8.3 23.1 (50.1) 2.3 0.3 $(16.1) $2.1 3.2 (0.8) (1.3) 1.3 $4.5 $9.6 21.8 (47.5) 2.4 0.8 $(12.9) $2.0 3.0 (0.9) (1.0) 1.0 $4.1 The estimated net loss and prior service cost for our defined benefit pension plans that will be amortized from accumulated other comprehensive income into net peri- odic benefit cost over the next fiscal year are $13.6 mil- lion and $2.4 million, respectively. The comparable amounts of expected amortization for other benefit plans are $1.8 million and $(1.2) million, respectively. Pension Benefits Actuarial (gain) loss Prior service cost Amortization of prior service cost Amortization of actuarial losses Total recognized in other comprehensive (income) loss Total recognized in net periodic benefit cost and other comprehensive (income) loss Other Benefits Actuarial (gain) loss Amortization of prior service cost Amortization of actuarial losses Total recognized in other comprehensive (income) loss Total recognized in net periodic benefit cost and other comprehensive loss Year Ended December 31 2009 2008 $(57.7) 1.9 (2.2) (12.6) $(70.6) $230.6 7.0 (2.4) (0.4) $234.8 $(63.6) $218.7 $ 0.2 1.2 (2.1) (0.7) $6.4 1.3 (1.3) 6.4 $ 5.8 $10.9 The weighted-average assumptions used in comput- ing the net periodic benefit (income) cost information above were as follows: In millions Pension Benefits Discount rate – benefit expense Future compensation growth rate Expected long-term rate of return on plan assets Other Benefits Discount rate – benefit expense Expected long-term rate of return on plan assets Year Ended December 31 2009 2007 2008 6.25% 6.25% 5.75% 4.0 8.5 4.0 8.5 4.0 8.5 6.25% 6.25% 5.75% 8.5 8.5 8.5 To develop the expected long-term rate of return assumption, we considered the historical returns and the future expected returns for each asset class, as well as the target asset allocation of the pension portfolio. Assumed health care cost trend rates used to determine benefit obligations at December 31 were as follows: Health care cost trend rate assumed for next year Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) Year that the rate reaches the ultimate rate 2009 2008 8.75% 8.75% 4.5 2021 4.5 2021 Assumed health care cost trend rates have a signif- icant effect on the amounts reported for health care plans. A one percentage-point change in assumed health care cost trend rates would have the following effects: In millions One Percentage Point increase decrease Effect on: Post-retirement benefit obligation Total of service and interest cost components $4.1 0.5 $3.7 0.4 Plan Assets On December 31, 2009, we prospec- tively implemented new disclosure requirements which expand disclosure for assets held by employer defined benefit pension and other postretirement benefit plans. All pension plan assets in the U.S. are invested through a single master trust fund. The strategic asset Glatfelter 2009 Annual Report 39 allocation for this trust fund is selected by management, reflecting the results of comprehensive asset liability modeling. The general principles guiding U.S. pension asset investment policies are those embodied in the Employee Retirement Income Security Act of 1974 (ERISA). These principles include discharging our invest- ment responsibilities for the exclusive benefit of plan participants and in accordance with the “prudent expert” standard and other ERISA rules and regulations. We establish strategic asset allocation percentage targets and appropriate benchmarks for significant asset classes with the aim of achieving a prudent balance between return and risk. Investments and decisions will be made solely in the interest of the Plan’s participants and beneficiaries, and for the exclusive purpose of providing benefits accrued there under. The primary goal of the Plan is to ensure the solvency of the Plan over time and thereby meet its distribution objectives. Plan assets will be diver- sified. All investments in the Plan will be made in accordance with ERISA and other applicable statutes. Risk is minimized by diversification by asset class by style of each manager and by sector and industry limits when applicable. The target allocation for the Plan assets are: The Investment Policy statement lists specific cate- gories of securities or activities that are prohibited – examples are options, futures, commodities, hedge funds, limited partnerships, and our stock. The table below presents the fair values of our pension assets by level within the fair value hierarchy, as described in Note 2: In millions Domestic Equity Large cap Small and mid cap International equity REIT Fixed income Cash and equivalents Total Fair Value Measurements at December 31, 2009 Total Level 1 Level 2 Level 3 $176.0 77.6 64.2 25.7 134.5 14.0 $492.0 $175.6 77.6 33.1 25.7 71.0 14.0 $397.0 $0.4 – 31.1 – 63.5 – $95.0 $– – – – – – $– Cash Flow We did not make contributions to our qualified pension plans in 2009. Contributions expected to be made in 2010 under our non-qualified pension plans and other benefit plans are summarized below: In thousands Nonqualified pension plans Other benefit plans $1,287 4,327 The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Domestic Equity – Large cap Small and mid cap International equity Real Estate Investment Trust (REIT) Fixed income Diversification is achieved by: i. ii. placing restrictions on the percentage of equity investments in any one company, percentage of investment in any one industry, limiting the amount of assets placed with any one manager; and setting targets for duration of fixed income securities, maintaining a certain level of credit quality, and limiting the amount of investment in non-investment grade paper. A formal asset allocation review is done periodically to ensure that the Plan has an appropriate asset alloca- tion based on the Plan’s projected benefit obligations. The target return for each equity and fixed income manager will be one that places the manager’s perfor- mance in the top 40% of its peers and on a gross basis, exceeds that of the manager’s respective benchmark index. The target return for cash and cash equivalents is a return that at least equals that of the 90-day T-bills. 40 In thousands 2010 2011 2012 2013 2014 2015 through 2019 39% 13 13 5 30 Pension Benefits Other Benefits $ 30,316 29,918 30,166 30,459 30,743 160,153 $ 6,009 6,182 6,052 5,958 6,182 32,133 Defined Contribution Plans We maintain 401(k) plans for certain hourly and salaried employees. Employees may contribute up to 15% of their salary to these plans, subject to certain restrictions. We will match a portion of the employee’s contribution, subject to certain limitations, in the form of shares of Glatfelter common stock. The expense associated with our 401(k) match was $0.9 million, $0.9 million and $1.5 million in 2009, 2008 and 2007, respectively. 12. INVENTORIES Inventories, net of reserves were as follows: In thousands Raw materials In-process and finished Supplies Total 2009 2008 $ 44,150 78,340 45,880 $ 49,083 97,390 46,881 $168,370 $193,354 If we had valued all inventories using the average- cost method, inventories would have been $6.4 million and $16.9 million higher than reported at December 31, 2009 and 2008, respectively. During 2009 and 2008, we Goodwill – Composite Fibers $17,331 $16,513 In thousands liquidated certain LIFO inventories, the effect of which did not have a significant impact on results of operations. 13. PLANT, EQUIPMENT AND TIMBERLANDS Plant, equipment and timberlands at December 31 were as follows: In thousands Land and buildings Machinery and equipment Furniture, fixtures, and other Accumulated depreciation Construction in progress Asset retirement – Lagoons Timberlands, less depletion Total 2009 2008 $ 136,260 970,708 101,327 (773,057) $ 131,258 964,502 90,535 (722,630) 435,238 23,947 10,300 1,147 463,665 17,141 11,085 1,673 $ 470,632 $ 493,564 14. GOODWILL AND INTANGIBLE ASSETS The following table sets forth information with respect to goodwill and other intangible assets which are recorded in the caption “Other long-term assets” in the accompanying Consolidated Balance Sheets: In thousands December 31 2009 2008 Specialty Papers Customer relationships Composite Fibers Technology and related Customer relationships and related Total intangibles Accumulated amortization Net intangibles $ 6,155 $ 6,155 4,373 1,867 3,931 291 12,395 (3,525) 10,377 (2,534) $ 8,870 $ 7,843 The increase in goodwill was due to foreign cur- rency translation adjustments. Other than non-amortiz- able goodwill, intangible assets are amortized on a straight-line basis. Customer relationships are amortized over periods ranging from 3 years to 14 years and technology and related intangible assets are amortized over a 14 year period. During 2009, we purchased certain intangible assets primarily consisting of Russian-based customer lists previ- ously served by a distributor. In thousands Aggregate amortization expense: Estimated amortization expense: 2010 2011 2012 2013 2014 2009 2008 $ 981 $999 1,436 1,436 1,395 940 940 The remaining weighted average useful life of intan- gible assets was 8 years at December 31, 2009. 15. OTHER LONG-TERM ASSETS Other long-term assets consist of the following: In thousands Pension Installment notes receivable Goodwill and intangibles Other Total December 31 2009 2008 $112,903 43,183 26,201 17,319 $ 44,460 81,033 24,356 22,077 $199,606 $171,926 16. OTHER CURRENT LIABILITIES Other current liabilities consist of the following: In thousands Accrued payroll and benefits Other accrued compensation and retirement benefits Income taxes payable Accrued rebates Other accrued expenses Total December 31 2009 2008 $ 46,141 $ 39,672 6,476 4,684 14,195 28,753 6,560 6,163 16,205 32,304 $100,249 $100,904 17. LONG-TERM DEBT Long-term debt is summarized as follows: Revolving credit facility, due April 2011 Term Loan, due April 2011 71⁄8% Notes, due May 2016 Term Loan, due January 2013 Note payable due March 2013 Total long-term debt Less current portion December 31 2009 2008 $ – 14,000 200,000 36,695 – $ 6,724 30,000 200,000 36,695 34,000 250,695 (13,759) 307,419 (13,759) Long-term debt, excluding current portion $236,936 $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 agree- ment, we may borrow, repay and reborrow revolving credit loans in an aggregate principal amount not to exceed $200 million outstanding at any time. All borrow- ings 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 princi- pal 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 a sale of assets, the incurrence of additional indebtedness in excess of $30.0 million in the aggregate, or issuance of additional equity; we must repay a speci- fied portion of the term loan within five days of the prepayment event. Glatfelter 2009 Annual Report 41 Borrowings under the credit agreement bear inter- est, 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. 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. The credit agreement contains a number of custom- ary 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, make acquisitions and engage in mergers or consolidations. We are also required to comply with specified financial tests and ratios, each as defined in the credit agreement, including 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 December 31, 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 (“71⁄8% Notes”). Net proceeds from this offering totaled approximately $196.4 million, after deducting the commissions and other fees and expenses relating to the offering. 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 applica- ble 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. This feature expired in 2009. 42 Our credit agreement, as amended, contains a number of customary compliance covenants. In addition, both the Notes and our previously issued $200 million in aggregate principal amount of 71⁄8% Senior Notes due 2016 contain cross default provisions that could result in all such notes becoming due and payable in the event of a failure to repay debt outstanding under the credit agreement at maturity or a default under the credit agreement, that accelerates the debt outstanding there- under. As of December 31, 2009, we met all of the requirements of our debt covenants. In November 2007, we sold approximately 26,000 acres of timberland. In connection with that transaction, we formed GPW Virginia Timberlands LLC (“GPW Virginia”) as an indirect, wholly owned and bankruptcy-remote subsidiary of ours. GPW Virginia received as consideration for the timberland sold in that transaction a $43.2 million, interest-bearing note that matures in 2027 from the buyer, Glawson Investments Corp. (“Glawson”), a Georgia corporation, and GIC Investments LLC, a Delaware limited liability company owned by Glawson. The Glawson note receivable is fully secured by a letter of credit issued by The Royal Bank of Scotland plc. In January 2008, GPW Virginia monetized the Glawson note receivable by entering into a $36.7 mil- lion term loan agreement (the “2008 Term Loan”) with a financial institution. The 2008 Term Loan is secured by all of the assets of GPW Virginia, including the Glawson note receivable, the related letter of credit and additional notes with an aggregate principal amount of $9.2 million that we issued in favor of GPW Virginia (the “Company Note”). The 2008 Term Loan bears interest at a six month reserve adjusted LIBOR rate plus a margin rate of 1.20% per annum. Interest on the 2008 Term Loan is payable semiannually. The principal amount of the 2008 Term Loan is due on January 15, 2013, but GPW Virginia may prepay the 2008 Term Loan at any time, in whole or in part, without premium or penalty. During 2009, GPW Virginia received aggregate interest payments of $1.5 mil- lion under the Glawson note receivable and the Company Note and, in turn, made interest payments of $1.1 million under the 2008 Term Loan. 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 Sus- tainable 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, 18. ASSET RETIREMENT OBLIGATION 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. The following schedule sets forth the maturity of our long-term debt during the indicated year. In thousands 2010 2011 2012 2013 2014 Thereafter $13,759 241 – 36,695 – 200,000 P. H. Glatfelter Company guarantees all debt obli- gations of its subsidiaries. All such obligations are recorded in these consolidated financial statements. At December 31, 2009 and 2008, we had $5.7 mil- lion and $12.1 million, respectively, of letters of credit issued to us by a financial institution. Such letters of credit reduce amounts available under our revolving credit facility. The letters of credit provide financial assur- ances for i) the benefit of certain state workers compen- sation insurance agencies in conjunction with our self- insurance program, and ii) assurance related to the purchase of certain utilities for our manufacturing facili- ties. We bear the credit risk on this amount to the extent that we do not comply with the provisions of certain agreements. During 2008, we recorded $11.5 million, net present value, of asset retirement obligations related to the legal requirement to close several lagoons at the Spring Grove, PA facility. Historically, lagoons were used to dispose of residual waste material. Closure of the lagoons, which is expected to occur over the next seven years, will be accomplished by filling the lagoons, install- ing a non-permeable liner which will be covered with soil to construct the required cap over the lagoons. The amount referred to above, in addition to the upward revision in 2009, was accrued with a corresponding increase in the carrying value of the property, equipment and timberlands caption on the consolidated balance sheet. The amount capitalized is being amortized as a charge to operations on the straight-line basis in relation to the expected closure period. Following is a summary of activity recorded during 2009 and 2008: In thousands Beginning balance Upward revision Payments Accretion Ending balance 2009 2008 $(11,606) (600) 1,535 (621) $(11,487) – 110 (229) $(11,292) $(11,606) Of the total liability at the end of 2009, $2.4 million is recorded in the accompanying consolidated balance sheet under the caption “Other current liabilities” and $8.9 million is recorded under the caption “Other long- term liabilities.” The comparable amounts as of Decem- ber 31, 2008 were $1.6 million and $10.0 million, respectively. 19. FAIR VALUE OF FINANCIAL INSTRUMENTS The amounts reported on the consolidated balance sheets for cash and cash equivalents, accounts receivable and short-term debt approximate fair value. The following table sets forth carrying value and fair value of long-term debt: In thousands Fixed-rate Bonds Fixed rate note payable Variable rate debt Total December 31, 2009 Carrying Value Fair Value December 31, 2008 Fair Value Carrying Value $200,000 $196,750 $200,000 $167,727 – 50,695 $250,695 – 51,209 $247,959 34,000 73,419 $307,419 36,164 75,202 $279,093 As of December 31, 2009 and 2008, we had $200.0 million of 71⁄8% fixed rate debt that is publicly registered, but is thinly traded. Accordingly, the values set forth above are based on debt instruments with similar characteristics, or Level 2. The fair value of the remaining debt instruments was estimated using dis- counted cash flow models based on interest rates obtained from readily available, independent sources, or Level 3. Glatfelter 2009 Annual Report 43 20. SHAREHOLDERS’ EQUITY The following table summarizes outstanding shares of common stock: In thousands Year Ended December 31, 2008 2007 2009 Shares outstanding at beginning of year Treasury shares issued for: Restricted stock performance awards 401(k) plan Director compensation Employee stock options exercised Shares outstanding at end of year 45,434 45,143 44,821 86 169 17 – 45,706 94 119 14 64 45,434 – 206 11 105 45,143 21. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS Contractual Commitments The following table summarizes the minimum annual payments due on non- cancelable operating leases and other similar contractual obligations having initial or remaining terms in excess of one year: In thousands 2010 2011 2012 2013 2014 Thereafter Leases Other $5,022 3,098 1,905 1,685 1,059 7,480 $93,646 40,563 28,550 — — — Other contractual obligations primarily represent minimum purchase commitments under energy and pulp wood supply contracts and other purchase obligations. At December 31, 2009, required minimum annual payments due under operating leases and other similar contractual obligations aggregated $20.2 million and $162.8 million, respectively. Fox River–Neenah, Wisconsin Background We have significant uncertainties associated with environmental claims arising out of the presence of polychlorinated biphenyls (“PCBs”) in sedi- ments 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. 44 The United States, the State of Wisconsin and various state and federal governmental agencies (collec- tively, the “Governments”), as well as private parties, have found PCBs in sediments in the bed of the Fox River, apparently from a number of sources at municipal and industrial facilities along the upstream and down- stream 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 Win- nebago to the dam at Appleton, and is comprised of Little Lake Butte des Morts. Our Neenah Facility dis- charged its wastewater into OU1. OU2 extends from the dam at Appleton to the dam at Little Rapids, OU3 from the dam at Little Rapids to the dam at De Pere, OU4 from the dam at De Pere to the mouth of the river, and OU5 from the mouth into the lower portion of Green Bay. The river extends 39 miles from the upstream end of OU1 to the downstream end of OU4. Our liabilities, if any, for this contamination primarily arise under the federal Comprehensive Environmental, Response, Compensation and Liability Act (“CERCLA” or “Superfund”). The Governments have sought to recover “response actions” or “response costs,” which are the costs of studying and cleaning up contamination, from various “responsible parties.” In addition, various natural resource trustee agencies of the United States, the States of Wisconsin and Michigan, and several Indian Tribes (the “Natural Resources Trustees” or “Trustees”) have sought to recover natural resource damages (“NRDs”), including natural resource damage assessment costs. Parties that have incurred response costs or NRDs either voluntarily or in response to the governments’ and Trustees’ demands may have an opportunity to seek contribution or other recovery of some or all of those costs from other parties who are jointly and severally responsible under Superfund for those costs. Therefore, as we incur costs, we also acquire a claim against other parties who may not have paid their equitable share of those costs. As others incur costs, they acquire a claim against us to the extent that they claim that we have not paid our equitable share of the total. Any party that resolves its liability to the United States or a state in a judicially or administratively approved settlement agreement obtains protection from contribution claims for matters addressed in the settlement. For these reasons, all of the parties who are potentially responsible (“PRPs”) under CERCLA for response costs or NRDs have exposure to liability for: (a) the cost of past response actions taken by anyone else, (b) the cost of past NRD payments or restoration projects incurred by anyone else, (c) the cost of response actions to be taken in the future, and (d) NRDs. All of this exposure is subject to substantial defenses, including, for example, that the PRP is not liable or not jointly and severally liable for any particular cost or damage, that the cost or damage is not recoverable under CERCLA or any other law, or that the recovery is barred by the passage of time. In addition, a party that has incurred or committed to incur costs or has paid NRDs may be able to claim credit for that cost or payment in any equitable allocation of response costs or NRDs in any action for reallocation of costs. Cleanup Decisions. Our liability exposure depends importantly on the decisions made by EPA and the Wisconsin Department of Natural Resources (“WDNR”) as to how the Site will be cleaned up, and consequently the costs and timing of those response actions. The nature of the response actions has been highly controversial. EPA issued a record of decision (“ROD”) selecting response actions for OU1 and OU2 in December 2002. EPA issued a separate ROD selecting response actions for OU3, OU4, and OU5 in March 2004 and in June 2007. EPA amended the RODs for OUs 2-5 in June 2007 to require less dredging and more capping and covering of sediments containing PCBs. The governments have concluded that these methods will result in a reduction in the costs for this portion of the cleanup. Others disagree. Likewise, in June 2008, EPA also amended the ROD for OU1. NRD Assessment. The Natural Resources Trust- ees have engaged in work to assess NRDs at and arising from the Site. However, they have not completed a required NRD Assessment under the pertinent regulations. The Trustees’ 2009 estimate of NRDs and associated costs ranges from $287 million to $423 million, some of which has already been satisfied. With specific respect to NRD claims, we and others contended that the Trustees’ claims are barred by the applicable 3 year statute of limitations. Past Costs Demand. By letter dated January 15, 2009, EPA demanded that we and six other parties reimburse EPA for approximately $17.6 million in costs that EPA claims it incurred as necessary costs of response not subject to any other agreement in this matter. In response, we and the other parties which were con- tacted, notified the EPA that the supporting documenta- tion provided by EPA did not allow us to fully evaluate this demand and we requested that the EPA provide additional supporting information for the claimed costs. EPA has not yet responded to this request. Accordingly, we are unable to reasonably estimate our potential liability for these costs. Work Under Agreements, Orders, and Decrees. As we mention above, our exposure to liabil- ity depends on the amount of work done, costs incurred, and damages paid both by us and by others. The procedural context of any work done, costs incurred, and damages paid also impact are ultimate exposure. Since 1991, the Governments and various groups of potentially responsible parties, including us, have entered into a series of agreements, orders, and decrees under which we and others have performed work, incurred costs, or paid damages in connection with the Site. As a result, some parties have contributed or performed sub- stantial work at the Site and at least one party, Fort Howard Corporation (whose successor is either the Fort James Operating Company or Georgia Pacific Corpo- ration) has resolved its NRD liability at the Site. Notably, in April 2004, the United States District Court for the Eastern District of Wisconsin entered a consent decree (“OU1 Consent Decree”) in United States v. P.H. Glatfelter Co., No. 2:03-cv-949, under which we and WTM I Corp. have been implementing the remedy in OU1, dividing costs evenly in addition to a $7 million contribution from Menasha Corp. and a $10 million contribution that the United States contrib- uted 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”). That amendment allowed for imple- mentation of the amended remedy for OU1 and commit- ted us and WTM I to implement that remedy without a cost limitation on that commitment. We and WTM I have substantially completed the amended remedy for OU1. We anticipate that the remaining tasks, other than monitoring and maintenance, will be completed by the second quarter of 2010. Further, in November 2007, EPA issued an adminis- trative order for remedial action (“UAO”) to Appleton Papers Inc., CBC Coating, Inc. (formerly known as River- side Paper Corporation), Georgia-Pacific Consumer Prod- ucts, 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 Glatfelter 2009 Annual Report 45 no vehicle for complying with the UAO’s overall require- ments 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 com- menced by Appleton Papers and NCR against the other UAO respondents. In order to remove this distraction, and in the spirit of cooperation, we stated that we would satisfy the EPA’s demand, an amount which was insignif- icant, in full. We paid this amount. Cost estimates. Estimates of the Site remedia- tion change over time as we, or others, gain additional data and experience at the Site. In addition, disagree- ment exists over the likely costs for some of this work. The Governments estimate that the total cost of imple- menting the amended remedy in OU1 will be approxi- mately $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. On February 26, 2010, EPA issued an “explana- tion of Significant Differences” – a document explaining changes to a remedy, including changes in cost, that are significant but which do not require the issuance of a new Record of Decision. In that ESD, EPA estimated the cost for the OU 2-5 remedy to be $701 million. EPA estimates costs as a range, in this case from $491 million to $1.05 billion. This estimate is slightly different than, but not inconsistent with, an estimate of the total cost for remediation of the Site that the Governments pre- pared for purposes of justifying a recent “de minimis” settlement with certain parties whose liability at the Site the United States and the Governments believe to be insignificant. That settlement was approved by the federal court in Green Bay on December 16, 2009. In their brief in support of that settlement, the Governments estimated the total past costs incurred at the Site – including the OU1 project – to be $200 million. In addition, they estimated the cost of implementing the remedy set forth in the amended ROD for OU2-5 (the downstream por- tions of the Site) to total between $600 million and $700 million exclusive of amounts already spent. For purposes of the settlement, the Governments took the high end of that range and applied a 50% contingency to arrive at a cost estimate for future cleanup work of $1.05 billion. Based upon independent estimates commis- sioned by various potentially responsible parties, we have no reason to disagree with the Governments’ assertion that future costs to implement the amended remedy for 46 OU2-5 are likely to fall between $700 million and $1.05 billion. NRDs. The Trustees claimed that we were jointly and severally responsible for NRDs with a value between $176 million and $333 million. In their recently filed brief, they further claim that this range should be inflated to 2009 dollars and then certain unreimbursed past assessment costs should be added, so that the range of their claim would be $287 million to $423 million. We deny (a) liability for most of these NRDs, (b) that if anyone is liable, that we are jointly and severally liable for the full amount; and (c) that the Trustees can pursue this claim at this late date as the limitations period for NRD claims is three years from discovery. Allocation. Since 1991, various potentially responsible parties have, without success, attempted to agree on a binding, final, allocation of costs and dam- ages among themselves. All costs that they have incurred to date have been incurred individually, or under interim, nonbinding allocations. However, the consent decree in United States v. P. H. Glatfelter Co. affords us and WTM I contribution protection for claims seeking to reallocate costs of implementing the OU1 remedy, and Fort James Operating Co. (now Georgia-Pacific) has certain rights under its consent decree. Otherwise, the parties have not litigated their internal allocation with us except as described below. NCR and Appleton Papers Inc. commenced litigation in the United States District Court for the Eastern District of Wisconsin captioned Appleton Papers Inc. v. George A. Whiting Paper Co., No. 2:08-cv-16, seeking to reallocate costs and damages allegedly incurred or paid or to be incurred or paid by NCR or Appleton Papers (the “Whit- ing 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., Interna- tional Paper Company, Leicht Transfer & Storage Com- pany, Neenah Foundry Company, Newpage Wisconsin System Inc., The Procter & Gamble Paper Products Com- pany, Wisconsin Public Service Corp., the Cities of Apple- ton, De Pere, and Green Bay, Brown County, Green Bay Metropolitan Sewerage District, Heart of the Valley Met- ropolitan Sewerage District, Neenah-Menasha Sewerage Commission, WTM I Company, U.S. Paper Mills Corpora- tion, Georgia-Pacific Consumer Products LP, Georgia- Pacific LLC, Fort James Operating Company, CBC Coating Company, Inc., Fort James Corporation, Kimberly-Clark Corporation, LaFarge North America Inc., Union Pacific Railroad Company, and the United States Army Corps of Engineers. As the result of certain third-party claims, federal agencies other than the Corps of Engineers are also involved in this allocation. to resolve its liability at the Site. That Consent Decree has not yet been approved. On December 16, 2009, the Court granted motions for summary judgment in our favor on the contribution claims brought by NCR and Appleton Papers Inc. in the Whiting litigation. The Court held that neither NCR nor Appleton Papers may seek contribution from us or other recyclers under CERCLA. The Court made no ruling as to any other allocation, the liability of NCR or Appleton Papers to us for costs we have incurred, or our liability to the governments or Trustees. NCR and Appleton Papers have stated their intention to appeal, but an appeal is not yet timely because the Court has not entered a final judgment. As described above, we have counterclaims against NCR and Appleton Papers Inc. to recover the costs we have incurred and may later incur and the damages we have paid and may later pay in connection with the Fox River site. Other defendants have similar claims. On January 20, 2010, the Court issued an order inviting submissions from the parties as to whether the counter- claims of the defendants, as well as certain additional claims, could be resolved without a trial within approxi- mately six months. If the Court is convinced that the case may be resolvable on that basis, it will establish a briefing schedule and attempt to decide the remaining issues on our claims before an appeal will become timely. As noted above, on December 16, 2009, the Court approved a de minimis party consent decree (“Consent Decree”) settlement among the United States, the State of Wisconsin, and eleven defendants resolving those defendants’ liability for this site. The eleven settling defendants are: George A. Whiting Paper Co.; Green Bay Metropolitan Sewerage District; Green Bay Packaging, Inc.; Heart of the Valley Metropolitan Sewerage District; International Paper Co.; LaFarge North America Inc.; Leicht Transfer and Storage Co.; Neenah Foundry Co.; Procter & Gamble Paper Products Co.; Union Pacific Railroad Co.; and Wisconsin Public Service Corp. (collec- tively, the “Eleven Settling Defendants”). The Consent Decree reflects the conclusion by the United States and the State of Wisconsin that each of the Eleven Settling Defendants qualifies for treatment as a de minimis party under CERCLA. The Consent Decree requires the Settling Defendants to make a collective payment of $1,875,000. Those Eleven Settling Defendants have moved for judg- ment in the Whiting Litigation based upon the protec- tions in the Consent Decree. In addition, the Governments on September 25, 2009, lodged a separate consent decree in the same case that would, if entered, resolve the liabilities of the City of DePere. Under that consent decree, the City of DePere would pay $210,000 We contend that we are not jointly and severally liable for costs or damages arising from the presence of PCBs downstream of OU1. In addition, we contend that NCR or other sources of NCR»-brand carbonless copy paper that our Neenah Mill recycled bear most of the responsibility for costs and damages arising from the presence of PCBs in OU1. Other parties disagree. Our counterclaims for a re-allocation of costs we have incurred or may incur remain pending. Reserves for the Fox River Site. As of Decem- ber 31, 2009, our reserve for our claimed liability at the Fox River, including our remediation and ongoing moni- toring obligations at OU1, our claimed liability for the remediation of OU2-5, our claimed liability for NRDs associated with PCB contamination at the Site and all pending, threatened or asserted and unasserted claims against us relating to PCB contamination at the Site totaled $17.4 million. No additional amounts were accrued during 2009 or 2008. Of our total reserve for the Fox River, $0.4 million is recorded in the accompany- ing consolidated balance sheets under the caption “Envi- ronmental liabilities” and the remaining $17.0 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. 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 2009, we and WTM I concluded that the amounts in the escrow account would be sufficient to pay for the estimated cost of the work at OU1, including operation, maintenance, and other post-construction expenses. However, there can be no assurance that these amounts will in fact suffice. WTM I has filed a bankruptcy petition in the Bankruptcy Court in Richmond. There can be no assurance should additional amounts be required to complete the project that WTM I will be able to fulfill its obligation to pay half the additional cost. We believe that we have strong defenses to liability for remediation of OU2-5 including the existence of ample data that indicate that PCBs did not leave OU1 in concentrations that could have caused or contributed to the need for cleanup in OU2-5. Others, including the EPA and other PRPs, disagree with us and, as a result, the EPA has issued a UAO to us and to others to perform the OU2-5 work. NCR and Appleton Papers commenced Glatfelter 2009 Annual Report 47 the Whiting Litigation and joined us and others as defendants, but did not prevail. 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 enti- ties providing PCB-containing wastepaper to each of the recycling mills. 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 asso- ciated with OU2-5. The accompanying consolidated finan- cial statements do not include reserves for defense costs for the Whiting Litigation or any future defense costs related to our involvement at the Fox River which could be significant. In setting our reserve for the Fox River, we have assessed our legal defenses, including our successful defenses to the allegations made in the Whiting Litiga- tion, 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 evalu- ation 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 relation- ship 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 expen- ditures for environmental compliance, cleanup, remedia- tion and personal injury, NRDs and property damage liabilities cannot be ascertained with any certainty due to, among other things, the unknown extent and nature of any contamination, the response actions that may ultimately be required, the availability of remediation equipment, and landfill space, and the number and financial resources of any other PRPs. Other Information. Based in part upon the Court’s December 16, 2009, ruling and the Court’s 48 January 10, 2010 order in the Whiting Litigation, we continue to believe that a volumetric allocation would not constitute an equitable allocation of the potential liability for the contamination at the Fox River. We contend that other factors, such as the location of contamination, the location of discharge, and a party’s role in causing discharge, must be considered in order for the allocation to be equitable. The Wisconsin DNR and FWS have each published studies, the latter in draft form, estimating the amount of PCBs discharged by each identified PRP’s facility to the lower Fox River and the Bay of Green Bay. These reports estimate the Neenah Facility’s share of the volumetric discharge to be as high as 27%. We do not believe the volumetric estimates used in these studies are accurate because (a) the studies themselves disclose that they are not accurate and (b) the volumetric estimates contained in the studies are based on assumptions that are unsup- ported by existing data on the Site. We believe that the Neenah Facility’s volumetric contribution is significantly lower than the estimates set forth in these studies. We previously entered into interim cost-sharing agreements with four of the other PRPs, which provided for those PRPs to share certain costs relating to scientific studies of PCBs discharged at the Site (“Interim Cost Sharing Agreements”). These interim cost-sharing agree- ments do not establish the final allocation of remediation costs incurred at the Site. Based upon our evaluation of the Court’s December 16, 2009, ruling in the Whiting Litigation as well as the volume, nature and location of the various discharges of PCBs at the Site and the relationship of those discharges to identified contamina- tion, we believe our allocable share of liability at the Site is less than our share of costs under the Interim Cost Sharing Agreements. While the Amended OU1 Consent Decree provides a negotiated framework for resolving both our and WTM I’s liability for the remediation of OU1, it does not resolve our exposure at the Site. The OU1 Consent Decree does not address response costs necessary to remediate the remainder of the Site and only addresses NRDs and claims for reimbursement of government expenses to a limited extent. Because CERCLA imposes strict and often joint and several liability, uncertainty persists regarding our exposure with respect to the remainder of the Fox River site. In addition, as mentioned previously, EPA has issued a UAO to us and others calling for further work in OU2-5, and Appleton Papers and NCR have commenced the Whiting Litigation that may become more compli- cated and involve additional parties. We cannot predict the ultimate outcome of the Whiting Litigation or any other litigation or regulatory actions related to this matter. Range of Reasonably Possible Outcomes. Our analysis of the range of reasonably possible out- comes 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 liability associated with the Fox River matter may exceed the aggregate amounts which we have 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 undetermin- able 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 possi- ble outcomes within the range and that the possibility of an outcome in excess of the upper end of the monetary range is remote. The summary judgment in our favor in the Whiting Litigation, if sustained on appeal, suggests that outcomes in the upper end of the monetary range have become somewhat less probable, while increases in cost estimates for some of the work may militate in the opposite direction. All remedial work in OU-1 has been completed and we and WTM I 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 obliga- tions related to this matter, that our share of costs and/or damages will not exceed our available resources, or that such obligations will not have a long-term, material adverse effect on our consolidated financial position, liquidity or results of operations. If we are not successful in obtaining acknowledgment that the reme- dial work at OU1 has been substantially completed and/or should the United States seek to enforce the UAO for OU2-5 against us which requires us either to perform directly or to contribute significant amounts towards the performance of that work, those developments could have a material adverse effect on our consolidated financial position, liquidity and results of operations and might result in a default under our loan covenants. Ecusta Environmental Matters Beginning in April 2003, government authorities, including the North Carolina Department of Environment and Natural Resources (“NCDENR”), initiated discussions with us and other parties regarding, among other environmental issues, certain landfill closure liabilities associated with our former Ecusta mill and its properties (the “Ecusta Property”). The discussions focused on NCDENR’s desire to establish a plan and secure financial resources to close three landfills located at the Ecusta Property and to address other environmental matters at the facility. Dur- ing the third quarter of 2003, the discussions ended with NCDENR’s conclusion to hold us responsible for the closure of three landfills. Accordingly, in 2003 we estab- lished reserves totaling approximately $7.6 million repre- senting estimated landfill closure costs. During 2009, we completed the closure of the last of those three landfills (collectively, the “Landfill Closure and Post-Closure Obligations”). In September 2005, we established an additional $2.7 million reserve for potential environmental liabilities associated with the Ecusta Property relating to: (i) mercury releases from the Electro-Chemical Building; (ii) contami- nation in and operation of the aeration and stabilization basin (the “ASB”), which is part of the Ecusta Property’s wastewater treatment system; (iii) a previously closed ash landfill (“Brown #1 Landfill”); and (iv) contamination in the vicinity of a former caustic building. On January 25, 2008, we entered into a series of agreements with, among others, Davidson River Village, LLC (“DRV”)- the current owner of the Ecusta Property pursuant to which we transferred potential liabilities for certain environmental matters at the Ecusta Property to DRV (the “DRV Transaction”). In connection with the DRV Transaction, DRV assumed, and indemnified us for, liability arising from environmental matters and condi- tions at the Ecusta Property with certain exceptions, including the Landfill Closure and Post-Closure Obliga- tions and investigation and remediation (if necessary) of any pollutants that may have migrated from the Ecusta Property to the Davidson and French Broad Rivers (the “River Areas”), which liabilities were retained by us. Glatfelter 2009 Annual Report 49 22. SEGMENT AND GEOGRAPHIC INFORMATION The following table sets forth profitability and other information by business unit for the year ended December 31: In thousands Net sales Energy sales, net Total revenue Cost of products sold Gross profit SG&A Restructuring charges Gains on dispositions of plant, equipment and timberlands Total operating income Nonoperating income (expense) Income before income Specialty Papers 2008 2009 2007 2009 Composite Fibers 2008 2007 Other and Unallocated 2008 2009 2007 2009 Total 2008 2007 $– $791,915 $833,899 $802,293 $392,095 $429,952 $346,030 – – 346,030 – 287,606 (100,749) 100,749 58,424 19,070 32,541 – – 13,332 805,247 693,949 111,298 55,408 – – 392,095 334,378 57,717 35,779 – 9,364 843,263 739,481 103,782 54,596 – – 429,952 366,791 63,161 38,206 – 9,445 811,738 721,216 90,522 56,561 – $(1) – (1) (10,840) 10,839 5,095 (856) $– $1,184,010 13,332 – 1,197,342 – 927,578 (7,366) 269,764 7,366 110,257 27,042 – 35 $1,263,850 $1,148,323 9,445 1,157,768 1,001,456 156,312 116,144 35 9,364 1,273,214 1,095,432 177,782 97,897 (856) – – – – – – (898) (18,468) (78,685) (898) (18,468) (78,685) 55,890 49,186 33,961 21,938 24,955 25,883 82,577 25,068 58,974 160,405 99,209 118,818 – – – – – – (17,259) (18,183) (24,884) (17,259) (18,183) (24,884) taxes $55,890 $49,186 $33,961 $21,938 $24,955 $25,883 $65,318 $6,885 $34,090 $143,146 $81,026 $93,934 Supplemental Data Plant, equipment and timberlands, net Capital expenditures Depreciation, depletion and amortization $262,807 $284,689 $287,107 $207,825 $208,875 $232,759 11,565 14,077 12,080 20,878 17,395 31,591 37,520 35,010 34,882 23,736 25,601 21,119 $– – – $– – – $– – – $470,632 26,257 $493,564 52,469 $519,866 28,960 61,256 60,611 56,001 Results of individual business units are presented Our North America-based Specialty Papers business unit focuses on producing papers for the following markets: (cid:129) Carbonless and forms papers for credit card receipts, multi-part forms, security papers and other end-user applications; (cid:129) Book publishing papers for the production of high quality hardbound books and other book publishing needs; (cid:129) Envelope and converting papers for the direct mail market, shopping bags, and other converting applications; and (cid:129) Engineered products for digital imaging, trans- fer, casting, release, postal, playing card and other niche specialty applications. Specialty Papers’ revenue composition by market consisted of the following for the years indicated: In thousands Carbonless & forms Book publishing Envelope & converting Engineered products Other Total 2009 2008 2007 $320,088 176,646 146,812 143,490 4,879 $791,915 $338,067 201,040 138,293 149,372 7,127 $833,899 $345,785 185,343 116,797 136,785 17,583 $802,293 based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management account- ing 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 com- pany. The management accounting process uses assump- tions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the business unit are allocated primarily based on an estimated utilization of support area services. Management evaluates results of operations of the business units before pension income or expense, alterna- tive 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 our performance is evaluated internally and by our Board of Directors. 50 Our Composite Fibers business unit, based in Gernsbach, Germany, serves customers globally and focuses on higher-value-added products in the following markets: (cid:129) Food & Beverage paper used for tea bags and coffee pods/pads and filters; (cid:129) Metallized products used in the labeling of beer bottles, innerliners, gift wrap, self-adhesive labels and other consumer products applications; (cid:129) Composite Laminates papers used in produc- tion of decorative laminates for furniture and flooring; and (cid:129) Technical Specialties is a diverse line of paper products used in batteries, medical masks and other highly engineered applications. Composite Fibers’ revenue composition by market consisted of the following for the years indicated: In thousands 2009 2008 2007 Food & beverage Metallized Composite laminates Technical specialties and other Total $233,899 81,388 46,442 30,366 $392,095 $252,545 85,719 58,705 32,983 $429,952 $218,961 45,426 52,972 28,671 $346,030 We sell a significant portion of our specialty papers through wholesale paper merchants. No individual cus- tomer accounted for more than 10% of our consolidated net sales in 2009, 2008 or 2007. Our net sales to external customers and location of net plant, equipment and timberlands are summarized below. Net sales are attributed to countries based upon origin of shipment. In thousands United States Germany United Kingdom Other Total 2009 Plant, Equipment and Timberlands – Net $262,807 124,881 60,104 22,840 2008 Plant, Equipment and Timberlands – Net $284,689 131,304 53,054 24,517 2007 Plant, Equipment and Timberlands – Net $287,107 133,505 74,000 25,254 Net sales $ 832,724 190,796 87,054 37,749 Net sales $ 869,325 216,011 134,212 44,302 Net sales $ 824,833 191,660 125,047 42,470 $1,184,010 $470,632 $1,263,850 $493,564 $1,148,323 $519,866 Glatfelter 2009 Annual Report 51 23. GUARANTOR FINANCIAL STATEMENTS Our 71⁄8% Notes have been fully and unconditionally guaranteed, on a joint and several basis, by certain of our 100%-owned domestic subsidiaries, PHG Tea Leaves, Inc., Mollanvick, Inc., The Glatfelter Pulp Wood Company, and Glatfelter Holdings, LLC. The following presents our consolidating statements of income and cash flow for the years ended December 31, 2009, 2008 and 2007 and our consolidating balance sheets as of December 31, 2009 and 2008. 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 year ended December 31, 2009 In thousands Net sales Energy sales – net Total revenues Costs of products sold Gross profit Selling, general and administrative expenses Gains on dispositions of plant, equipment and timberlands, net Operating income Non-operating income (expense) Interest expense Other income (expense) – net Total other income (expense) Income (loss) before income taxes Income tax provision (benefit) Net income (loss) Parent Company $791,915 13,332 805,247 597,693 207,554 71,484 9 136,061 (16,324) 15,000 (1,324) 134,737 11,295 Guarantors Non Guarantors Adjustments/ Eliminations $46,796 – 46,796 42,320 $392,095 – 392,095 334,544 $(46,796) – (46,796) (46,979) Consolidated $1,184,010 13,332 1,197,342 927,578 4,476 2,304 (907) 3,079 5,025 1,470 6,495 9,574 3,382 57,551 36,469 – 21,082 (2,810) (144) (2,954) 18,128 6,171 183 – – 183 (3,225) (16,251) (19,476) (19,293) (1,144) 269,764 110,257 (898) 160,405 (17,334) 75 (17,259) 143,146 19,704 $123,442 $6,192 $11,957 $(18,149) $123,442 Condensed Consolidating Statement of Income for the year ended December 31, 2008 Guarantors Non Guarantors Adjustments/ Eliminations Parent Company $833,900 9,364 843,264 729,425 113,839 56,425 (856) 183 $45,640 – 45,640 44,448 1,192 1,910 – (18,651) 58,087 17,933 (19,940) 36,376 16,436 74,523 16,635 (14) 11,130 11,116 29,049 11,486 $429,950 – 429,950 367,005 62,945 39,562 – – 23,383 (3,206) (4,383) (7,589) 15,794 4,211 $(45,640) – (45,640) (45,446) (194) – – – (194) – (38,146) (38,146) (38,340) (9,194) $57,888 $17,563 $11,583 $(29,146) Consolidated $1,263,850 9,364 1,273,214 1,095,432 177,782 97,897 (856) (18,468) 99,209 (23,160) 4,977 (18,183) 81,026 23,138 $57,888 In thousands Net sales Energy sales – net Total revenues Costs of products sold Gross profit Selling, general and administrative expenses Reversal of shutdown and restructuring charges Gains on dispositions of plant, equipment and timberlands, net Operating income (loss) Non-operating income (expense) Interest expense Other income (expense) – net Total other income (expense) Income (loss) before income taxes Income tax provision (benefit) Net income (loss) 52 Condensed Consolidating Statement of Income for the year ended December 31, 2007 In thousands Net sales Energy sales – net Total revenues Costs of products sold Gross profit Selling, general and administrative expenses (Reversal of) Shutdown and restructuring charges Gains on dispositions of plant, equipment and timberlands, net Operating income Non-operating income (expense) Interest expense Other income (expense) – net Total other income (expense) Income (loss) before income taxes Income tax provision (benefit) Net income (loss) Parent Company $802,293 9,445 811,738 716,015 95,723 80,112 201 76 15,334 (26,980) 75,806 48,826 64,160 688 Guarantors Non Guarantors Adjustments/ Eliminations $42,801 – 42,801 40,181 2,620 1,845 – (78,761) 79,536 (3) 15,910 15,907 95,443 35,992 $346,030 – 346,030 287,931 $(42,801) – (42,801) (42,671) 58,099 34,187 (166) – 24,078 (2,039) (5,939) (7,978) 16,100 555 (130) – – – (130) – (81,639) (81,639) (81,769) (6,773) $63,472 $59,451 $15,545 $(74,996) Consolidated $1,148,323 9,445 1,157,768 1,001,456 156,312 116,144 35 (78,685) 118,818 (29,022) 4,138 (24,884) 93,934 30,462 $63,472 Condensed Consolidating Balance Sheet as of December 31, 2009 In thousands Assets Cash and cash equivalents Other current assets Plant, equipment and timberlands – net Other assets Total assets Liabilities and Shareholders’ Equity Current liabilities Long-term debt Deferred income taxes Other long-term liabilities Total liabilities Shareholders’ equity Parent Company Guarantors Non Guarantors Adjustments/ Eliminations Consolidated $76,970 275,490 255,886 600,116 $985 260,834 6,921 145,304 $57,465 148,090 207,825 75,731 $– (299,778) – (621,545) $135,420 384,636 470,632 199,606 $1,208,462 $414,044 $489,111 $(921,323) $1,190,294 $301,908 200,241 71,035 124,574 697,758 510,704 $1,357 – 15,347 13,531 30,235 383,809 $179,273 36,695 26,284 9,654 251,906 237,205 $(296,428) – (15,998) 12,117 (300,309) (621,014) $186,110 236,936 96,668 159,876 679,590 510,704 Total liabilities and shareholders’ equity $1,208,462 $414,044 $489,111 $(921,323) $1,190,294 Glatfelter 2009 Annual Report 53 Condensed Consolidating Balance Sheet as of December 31, 2008 In thousands Assets Cash and cash equivalents Other current assets Plant, equipment and timberlands – net Other assets Total assets Liabilities and Shareholders’ Equity Current liabilities Long-term debt Deferred income taxes Other long-term liabilities Total liabilities Shareholders’ equity Parent Company Guarantors Non Guarantors Adjustments/ Eliminations Consolidated $8,860 266,899 277,215 510,144 $756 256,834 7,470 175,927 $22,618 88,288 208,879 (29,767) $– (252,436) – (484,378) $32,234 359,585 493,564 171,926 $1,063,118 $440,987 $290,018 $(736,814) $1,057,309 $336,182 222,965 53,976 107,288 720,411 342,707 $17,072 – 24,615 13,838 55,525 385,462 $85,668 70,695 26,272 8,941 191,576 98,442 $(248,820) – (14,705) 10,615 (252,910) (483,904) $190,102 293,660 90,158 140,682 714,602 342,707 Total liabilities and shareholders’ equity $1,063,118 $440,987 $290,018 $(736,814) $1,057,309 Condensed Consolidating Statement of Cash Flows for the year ended December 31, 2009 In thousands Net cash provided (used) by Operating activities Investing activities Purchase of plant, equipment and timberlands Proceeds from disposal plant, equipment and timberlands Proceeds from timberland installment note receivable Repayments from (advances of) intercompany loans, net Total investing activities Financing activities Net (repayments of) proceeds from indebtedness Payment of dividends to shareholders (Repayments) borrowings of intercompany loans, net Payment of intercompany dividends Total financing activities Effect of exchange rate on cash Net increase (decrease) in cash Cash at the beginning of period Cash at the end of period Parent Company Guarantors Non Guarantors Adjustments/ Eliminations Consolidated $102,891 $17,534 $46,668 $(3,225) $163,868 (14,040) – – 9,186 (4,854) (22,725) (16,596) 9,394 – (29,927) – 68,110 8,860 $76,970 (137) 951 – (9,394) (8,580) – – (5,500) (3,225) (8,725) – 229 756 $985 (12,080) – 37,850 – 25,770 (36,008) – (3,686) – (39,694) 2,103 34,847 22,618 $57,465 – – – 208 208 – – (208) 3,225 3,017 – – – $– (26,257) 951 37,850 – 12,544 (58,733) (16,596) – – (75,329) 2,103 103,186 32,234 $135,420 54 Condensed Consolidating Statement of Cash Flows for the year ended December 31, 2008 In thousands Net cash provided (used) by Operating activities Investing activities Purchase of plant, equipment and timberlands Proceeds from disposal plant, equipment and timberlands Repayments from (advances of) intercompany loans, net Return (contributions) of intercompany capital, net Total investing activities Financing activities Net (repayments of) proceeds from indebtedness Payment of dividends to shareholders (Repayments) borrowings of intercompany loans, net Return of intercompany capital, net Payment of intercompany dividends Proceeds from stock options exercised and other Total financing activities Effect of exchange rate on cash Net increase (decrease ) in cash Cash at the beginning of period Cash at the end of period Parent Company Guarantors Non Guarantors Adjustments/ Eliminations Consolidated $15,641 $26,929 $34,455 $(23,600) $53,425 (19,998) 19,279 4,593 – 3,874 (39,196) (16,469) 39,280 – – 1,165 (15,220) (2,128) 2,167 6,693 $8,860 (880) – (19,678) 24,997 4,439 – – (7,174) – (23,600) – (30,774) – 594 162 $756 (31,591) – (17,502) – (49,093) 41,621 – 481 (24,997) – – 17,105 (2,827) (360) 22,978 $22,618 – – 32,587 (24,997) 7,590 – – (32,587) 24,997 23,600 – 16,010 – – $– (52,469) 19,279 – – (33,190) 2,425 (16,469) – – – 1,165 (12,879) (4,955) 2,401 29,833 $32,234 Condensed Consolidating Statement of Cash Flows for the year ended December 31, 2007 In thousands Net cash provided (used) by Operating activities Investing activities Purchase of plant, equipment and timberlands Proceeds from disposal plant, equipment and timberlands Acquisitions, net of cash acquired Total investing activities Financing activities Net (repayments of) proceeds from indebtedness Payment of dividends Proceeds from stock options exercised and other Total financing activities Effect of exchange rate on cash Net increase (decrease) in cash Cash at the beginning of period Cash at the end of period Parent Company Guarantors Non Guarantors Adjustments/ Eliminations Consolidated $92,366 $(40,334) $48,300 $– $100,332 (16,334) 199 – (16,135) (71,570) (16,350) 7,551 (80,369) 604 (3,534) 10,227 $6,693 (1,091) 41,041 – 39,950 – – – – – (384) 546 $162 (11,535) 376 (7,923) (19,082) (19,002) – – (19,002) 1,550 11,766 11,212 $22,978 – – – – – – – – – – – – (28,960) 41,616 (7,923) 4,733 (90,572) (16,350) 7,551 (99,371) 2,154 7,848 21,985 $29,833 Glatfelter 2009 Annual Report 55 24. SUBSEQUENT EVENTS On February 5, 2010, we and certain of our subsid- iaries (the “Guarantors”) issued and sold $100 million in aggregate principal amount of 71/8% Senior Notes due 2016 (the “Notes”). The Notes were issued at 95.0% of the principal amount. We used the net proceeds from the sale, along with borrowings under our revolving credit facility and cash on hand, to fund the acquisition of Concert Industries Corp. (“Concert”). The Notes and the guarantees thereof (the “Guar- antees”) were issued pursuant to an indenture dated as of February 5, 2010 (the “Indenture”) among us, the Guarantors and HSBC Bank USA, National Association, as trustee (the “Trustee”). The Indenture contains cove- nants that, among other things, limits the ability of us and the Guarantors to incur debt, make restricted pay- ments, create certain liens, sell assets, enter into certain sale and leaseback transactions, and consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis. The Indenture provides for customary events of default. We will pay interest on the Notes on May 1 and November 1 of each year, beginning on May 1, 2010. The Notes will mature on May 1, 2016. The Notes are senior unsecured obligations and will rank equally with our other and future senior unsecured obligations. The Notes are guaranteed, jointly and severally, on a senior unsecured basis, by certain of our current and future domestic subsidiaries. We may redeem some or all of the notes at any time and from time to time on or after May 1, 2011 at the applicable redemption price plus accrued and unpaid interest to the date of redemption. We have the option to redeem the Notes in whole, but not in part, prior to May 1, 2011 at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest and a make-whole premium. On February 12, 2010, we completed the acquisi- tion (Concert) of all of the issued and outstanding shares of Concert from Brookfield Special Situations Manage- ment Limited (f/k/a Tricap Management Limited) (” Ven- dor”) pursuant to a share purchase agreement entered into among us and Vendor on January 4, 2010, as amended on February 12, 2010. The purchase price paid was approximately $234.4 million based on the currency exchange rates on the closing date, subject to a post- closing working capital adjustment. Concert is a leading global supplier of highly absorbent cellulose-based airlaid non-woven materials, used to manufacture a diverse range of consumer and industrial products for growing global end-use markets, including feminine hygiene and adult incontinence products, specialty wipes and food pads. In 2009, Concert’s revenues were approximately $203.0 million. 25. QUARTERLY RESULTS (UNAUDITED) In thousands, except per share First Second Third Fourth 2009 $291,552 278,979 312,358 301,121 Net sales Gross Profit Net Income (loss) 2008 $305,499 320,224 339,822 298,305 2009 $43,314 59,001 82,465 84,984 2008 $44,258 32,398 57,172 43,954 2009 $11,538 19,870 45,994 46,040 2008 $19,675 3,156 21,662 13,395 The information set forth above includes the following, on an after-tax basis: Diluted Earnings Per Share 2009 $0.25 0.43 1.00 1.00 2008 $0.43 0.07 0.47 0.29 Alternative Fuel Mixture Credits 2009 $ – 30,418 32,890 32,456 2008 $– – – – Gains (losses) on Sales of Plant, Equipment and Timberlands 2009 2008 $ 378 (441) (5) 65 $8,662 – 2,371 (9) Acquisition Integration Costs 2009 $ – – – (1,768) 2008 $(411) (177) (240) (61) In thousands First Second Third Fourth 56 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES committee financial experts as this term is set forth in the applicable regulations of the SEC. None. ITEM 9A CONTROLS AND PROCEDURES Disclosure Controls and Procedures Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of December 31, 2009, have concluded that, as of the evaluation date, our disclosure controls and procedures were effective. Internal Control Over Financial Reporting Management’s report on the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) and the related report of our independent registered public accounting firm are included in Item 8 – Financial Statements and Supple- mentary Data. Executive Officers of the Registrant The information with respect to the executive officers required under this Item incorporated herein by reference to “Executive Officers” as set forth in Part I, page 12 of this report. We have adopted a Code of Business Ethics for the CEO and Senior Financial Officers in compliance with applicable rules of the Securities and Exchange Commis- sion that applies to our chief executive officer, chief financial officer and our principal accounting officer or controller, or persons performing similar functions. A copy of the Code of Ethical Business Conduct is filed as an exhibit to this Annual Report on Form 10-K and is available on our website, free of charge, at www.glatfelter.com. ITEM 11 EXECUTIVE COMPENSATION The information required under this Item is incorpo- rated herein by reference to our Proxy Statement, to be dated on or about March 29, 2010. Changes in Internal Control over Financial Reporting ITEM 12 SECURITYOWNERSHIP OF CERTAIN BEN- EFICIAL OWNERS AND MANAGEMENT There were no changes in our internal control over financial reporting during the three months ended December 31, 2009, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. In the course of completing our evaluation of internal control over financial reporting we implemented certain changes and enhancements to our controls. ITEM 9B OTHER INFORMATION None. PART III ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Directors The information with respect to direc- tors required under this Item is incorporated herein by reference to our Proxy Statement, to be dated on or about March 29, 2010. Our board of directors has determined that, based on the relevant experience of the members of the Audit Committee, all members are audit The information required under this Item is incorpo- rated herein by reference to our Proxy Statement, to be dated on or about March 29, 2010. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required under this Item is incorpo- rated herein by reference to our Proxy Statement, to be dated on or about March 29, 2010. ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES The information required under this Item is incorpo- rated herein by reference to our Proxy Statement, to be dated on or about March 29, 2010. Our Chief Executive Officer has certified to the New York Stock Exchange that he is not aware of any violations by the Company of the NYSE corporate gover- nance listing standards. Glatfelter 2009 Annual Report 57 PART IV ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) 1. 2. Our Consolidated Financial Statements as follows are included in Part II, Item 8: Consolidated Statements of Income for the Years Ended December 31, 2009, 2008 and 2007 Consolidated Balance Sheets as of December 31, 2009 and 2008 Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2009, 2008 and 2007 Notes to Consolidated Financial Statements for the Years Ended December 31, 2009, 2008 and 2007 Financial Statement Schedules (Consolidated) are included in Part IV: Schedule II – Valuation and Qualifying Accounts – For Each of the Three Years in the Period Ended December 31, 2009 i. ii. iii. iv. v. i. (b) Exhibit Index Exhibit Number Description of Documents Incorporated by Reference to Exhibit Filing 2 (a) Share Purchase Agreement, dated January 4, 2010, among Brookfield Special Situations Management Limited, P. H. Glatfelter Company and Glatfelter Canada, Inc., (the schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K and will be provided to the Securities and Exchange Commission upon request) filed herewith. Amendment to the Share Purchase Agreement, dated February 12, 2010, filed herewith. Asset Purchase Agreement, dated February 21, 2006, among NewPage Corporation, Chillicothe Paper Inc. and P. H. Glatfelter Company Agreement for Sale of Assets (Lydney), dated March 8, 2006, by and among J R Crompton Limited, Nicholas James Dargan and Willian Kenneth Dawson, as administrators and Glatfelter-UK Limited and the Company Agreement, dated as of November 30, 2007, between Metallised Products Limited (“MPL”) and Glatfelter Lydney Limited, a wholly-owned indirect subsidiary of P. H. Glatfelter Company to acquire MPL, (the schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K and will be provided to the Securities and Exchange Commission upon request) filed herewith. 2.1 10 February 21, 2006 Form 8-K March 31, 2006 Form 10-Q 2(c) 2007 Form 10-K Articles of Incorporation, as amended through December 20, 2007 (restated for the purpose of 3(b) 2007 Form 10-K filing on EDGAR) By-Laws as amended through February 18, 2009 Indenture, dated as of February 5, 2010 by and between the Company and HSBC Bank USA, National Association, as trustee relating to 71⁄8 Notes due 2016. Indenture, dated as of April 28, 2006, by and between the Company and SunTrust Bank, as trustee relating to 71⁄8 Notes due 2016 First Supplemental Indenture, dated as of September 22, 2006, among Glatfelter Holdings, LLC, Glatfelter Holdings II, LLC, the Existing Subsidiary Guarantors named therein and SunTrust Bank relating to 71⁄8 Notes due 2016 3.1 4.1 4.1 4.3 June 30, 2009 Form 10-Q February 5, 2010 Form 8-K May 3, 2006 Form 8-K September 22, 2006 Form S-4/A P. H. Glatfelter Company Management Incentive Plan, effective January 1, 1982, as amended 10(a) 2000 Form 10-K** and restated effective January 1, 1994** P. H. Glatfelter Company 2005 Management Incentive Plan, adopted as of April 27, 2006** P. H. Glatfelter Company Supplemental Executive Retirement Plan, as amended and restated effective April 23, 1998 and further amended December 20, 2000** Description of Executive Salary Continuation Plan** P. H. Glatfelter Company Supplemental Management Pension Plan, effective as of April 23, 1998** 10.4 10(c) 10(g) 10(f) April 27, 2006 Form 8-K 2000 Form 10-K** 1990 Form 10-K** 1998 Form 10-K** P. H. Glatfelter Company 1992 Key Employee Long-Term Incentive Plan, as amended December 10(g) 2000 Form 10-K** 20, 2000** P. H. Glatfelter Company 2005 Long-Term Incentive Plan, adopted as of April 27, 2006** (g) (A) Form of Top Management Restricted Stock Unit Award Certificate.** (g) (B) Form of Non-Employee Director Restricted Stock Unit Award Certificate** (h) (i) P. H. Glatfelter Company Deferred Compensation Plan for Directors, effective as of April 22, 1998** Change in Control Employment Agreement by and between P. H. Glatfelter Company and George H. Glatfelter II, dated as of December 8, 2008** 10.1 10.2 10.3 10(h) 10(i) April 27, 2006 Form 8-K April 27, 2006 Form 8-K April 27, 2006 Form 8-K 1998 Form 10-K** 2008 Form 10-K** (b) (c) (d) (e) (a) (b) (a) (b) (c) (a) (b) (c) (d) (e) (f) (g) 3 4 10 58 Exhibit Number (j) (j) (k) (l) Description of Documents Incorporated by Reference to Exhibit Filing Form of Change in Control Employment Agreement by and between P. H. Glatfelter Company 10(j) 2008 Form 10-K** and certain employees, dated as of December 8, 2008** (A) Schedule of Change in Control Employment Agreements, filed herewith** Agreement between the State of Wisconsin and Certain Companies Concerning the Fox River, dated as of January 31, 1997, among P. H. Glatfelter Company, Fort Howard Corporation, NCR Corporation, Appleton Papers Inc., Riverside Paper Corporation, U.S. Paper Mills, Wisconsin Tissue Mills Inc. and the State of Wisconsin Credit Agreement, dated as of April 3, 2006, by and among the Company, certain of the Company’s subsidiaries as guarantors, the banks party thereto, PNC Bank, National Association, as agent for the banks under the Credit Agreement, PNC Capital Markets LLC and Credit Suisse Securities (USA) LLC, as joint arrangers and bookrunners, and Credit Suisse Securities (USA) LLC, as syndication agent 10(i) 1996 Form 10-K 10.1 April 7, 2006 Form 8-K 10(o) 2002 Form 10-K (l) (A) First Amendment to Credit Agreement among the Company, certain of the Company’s 10.1 subsidiaries, certain lenders party thereto and PNC Bank, National Association, in its capacity as agent for such lenders, dated April 25, 2006 (l) (B) Second Amendment to Credit Agreement among the Company, certain of the Company’s 10.2 subsidiaries, certain lenders party thereto and PNC Bank, National Association, in its capacity as agent for such lenders, dated December 22, 2006 (l) (C) Third Amendment to Credit Agreement among the Company, certain of the Company’s 10.3 subsidiaries, certain lenders party thereto and PNC Bank, National Association, in its capacity as agent for such lenders, dated June 8, 2007* (m) Contract for the Purchase and Bargain Sale of Property, dated as of December 16, 2002, by and among Glatfelter Pulp Wood Company (a wholly owned subsidiary of the Registrant), the Conservation Fund and Fidelity National Title Insurance Company (n) Consent Decree for Remedial Design and Remedial Action at Operable Unit 1 of the Lower Fox 10.2 River and Green Bay site by and among the United States of America and the State of Wisconsin v. P. H. Glatfelter Company and WTMI Company (f/k/a Wisconsin Tissue Mills, Inc.) (n) (A) Agreed Supplement to Consent Decree between United States of America and the State of Wisconsin vs. P.H. Glatfelter Company and WTM I Company (f/k/a Wisconsin Tissue Mills Inc.) Second Agreed Supplement to Consent Decree between United States of America and the State of Wisconsin vs. P.H. Glatfelter Company and WTM I Company (f/k/a Wisconsin Tissue Mills Inc.) Administrative Order for Remedial Action dated November 13, 2008; issued by the United States Environmental Protection Agency Amended Consent Decree for Remedial Design and Remedial Action at Operable Unit 1 of the Lower Fox River and Green Bay Site by and among the United States of America and the State of Wisconsin v. P. H. Glatfelter and WTM I Company (f/k/a Wisconsin Tissue Mills Inc.), certain Appendices have been intentionally omitted, copies of which can be obtained free of charge from the Registrant) Compensatory Arrangements with Certain Executive Officers, filed herewith** Summary of Non-Employee Director Compensation (effective January 1, 2007), filed herewith** Service Agreement, commencing on August 1, 2007, between the Registrant (through a wholly owned subsidiary) and Martin Rapp** Retirement Pension Contract, dated October 31, 2008, between Registrant (through a wholly owned subsidiary) and Martin Rapp** Form of Stock-Only Stock Appreciation Right Award Certificate** Form of 2007 Top Management Restricted Stock Unit Award Certificate** Separation Agreement and General Release entered into between Jeffrey J. Norton and P. H. Glatfelter Company dated as of October 25, 2008 Timberland Purchase & Sale Agreement – Virginia Timberlands, entered into by and among Glawson Investments Corp., GIC Investments LLC and Glatfelter Pulp Wood Company, dated and effective as of August 8, 2007 10(o) 10.1 10.2 10.1 10(r) 10(t) 10(s) 10(t) 10.1 10.1 June 30, 2007 Form 10-Q June 30, 2007 Form 10-Q June 30, 2007 Form 10-Q October 1, 2003 Form 8-K/A – No. 1 2007 Form 10-K Nov 15, 2008 Form 8-K Nov 15, 2008 Form 8-K June 30, 2008 Form 8-K 2006 Form 10-K 2007 Form 10-K 2006 Form 10-K 2006 Form 10-K Sept. 30, 2008 Form 10-Q Sept. 30, 2007 Form 10-Q Term Loan Agreement dated January 15, 2008, among GPW Virginia Timberlands LLC, certain 10(x) 2007 Form 10-K lenders party thereto and SunTrust Bank, in its capacity as agent for such lenders Contract for Sale for Sale of Real Estate between Glatfelter Pulp Wood Company, a wholly owned subsidiary of the Company, and George H. Glatfelter II and Beverly G. Glatfelter, dated May 8, 2008 Code of Business Ethics for the CEO and Senior Financial Officers of Glatfelter Subsidiaries of the Registrant, filed herewith Consent of Independent Registered Public Accounting Firm, filed herewith. Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 302 (a) of the Sarbanes-Oxley Act Of 2002, filed herewith 10.2 June 30, 2008 Form 10Q 14 2003 Form 10-K Glatfelter 2009 Annual Report 59 (n) (B) (o) (p) (q) (r) (s) (t) (u) (v) (w) (x) (y) (z) 14 21 23 31.1 Exhibit Number 31.2 32.1 32.2 Description of Documents Incorporated by Reference to Exhibit Filing 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, filed herewith Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, filed herewith Certification of John 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, filed herewith * Portions of this exhibit have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities and Exchange Commission. ** Management contract or compensatory plan 60 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. SIGNATURES March 16, 2010 P. H. GLATFELTER COMPANY (Registrant) By /s/ George H. Glatfelter II George H. Glatfelter II Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated: Date Signature Capacity March 16, 2010 /s/ George H. Glatfelter II George H. Glatfelter II Chairman and Chief Executive Officer March 16, 2010 John P. Jacunski /s/ John P. Jacunski Senior Vice President and Chief Financial Officer March 16, 2010 /s/ David C. Elder David C. Elder Vice President and Corporate Controller March 16, 2010 Kathleen A. Dahlberg /s/ Kathleen A. Dahlberg March 16, 2010 /s/ Nicholas DeBenedictis Nicholas DeBenedictis March 16, 2010 Richard C. Ill /s/ Richard C. Ill March 16, 2010 J. Robert Hall /s/ J. Robert Hall March 16, 2010 Ronald J. Naples /s/ Ronald J. Naples March 16, 2010 Richard L. Smoot /s/ Richard L. Smoot March 16, 2010 Lee C. Stewart /s/ Lee C. Stewart Principal Executive Officer and Director Principal Financial Officer Controller and Chief Accounting Officer Director Director Director Director Director Director Director Glatfelter 2009 Annual Report 61 CERTIFICATION PURSUANT TO SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002 I, George H. Glatfelter II, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2009 of P. H. Glatfelter Company (“Glatfelter”); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. Glatfelter’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Glatfelter and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Glatfelter, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of Glatfelter’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in Glatfelter’s internal control over financial reporting that occurred during Glatfelter’s most recent fiscal quarter (the fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, Glatfelter’s internal control over financial reporting; and 5. Glatfelter’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Glatfelter’s auditors and the audit committee of Glatfelter’s board of directors or persons performing the equivalent functions: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Glatfelter’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in Glatfelter’s internal control over financial reporting. Date: March 16, 2010 By: /s/ George H. Glatfelter II George H. Glatfelter II Chairman and Chief Executive Officer 62 CERTIFICATION PURSUANT TO SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002 I, John P. Jacunski, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2009 of P. H. Glatfelter Company (“Glatfelter”); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. Glatfelter’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Glatfelter and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Glatfelter, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of Glatfelter’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in Glatfelter’s internal control over financial reporting that occurred during Glatfelter’s most recent fiscal quarter (the fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, Glatfelter’s internal control over financial reporting; and 5. Glatfelter’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Glatfelter’s auditors and the audit committee of Glatfelter’s board of directors or persons performing the equivalent functions: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Glatfelter’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in Glatfelter’s internal control over financial reporting. Date: March 16, 2010 By: /s/ John P. Jacunski John P. Jacunski Senior Vice President and Chief Financial Officer Glatfelter 2009 Annual Report 63 Schedule II P. H. GLATFELTER COMPANY AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE For each of the three years ended December 31, 2009 Valuation and Qualifying Accounts Allowance for In thousands Doubtful Accounts Sales Discounts and Deductions Balance, beginning of year Provision Write-offs, recoveries and discounts allowed Other(a) Balance, end of year 2009 $2,633 506 (306) 55 $2,888 2008 $3,117 (36) (296) (152) $2,633 2007 $3,613 781 (1,319) 42 $3,117 2009 $3,369 3,575 (4,197) 42 $2,789 2008 $4,345 6,620 (6,045) (1,551) $3,369 2007 $2,585 6,723 (5,195) 232 $4,345 The provision for doubtful accounts is included in selling, general and administrative expense and the provision for sales discounts and deductions is deducted from sales. The related allowances are deducted from accounts receivable. (a) Relates primarily to changes in currency exchange rates and, in 2008, a change in presentation of certain customer rebates. 64 Glatfelter today heading into 2010 is very real. Our reﬂ ections on 2009 and our outlook for 2010 and beyond can be summed up in three words: STRATEGY. RESU LTS. MOMENTUM. Strategy guides everything we do, our 2009 results were strong, and the momentum Headquartered in York, PA, Glatfelter is a global manufacturer of specialty papers and engineered products, offering over a century of experience, technical expertise and world-class service. U.S. operations include facilities in Spring Grove, PA and Chillicothe and Fremont, OH. International operations include facilities in Germany, France, the United Kingdom, Canada and the Philippines, a representative ofﬁ ce in China and a sales and distribution ofﬁ ce in Russia. Glatfelter’s sales exceed $1 billion annually and its common stock is traded on the New York Stock Exchange under the ticker symbol GLT. OUR VISION is to become the global supplier of choice in specialty papers and engineered products. Contents 2 5 6 8 Letter to Our Shareholders Financial Highlights Strategy – Proven, Consistent Approach Drives Value Results – Delivering Enviable Performance in Challenging Times 10 Momentum – Built to Thrive in 2010 and Beyond 12 Directors and Ofﬁ cers and Corporate Information Form 10-K Directory of Locations FORWARD-LOOKING STATEMENTS Certain statements made in this annual report which pertain to future ﬁ nancial and business performance, conditions and strategies and other ﬁ nancial and business matters are “forward- looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to numerous risks, uncertainties and other unpredictable or uncontrollable factors which may cause actual results or performance to differ materially from the Company’s expectations. Some of the risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in or implied by the forward- looking statements are detailed on page 15 of the accompanying 2009 Annual Report on Form 10-K included herein. A copy of that Form, which is on ﬁ le with the Securities and Exchange Commission, is also available at www.glatfelter.com or upon request. SALES OFFICES Spring Grove, Pennsylvania Lydney, United Kingdom 228 South Main Street Spring Grove, PA 17362 Chillicothe, Ohio 401 Paint Street Chillicothe, OH 45601 Gainesville, Georgia 200 Broad Street, Suite 206 Gainesville, GA 30501 Gernsbach, Germany Hördener Straße 5 76593 Gernsbach Germany LOCATIONS World Headquarters P. H. Glatfelter Company 96 South George Street Suite 500 York, PA 17401 U.S. Operating Locations Spring Grove Facility 228 South Main Street Spring Grove, PA 17362 Chillicothe Facility 401 Paint Street Chillicothe, OH 45601 Fremont Facility 2275 Commerce Drive Fremont, OH 43420 Glatfelter Pulp Wood Company 228 South Main Street Spring Grove, PA 17362 Church Road Hong Kong P.O. Box No. 13158 Lydney, Gloucestershire Central Post Ofﬁ ce, Hong Kong GL15 5EJ United Kingdom Caerphilly, United Kingdom Pontygwindy Industrial Estate Moscow, Russia Presnenskaya emb. 10 Block C, 5th Floor Moscow, 123317 Caerphilly, Mid Glamorgan Russia CF83 3HU United Kingdom Scaër, France BP 2 29390 Scaër France International Operating Locations Gernsbach Facility Hördener Straße 5 76593 Gernsbach Germany Scaër Facility BP 2 29390 Scaër France Lydney Facility Church Road Lydney, Gloucestershire GL15 5EJ United Kingdom Caerphilly Facility Pontygwindy Industrial Estate Caerphilly, Mid Glamorgan CF83 3HU United Kingdom Gatineau Facility 1680 rue Atmec Gatineau, QC J8P 7G7 Canada Falkenhagen Facility Gewerbepark Prignitz/Falkenhagen Am Lehmberg 10 16928 Pritzwalk Germany Balo-I Facility Bo. Maria Cristina 9217 Balo-I, Lanao del Norte Philippines Other Locations Glatfelter Composite Fibers NA, Inc. 200 Broad Street, Suite 206 Gainesville, GA 30501 China Representative Ofﬁ ce Century Financial Tower, A205 No. 1 Suhua Road Suzhou-SIP, Jiangsu 215021 China Hong Kong P.O. Box No. 13158 Central Post Ofﬁ ce, Hong Kong Glatfelter Russia, LLC Presnenskaya emb. 10 Block C, 5th Floor Moscow, 123317 Russia P. H. Glatfelter Company • 96 South George Street • Suite 500 • York, PA 17401 • www.glatfelter.com G l a t f e l t e r 2 0 0 9 A n n u a l R e p o r t © 2 01 0 Gla tfe lter

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