Glatfelter
Annual Report 2010

Plain-text annual report

2 0 1 0 A n n uA l R e p oR t the continuity of change P . H . G l a t f e l t e r C o mP a n y • 9 6 S o u tH G e o rG e S t r e e t • S u i t e 5 0 0 • y o r k , Pa 1 7 4 0 1 • w w w .G l a t f e l t e r .C o m p . H . G l A t f e l t e R C o m p A n n n n y y y y 2 0 1 0 a n n u a l R e p o R t © 2 01 1 Glatfe lte r glatfelteR Headquartered in york, Pa, Glatfelter is a global manufacturer of specialty papers and fiber-based engineered materials, offering more than 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 Canada, Germany, france, the united kingdom and the Philippines, a representative office in China, and a sales and distribution office in russia. Glatfelter’s sales approximate $1.5 billion annually and its common stock is traded on the new york Stock exchange under the ticker symbol Glt. contentS 1 2 5 financial Highlights letter to our Shareholders interview with Ceo Dante Parrini 10 Glatfelter at a Glance 12 Directors and officers and Corporate information form 10-k Directory of locations forwarD-lookinG StatementS Certain statements made in this annual report which pertain to future financial and business performance and conditions and other financial 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 the forward-looking statements are detailed on page 14 of the accompanying 2010 annual report on form 10-k included herein. SaleS officeS Spring Grove, Pennsylvania falkenhagen, Germany Scaër, france locationS 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 Gatineau, Canada 1680 rue atmec Gatineau, QC J8P 7G7 Canada Gernsbach, Germany Hördener Straße 5 76593 Gernsbach Germany 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 Gewerbepark Prignitz/falkenhagen Bp 2 am lehmberg 10 16928 Pritzwalk Germany 29390 Scaër france Hong Kong lydney, United Kingdom P.o. Box no. 13158 Church road lydney, Gloucestershire Gl15 5eJ united kingdom Central Post office, Hong kong Moscow, russia Chechersky proezd, 24 moscow, 117042 Caerphilly, United Kingdom russia Pontygwindy industrial estate Caerphilly, mid Glamorgan Cf83 3Hu united kingdom 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 Office Century financial tower, a205 no. 1 Suhua road Suzhou-SiP, Jiangsu 215021 China Hong Kong P.o. Box no. 13158 Central Post office, Hong kong Glatfelter russia, llC Chechersky proezd, 24 moscow, 117042 russia FinanCial highlightS Selected Consolidated Financial Data (In thousands, except per share data) As of or for the year ended December 31, Net sales Gross profit Gross profit % Reversal of (Shutdown and restructuring charges) Gains on disposition of PP&E and timberlands, insurance recoveries Net income (loss)* Diluted EPS Adjusted EPS*** Balance sheet information: Total assets Total debt 2010 2009 2008 2007 2006 $1,455,331 $1,184,010 $1,263,850 $1,148,323 $986,411 186,247 269,764 ** 177,782 156,312 105,294 13% 23% — 453 — 898 14% 856 14% (35) 11% (30,318) 18,468 78,685 17,394 54,434 123,442 57,888 63,472 (12,236) 1.17 0.88 2.70 0.64 1.27 1.04 1.40 0.81 (0.27) 0.55 1,341,747 1,190,294 1,057,309 1,287,067 1,225,643 333,022 254,583 313,285 313,185 397,613 Shareholders’ equity 552,442 510,704 342,707 476,068 388,368 5 5 4 , 1 $ Net Sales (in millions) 4 6 2 , 1 $ 4 8 1 , 1 $ 8 4 1 , 1 $ 6 8 9 $ Adjusted Earnings Per Share*** 4 0 . 1 $ 1 8 . 0 $ 8 8 . 0 $ 4 6 . 0 $ 5 5 . 0 $ Cash Flow from Operations (in millions) 9 . 3 6 1 $ 0 . 8 6 1 $ 3 . 0 0 1 $ 4 . 3 5 $ ) 4 . 8 2 $ ( 06 07 08 09 10 06 07 08 09 10 06 07 08 09 10 *During 2010, net income included a $23.2 million tax benefit from cellulosic biofuel production credits. **Includes $107.8 million of alternative fuel mixture credits. ***Adjusted earnings per share is a non-GAAP financial measure as it excludes the impact of certain items. It is used by the Company to evaluate the performance of its core business operations. Adjusted earnings per share excludes the following items, all on an after-tax per share basis: benefit of cellulosic biofuel production credits in 2010 of $0.50; acquisition and integration related costs aggregating $0.24, $0.04, $0.02, $0.03 and $0.19 in 2010 through 2006, respectively; alternative fuel mixture credits in 2009 of $2.09; gains from timberland sales and other asset sales in 2010 and 2008 through 2006 of $0.02, $0.24, $0.97, and $0.20, respectively; shutdown, restructuring charges and asset writedowns of $(0.01) in 2008 and $0.79 in 2006; reserves for environmental matters of $0.35 in 2007; and debt redemption costs of $0.04 in 2006. 1 DEAR FELLOW SHAREHOLDERS, For the past 12 years, George Glatfelter skillfully led the Company and guided it through several business cycles, significant geographic and market expansion, and four acquisitions to strategically repo- sition the business. He and I have worked together since 1997, and I would like to thank George for his support and encouragement throughout my career It is my distinct pleasure to write to you with Glatfelter. Although we are different people, we today as your recently appointed president and chief executive officer. I appreciate do share similar values and ideals, and at the top of the list is an unwavering faith in Glatfelter PEOPLE, whose integrity, resiliency and resourcefulness are the confidence and support that the Board central to our ongoing strength as a Company. With- of Directors has shown in me, and I am truly out a doubt, our PEOPLE are a big part of my high level of optimism about what lies ahead for Glatfelter honored to succeed George Glatfelter in as we embrace The Continuity of Change. this role and lead Glatfelter at this exciting time in the Company’s history. 2010 Accomplishments I am pleased to report that we ended 2010 and entered 2011 financially strong and well positioned for continued growth. The year was marked by a number of financial, operational and strategic accom- plishments, as well as the challenges of integrating a major acquisition, improving operational efficiency, and responding to some unevenness in the eco- nomic recovery. I am pleased with how the Company Without a doubt, our PEOPLE are a big part of my high level of optimism about what lies ahead for Glatfelter as we embrace The Continuity of Change. Dante C. Parrini President and Chief Executive Officer handled the challenges and opportunities, and the to deliver outstanding value to both customers and results we achieved. shareholders. The same can be said of our strategy From a financial perspective in 2010, we were for the Specialty Papers business, which continues to able to increase net sales by approximately 23 percent, thrive as a nimble and sustainable niche player due to which increased business unit operating income by its ongoing new product and business development 23 percent to $95.7 million and adjusted earnings efforts, and rigorous cost control initiatives. per share by approximately 38 percent to $0.88 per diluted share. These strong results were driven primar- ily by our Composite Fibers business, which effectively parlayed its leading market position into a 13 percent I am pleased with how the Company handled the challenges and opportunities, year-over-year increase in shipments and continued to and the results we achieved. realize operating efficiencies from ongoing continu- ous improvement initiatives. Similarly, our Specialty Papers business finished the year with higher year- Clearly, our most significant strategic move in over-year shipments, again outperforming the broader 2010 was the acquisition of Concert Industries, now uncoated free-sheet market, and generated increased known as our Advanced Airlaid Materials business. operating profit for the sixth consecutive year. This acquisition, our fourth since 2006, provides us From an operations standpoint, the success of access to the fast-growing feminine hygiene and our continuous improvement programs was reflected adult incontinence markets globally. Over the course in our strong bottom-line performance and our ability of the year, we began addressing this business’ oper- to generate the free cash flow necessary to execute ating efficiencies by aggressively implementing con- our smart growth strategy. This strategy depends on tinuous improvement initiatives similar to those we prudent reinvestment in our operations and targeted have successfully instituted elsewhere in our business. acquisitions of strategic assets that further expand Although we did not meet our expectations for this our value creation potential. For 2010, free cash flow business in 2010, we continue to refine the business (cash provided by operations less capital expenditures) and we are excited about its growth opportunities. was $131.5 million. From a strategic standpoint, 2010 was a break- growing glatfelter in 2011 and Beyond out year for our Composite Fibers business, which As we aspire to become the global supplier of has become the world leader in materials for the choice in specialty papers and engineered products, expanding tea and coffee industry, among others. we remain vigilant in growing the business smartly With operating margins up 226 basis points resulting to ensure we are creating sustainable value for our in a 50 percent improvement in operating income, it shareholders. Specialty papers remains a cornerstone, is apparent to us that our strategy of driving market- and, yet, nearly half of our business now comes from leading positions through innovation and continuous some form of a fiber-based engineered material. improvement is on target and working as designed The continued diversification will enable us to build 3 a more resilient business by adapting to the needs We will strive to continue delivering at least of an ever-changing world, profitably growing our 50 percent of annual sales from products less business, and delivering distinctive value to customers than five years old. and investors alike. • Finally, we will ensure the long-term competi- In order to grow Glatfelter in 2011 and beyond, tiveness of our organization by further expanding we will focus on four core growth drivers: our CONTINUOUS IMPROVEMENT efforts. Doing • In the area of GLOBALIZATION, we will so will enable us to aggressively manage costs while continue to grow our business by supporting our keeping safety and quality a top priority, develop the multinational, market-making customers, such as talent of Glatfelter PEOPLE, and strengthen our busi- those serving the feminine hygiene and tea and ness processes worldwide. We will target generating coffee markets. We will seek to further expand into savings equal to 1 percent of annual sales from our new geographies and attractive adjacent markets, continuous improvement initiatives. while leveraging our newly created scale to extend In capitalizing on these growth opportunities, our competitive positioning and source materials we will continue to be guided by our Core Values – and services more efficiently. integrity, financial discipline, mutual respect, customer We remain vigilant in growing the of how Glatfelter PEOPLE exemplify these values on a focus, and environmental and social responsibility. I believe in the strength of our culture and I am proud business smartly to ensure we are creating sustainable value for our shareholders. daily basis. I also believe we have the scale, collective will and capabilities to take this company to the next level of performance. For more insight on how we are embracing The Continuity of Change, I invite you to review • Continued advancements in SPECIALIZATION the Q&A discussion on the following pages. I look will ensure we are able to adapt quickly to chang- forward to updating you on our progress as we move ing market dynamics, preserve our enviable position the Company forward and I thank you for your as the supplier of choice, and bolster the Glatfelter continued interest in Glatfelter. brand with technically superior, high-value offerings. • By increasing our focus on INNOVATION, Sincerely, we will leverage – and exploit – our institutional speed, knowledge and technical capabilities to better position Glatfelter as the innovation partner Dante C. Parrini of choice, meeting customers’ needs for distinctive, President and Chief Executive Officer environmentally and financially sustainable solutions. March 11, 2011 4 intERviEW With CEO DantE PaRRini 1. For those who haven’t worked with you directly, how 2. As you have become CEO, how do you see the would you describe your management style? business evolving under your direction? I would say that I am a direct person and certainly want I view this leadership transition as one of strategic others to be direct with me. I’m focused on results, solutions continuity but not status quo. The Company has achieved and advancing toward goals as a team with an appropriate meaningful growth in recent years, has much to be proud of sense of urgency. The concept of “team” is very important to and is ready to take the next steps. me. I really do believe in the power of a unified and motivated I don’t think anyone here believes we’ve reached our full team. And I take my role in leading teams seriously. I’m a potential. As the new CEO, I am focused on helping the team hands-on leader and feel it’s important to lead by example, to build on our growth platforms of globalization, specializa- particularly when it comes to applying our Core Values on a tion, innovation and continuous improvement to create a more day-to-day basis. vibrant and sustainable company. For example, we need to generate organic growth consistently in order to truly comple- ment and leverage our targeted strategic acquisition effort. At the same time, we must consistently apply financial discipline in order to maintain our financial flexibility. 5 I N T E R V I E W “as the new CEO, i am focused on helping the team to build on our growth platforms of globalization, specialization, innovation and continuous improvement to create a more vibrant and sustainable company.” 3. What accomplishments and successes over the past 5. In the letter, you talk about the company’s growth year do you think the company can build on in 2011? strategy. How will you define success as it relates to I think there are several accomplishments that we can “globalization,” “specialization” and “innovation”? continue to benefit from. In my view, success within these growth platforms will Clearly, our Composite Fibers business had a fantastic be measured in a variety of ways, and we are very aware that year. Composite Fibers is a great example of what we can we need to deliver results that are meaningful for our investors, achieve through our pursuit of organic, profitable growth. And customers and employees. it shows what a motivated, engaged, customer-focused team For example, investors will want to see how these can accomplish together. I fully expect this business to be a key platforms translate our global scale and specialized products growth driver for us going forward. into steady and profitable growth. They will also be watching I am also very proud of what our team in the Specialty our cash flow from operations as closely as we will. Customers Papers business accomplished in 2010 – its sixth consecutive will judge us on our ability to meet their needs for customized year of outperforming the broader market and increased op- solutions quickly and consistently anywhere in the world. At the erating income. This is a real testament to the power of speed, same time, success for our employees will be indicated by them flexibility, innovation and continuous improvement. having the opportunity to contribute and grow their careers at I remain very excited about the growth potential of our a truly global organization that thrives on new ideas and values Advanced Airlaid Materials business, which grew shipment individual excellence. So, success will be measured by specific volumes by 17.1 percent in 2010. I firmly believe we will see results and overall progress that will benefit all of our critical meaningful, positive results from this business in 2011. stakeholders. Finally, I believe our proven ability to generate strong free cash flow will serve us well in 2011 and beyond. 6. What organizational metrics will you use to monitor 4. What business challenges are you focused on for 2011? “continuous improvement”? From a quantitative standpoint, we target to achieve a financial impact of approximately 1 percent of full-year Assuming macroeconomic conditions remain steady, revenues from continuous improvement, which improves our I would say our primary business challenges in 2011 will be: margins and helps to offset cost inflation. We also closely 1) accelerating the progress of our Advanced Airlaid Materials measure safety performance, quality levels, facility-specific business and 2) managing the inflationary pressure on raw productivity and customer satisfaction, to name a few. materials and other input costs. To a lesser extent, I also think From a qualitative standpoint, we want to see continu- we have to make sure our internal processes are aligned with ous improvement shift from a project- or event-specific focus the realities of our growing business and that we remain to a consistent daily mindset of “How can we do this better, vigilant in our execution as we continue to grow Glatfelter. smarter, safer, faster?” I would add that I think the team has done an excellent job preparing for these challenges as they became apparent during our 2011 planning process. 6 I N T E R V I E W “... investors will want to see how these platforms translate our global scale and specialized products into steady and profitable growth.” 7. Given the challenges that the Company has disclosed 9. What is it about “the Glatfelter story” that you hope with the recently acquired Advanced Airlaid Materials investors will learn more about over the next year? business, has your outlook for this business unit changed? Without a doubt, it’s the size and strength of our growth If so, how? If not, why? engine and the upside it represents. I feel good about this business and believe it will prove As we discussed earlier, our Composite Fibers business to be a significant contributor to the Company’s long-term val- had a breakout year in 2010 and exemplifies precisely what we ue creation. Rapidly rising input costs and currency fluctuations are looking to accomplish through our smart growth strategy. had a negative effect on this business’ 2010 results. Clearly, its We are having similar success outworking, out-thinking and operating performance needs to improve, and we have a com- out-innovating the competition within the Specialty Papers seg- prehensive plan in place to do just that, which includes a sharp ment. And we have been doing so for some time now. When focus on improving the cost structure. Immediate challenges you factor in the potential of our Advanced Airlaid Materials aside, shipments were up 17.1 percent on a year-over-year basis business, our strong balance sheet and cash flow profile, I think as we asserted our market-leading position, which signals to us we have a compelling growth story to offer investors. Obvious- that we have opportunities to continue the strong growth. ly, the key to it will be delivering that growth consistently across the business segments. 8. Going forward, what role do you think acquisitions will play in the company’s business strategy? 10. How do you plan to deliver this message Acquisitions will continue to be a part of our smart to investors? growth strategy and we’ll continue to look at those opportu- As an organization, we are going to remain appropri- nities that will allow us to access adjacent markets and new ately transparent in our disclosures and proactively engage with geographies, as well as those that enable us to accelerate our our current and prospective investors. Personally, I plan to be an globalization, specialization and innovation growth drivers. active participant in our ongoing dialogue with investors. The That said, given the significant organic growth potential in last thing I want to do is become a voice that’s heard only once the business right now, I would expect much of our growth in a quarter on a conference call. I think it is important for the the near term will come from our existing business platforms. market to hear from me and for me to get firsthand input and insight from investors. 8 at a glanCE Specialty Papers Composite Fibers Specialty Papers Composite Fibers Advanced Airlaid Materials Advanced Airlaid Materials 3% 15% 82% 3% 15% 82% Feminine Hygiene Other Adult Incontinence Feminine Hygiene Other Adult Incontinence 2010 NET SALES: $419.2M Composite Fibers 2010 TONS SOLD: ~90,350 tons 9% 12% 2010 AVERAGE PRICE: 21% 9% ~$4,640/ton 12% 21% 58% 58% Food & Beverage Metallized Composite Laminates Our Composite Fibers business unit Technical Specialties Food & Beverage serves customers globally and focuses Metallized on higher-value-added products in the Composite Laminates following markets: Technical Specialties • FOOD & BEVERAGE: paper used for tea bags and single-serve coffee products • METALLIZED: products used in the labeling of beer bottles, innerliners, gift wrap, self-adhesive labels and other consumer product applications • COMPOSITE LAMINATES: papers used in the production of decorative laminates, furniture and flooring applications • TECHNICAL SPECIALTIES: diverse line of paper products used in batteries, medical masks and other highly engineered applications 2010 NET SALES: $842.6M 2010 TONS SOLD: ~764,670 tons 2010 AVERAGE PRICE: ~$1,102/ton Our Specialty Papers business unit focuses on producing papers for the following markets primarily in North America: • CARBONLESS & FORMS: papers for credit card receipts, multi-part forms, security papers and other end-use applications • BOOk PUBLISHING: papers for the production of high-quality hardbound books and other book publishing needs • ENVELOPE AND CONVERTING: papers for the direct mail market, shopping bags, and other converting applications • ENGINEERED PRODUCTS: for digital imaging, transfer, casting, release, postal, playing card, FDA-compliant food and beverage applications, and other niche specialty applications Specialty Papers Product SaleS Mix 18% 19% 18% 20% 19% 43% 43% Carbonless & Forms 20% Book Publishing Envelope & Converting Engineered Products Carbonless & Forms Book Publishing Envelope & Converting Engineered Products Specialty Papers‘ volumes outperformed the broader uncoated free-sheet market and increased operating profit for the 6th consecutive year. 10 Specialty Papers Specialty Papers Composite Fibers Specialty Papers Specialty Papers Composite Fibers Product SaleS Mix 18% 18% 43% 43% 19% 18% 20% 19% 18% 20% 43% 43% 19% 19% 9% 12% 21% 9% 12% 58% advanced airlaid Materials Composite Fibers Advanced Airlaid Materials Advanced Airlaid Materials 2010 NET SALES: Composite Fibers $193.5M Advanced Airlaid Materials Advanced Airlaid Materials Product SaleS Mix 9% 2010 TONS SOLD: 12% ~72,833 tons 3% 15% 3% 15% 21% 2010 AVERAGE PRICE: 58% 9% ~$2,657/ton 12% 82% 3% 82% 3% 15% 15% 21% 58% 21% 58% 82% 82% Carbonless & Forms 20% Book Publishing Carbonless & Forms Food & Beverage Food & Beverage Feminine Hygiene Feminine Hygiene 20% Book Publishing Metallized Metallized Other Other Envelope & Converting Envelope & Converting Composite Laminates Composite Laminates Adult Incontinence Adult Incontinence Engineered Products Carbonless & Forms Engineered Products Carbonless & Forms Technical Specialties Food & Beverage Book Publishing Book Publishing Metallized Envelope & Converting Envelope & Converting Composite Laminates Engineered Products Engineered Products Technical Specialties Food & Beverage Technical Specialties Our Advanced Airlaid Materials Feminine Hygiene business unit focuses on producing Metallized Other highly absorbent cellulose-based airlaid Composite Laminates Adult Incontinence non-woven materials for high-growth Technical Specialties consumer and industrial applications and markets, including: • FEMININE HyGIENE • ADULT INCONTINENCE Feminine Hygiene Other Adult Incontinence 2010 was a breakout • HOME CARE such as specialty wipes advanced airlaid Materials year for Composite Fibers, • TABLETOP AND TOWELS • FOOD PADS which increased operating profit by 50% over 2009 results. grew shipments by 17% in 2010 and is well-positioned for meaningful growth. 11 Directors anD officers Officers and Management Dante C. Parrini President and Chief Executive Officer John P. Jacunski Senior Vice President and Chief Financial Officer Christopher W. Astley Vice President Corporate Strategy Thomas G. Jackson William T. Yanavitch II Vice President, General Counsel Vice President and Secretary Janis C. Jesse Vice President Information Technology Human Resources and Administration John R. Blind Division Vice President, Printing & Carbonless Papers Debabrata Mukherjee Vice President and General Manager, Specialty Papers Business Unit Timothy R. Hess Division Vice President, Engineered & Converting Products Jonathan A. Bourget Martin Rapp Vice President and General Manager, Vice President and General Manager, Reinhard S. Schiebeler Operations Director, Advanced Airlaid Materials Business Unit Composite Fibers Business Unit Composite Fibers Business Unit David C. Elder Mark A. Sullivan Vice President and Corporate Controller Vice President Global Supply Chain Directors George H. Glatfelter II J. Robert Hall Chairman Kathleen A. Dahlberg Chief Executive Officer 2Unify LLC Nicholas DeBenedictis Chief Executive Officer Ardale Enterprises, LLC Dante C. Parrini President and Chief Executive Officer Richard C. Ill Richard L. Smoot Chairman and Chief Executive Officer Retired Regional Chairman Triumph Group, Inc. PNC Bank, NA Philadelphia/South Jersey Markets Chairman and Chief Executive Officer Ronald J. Naples Aqua America Corporation Retired Chairman and Chief Executive Officer Quaker Chemical Corporation Lee C. Stewart Financial Consultant corporate information World Headquarters P. H. Glatfelter Company Annual Meeting of Shareholders Information Sources For the latest quarterly business results 96 South George Street May 4, 2011 10:00 a.m. EST or other information, 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 York Expo Center, visit www.glatfelter.com or contact: 334 Carlisle Avenue, York, PA Investor Relations Transfer Agent, Dividend Disbursing Agent and Registrar P. H. Glatfelter Company 96 South George Street Suite 500 York, PA 17401 ph: 717-225-4711 BNY Mellon Shareowner Services E-mail: ir@glatfelter.com 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, 2010 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). 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 Yes n No ¥. Act) Based on the closing price as of June 30, 2010, the aggregate market value of the Common Stock of the Registrant held by non-affiliates was $490.7 million. Common Stock outstanding on March 11, 2011 totaled 45,999,846 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 30, 2011 (Part III). P. H. GLATFELTER COMPANY ANNUAL REPORT ON FORM 10-K For the Year Ended DECEMBER 31, 2010 Table of Contents Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Executive Officers (Reserved) 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 7 11 11 11 11 12 12 13 14 23 24 57 57 57 57 57 57 57 57 58 60 61 63 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 we believe we are one of the world’s leading manufacturers of specialty papers and fiber-based engi- neered materials. Headquartered in York, Pennsylvania, we own and operate manufacturing facilities located in Pennsylvania, Ohio, Canada, Germany, the United King- dom, France, and the Philippines. of our business units for the past three years are summarized below: Dollars in thousands 2010 2009 2008 Net sales Business unit contribution Specialty Papers Composite Fibers Advanced Airlaid Materials $1,455,331 $1,184,010 $1,263,850 57.9% 28.8 13.3 66.9% 33.1 – 66.0% 34.0 – Total 100.0% 100.0% 100.0% Net tons sold by each business unit for the past Acquisitions Over the past several years we three years were as follows: completed the following acquisitions: Dollars in millions Date Est. Annual Revenue(1) Business Unit Primary Products Location Canada and Germany Feb ’10 $203.0 Wales Ohio Nov ’07 53.4 Apr ’06 440.0 England Mar ’06 75.0 Advanced Airlaid Materials Composite Fibers Specialty Papers Composite Fibers Airlaid non-woven for feminine hygiene, adult incontinence and other Metallized Carbonless & forms Tea & coffee filter papers (1) Represents annual revenue prior to acquisition. These strategic acquisitions significantly increased our revenues and provided us with additional operating scale, increased production capacity, and an expansion of our geographic reach. Products Our three business units manufacture, both domestically and internationally, a wide array of specialty papers and fiber-based engineered materials including: (cid:129) Specialty Papers with revenues earned from the sale of carbonless papers and forms, book pub- lishing, envelope & converting, and engineered products; (cid:129) Composite Fibers with revenue from the sale of food & beverage filtration papers, metallized papers, composite laminates used for decorative furniture and flooring applications, and technical specialties; and (cid:129) AdvancedAirlaid Materials with revenue from the sale of airlaid non-woven fabric-like materials used in feminine hygiene products, adult inconti- nence products, cleaning pads and wipes, food pads, napkins and tablecloths, and baby wipes. Our Business Units Since completing the acqui- sition of Concert Industries Corp. (“Concert”) on Febru- ary 12, 2010, we now manage our company as three distinct business units: (i) Specialty Papers; (ii) Composite Fibers; and (iii) Advanced Airlaid Materials. Consolidated net sales and the relative net sales contribution of each Specialty Papers Composite Fibers Advanced Airlaid Materials Total 2010 2009 2008 764,670 90,350 72,833 738,841 80,064 – 743,755 85,599 – 927,853 818,905 829,354 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, FDA- compliant food and beverage applications, and other niche specialty applications. The market segments in which Specialty Papers competes have undergone significant and rapid consoli- dation over the past several years resulting in fewer, more globally focused producers. This includes both com- modity products (comprised of envelopes and certain forms) and higher-value-added specialty products. Specialty Papers’ revenue composition by market consisted of the following for the years indicated: In thousands 2010 2009 2008 Carbonless & forms Book publishing Envelope & converting Engineered products Other $359,033 168,155 157,202 155,257 2,967 $320,088 176,646 146,812 143,490 4,879 $338,067 201,040 138,293 149,372 7,127 Total $842,614 $791,915 $833,899 Many of the markets served by Specialty Papers are more mature and, in certain instances, declining. How- ever, we have been successful in increasing this unit’s Glatfelter 2010 Annual Report 1 shipments through new product and new business devel- opment initiatives and leveraging the flexibility of our operating assets to efficiently respond to changing cus- tomer demands. During 2010, we invested approximately $10.4 million in product development activities and, in each of 2009 and 2008, we invested approximately $8.0 million. In each of the past three years, in excess of 50% of net sales were generated from products devel- oped, enhanced or improved within the past five years. We believe we are one of the leading suppliers of book publishing and carbonless papers in the United States. Although the markets for book publishing and carbonless papers in North America are declining, 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. In the carbonless paper and forms market, we compete with Appleton Papers and, to a lesser extent, Nekoosa Papers, Inc. We believe we are one of the leading producers of book publishing papers and compete in these markets with, among others, Domtar and North Pacific Paper (NORPAC). In the envelope sector we com- pete with International Paper, Domtar and Evergreen, among others. In our Specialty Papers’ engineered prod- ucts markets, competition is product line specific as the necessity for technical expertise and specialized manufac- turing equipment limits the number of companies offering multiple product lines. We compete with specialty divi- sions of large companies such as, among others, Interna- tional Paper, Domtar, Boise, NewPage and Sappi. Service, product performance, technological advances and product pricing are important competitive factors with respect to all our products. We believe our reputation in these areas continues to be excellent. The Specialty Papers business unit operates two integrated pulp and paper making facilities with the following combined attributes: Uncoated Capacity (short tons) 732,000 Principal Raw Material (“PRM”) Estimated Annual Quantity of PRM (short tons) Percent of PRM Purchased(1) Percent of Need Generated Steam Electricity Principal Source of Fuel Estimated Annual Quantity Pulpwood Wood- and other pulps 2,321,000 684,500 97% 16 100% 90% Coal Natural gas 610,000 tons 765,000 MCF (1) Represents percent purchased from unrelated third-parties. The Spring Grove, Pennsylvania facility includes five uncoated paper machines that have been rebuilt and modernized from time to time. 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 approximately 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. The Chillicothe, Ohio facility operates four paper machines producing uncoated and carbonless paper. This facility also includes a pulpmill that has a production 2 capacity of approximately 955 tons of bleached pulp per day. The principal raw material used to produce each facility’s pulp is pulpwood, including both hardwoods and softwoods. Hardwoods are available within a relatively 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. The Spring Grove facility produces more electricity than it requires. Excess electricity was sold to the local power company under a long-term co-generation contract that expired on March 31, 2010. During 2010, in antic- ipation of the contract’s expiration, we became a member of PJM Interconnection, a federally regulated regional transmission 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 the price at which energy is sold together with volatility in input costs, primarily related to coal. Cellulosic Biofuel Production Credits and Alter- native FuelMixture Credits The U.S. Internal Revenue Code (the “IRC”) provided tax credits for companies that produce cellulosic biofuel or use alternative fuel mixtures to produce energy to operate their businesses. The credits equal to $1.01 per gallon of cellulosic biofuel or $0.50 per gallon of alternative fuel contained in the mixture. In a memorandum issued in July 2010, the Internal Revenue Service issued guidance concluding that black liquor sold or used before January 1, 2010, qualifies for the cellulosic biofuel producer credit (“CBPC”) and no further certifica- tion of eligibility was needed. In connection with filing our 2009 income tax return, we claimed $23.2 million, net of taxes, of CBPC for black liquor used during the period January 1, 2009 through February 19, 2009. The alternative fuel mixture credit is refundable to the taxpayer. On May 11, 2009, we were notified by the Internal Revenue Service that our application to be regis- tered as an alternative fuel mixer was approved. During 2009, we mixed and burned eligible alternative fuels for the period February 20, 2009 through December 31, 2009, and earned $107.8 million of alternative fuel mixture credits. 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 single serve coffee products; (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 growing tea bags and single-serve coffee products markets and the composite laminates mar- ket. Since the completion of the Caerphilly acquisition, we have the second largest market share for metallized prod- ucts globally. Composite Fibers’ revenue composition by market consisted of the following for the years indicated: In thousands 2010 2009 2008 Food & beverage Metallized Composite laminates Technical specialties and other $242,882 88,753 50,801 36,781 $233,899 81,388 46,442 30,366 $252,545 85,719 58,705 32,983 Total $419,217 $392,095 $429,952 We believe many of the market segments served by Composite Fibers, particularly Food & Beverage and Metallized papers, present attractive growth opportunities by expanding into new geographic markets and by gain- ing market share through quality product and service offerings. Growth in these markets is driven by growing population and disposable income and changes in con- sumer preferences. Many of this unit’s papers are techni- cally sophisticated. Most of the papers produced in the Composite Fibers business unit, except for metallized papers, are extremely lightweight and require very spe- cialized fibers. Our engineering capabilities, specifically designed papermaking equipment and customer orienta- tion position us well to compete in these global markets. The Composite Fibers Business Unit is comprised of the three paper making facilities (Germany, France and the United Kingdom), metallizing operations (Wales and Germany) and a pulp mill (the Philippines) with the indicated combined attributes: Production Capacity (short tons) 65,900 Lightweight 28,800 12,500 Metallized Abaca pulp Principal Raw Material (“PRM”) Abaca pulp Wood pulp Synthetic fiber Base stock Abaca fiber Estimated Annual Quantity of PRM (short tons) Percent of PRM Purchased(1) Percent of Need Generated Steam Electricity Principal Source of Fuel Approximate Quantity 15,500 42,600 10,600 30,500 19,100 20% 100 100 100 100 100% 15% Natural gas 1,654,000 MCF – – Natural gas 44,500 MCF (1) Represents percent purchased from unrelated third-parties. Glatfelter 2010 Annual Report 3 Our mill in the Philippines processes abaca fiber to produce a specialized pulp. This abaca pulp production process provides a unique advantage by supplying a key raw material in pulped form used by our Composite Fibers business unit. In the event the supply of abaca fiber becomes constrained or should production demands exceed capacity from the Philippines mill, alternative sources and/or substitute fibers are used to meet cus- tomer demands. In addition, events may arise from the relatively unstable political and economic environment in which the Philippine facility operates that could interrupt the production of abaca pulp. Management periodically evaluates the availability of abaca pulp for our Composite Fibers business unit. Any extended interruption of the Philippine operation could have a material impact on our consolidated financial position and/or results of opera- tions. 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. In Composite Fibers’ markets, competition is product line specific as the necessity for technical expertise and specialized manufacturing equipment limits the number of companies offering multiple product lines. We believe we have leading market positions for paper used in tea bags and single serve coffee products and compete with companies such as Ahlstrom and Purico. In composite laminates we compete with PdM, a division of Sch- weitzer-Maudit, Purico and MB Papeles and for metal- lized products, competitors include Vacumet, AR Metallizing, Amsterdam Metallized Products, and Protec. Advanced Airlaid Materials On February 12, 2010, we acquired Concert, which we now operate as the Advanced Airlaid Materials business unit. Founded in 1993, 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. These products include: (cid:129) feminine hygiene; (cid:129) adult incontinence; (cid:129) home care such as specialty wipes; (cid:129) table top and towels; and (cid:129) food pads and other. This acquisition affords us the opportunity to grow with our customers who are industry leading consumer product companies for feminine hygiene and adult incon- tinence products. Advanced Airlaid Materials holds 4 leading market share positions in the markets it serves, excels in building long-term customer relationships through superior quality and customer service programs, and has a well-earned reputation for innovation and its ability to quickly bring new products to market. Its customers are within close proximity to its facilities, and include multinational blue-chip consumer product companies. Sales of feminine hygiene product material accounted for 81% of Advanced Airlaid Material’s reve- nue in 2010. These markets are considered to be more growth oriented in certain geographic regions driven by population growth, consumer preferences and suppliers’ ability to provide innovative products. In developing markets, demand is also influenced by increases in disposable income and cultural preferences. The Advanced Airlaid Materials business unit oper- ates two facilities with the following combined attributes: Production Capacity (short tons) 102,300 Principal Raw Material Fluff pulp Estimated Annual Quantity of PRM (short tons) 68,200 Advanced Airlaid Materials operates state-of-the-art facilities in Gatineau, Quebec, Canada and Falkenhagen, Germany. The Gatineau location consists of two airlaid production lines employing multi-bonded and thermal airlaid techniques and a single-lane festooner. The Falken- hagen location operates three multi-bonded production lines and three single-lane festooners. Prior to our acquisition of Concert, approximately $80 million was invested by its previous owners to install a new line at the Falkenhagen facility. The new line, which successfully commenced commercial production during the fourth quarter of 2009, increased annual rated capacity by 19,400 tons, a 27% increase in the business unit’s capacity. A significant portion of this unit’s capacity is under contract through 2013. Advanced Airlaid Materials is a technology and product innovation leader in technically demanding seg- ments of the airlaid market, most notably feminine hygiene. We believe that its facilities are among the most modern and flexible airlaid facilities in the world, which allow it to produce at industry leading operating rates. Its proprietary single-lane rotary festooning technology, which was developed in 2002, provides customers with product packaged for efficient use. Advanced Airlaid Materials has leading market positions in feminine hygiene and adult incontinence products, food pads and specialty wipes. This business unit’s in-house technical product and process expertise, festooning capabilities and rigorous customer requirements create large barriers to entry for new entrants. The airlaid industry is made up of a few large producers, including Buckeye Technologies Inc., Georgia- Pacific LLC, Duni AB, Fiberweb Plc., and us. 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 21. 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. Our strategy includes maintaining and expanding market leading positions in global growth markets, focus- ing on specialization and innovation, in part, through new product development, driving efficiencies and cost reduction through ongoing continuous improvement initi- atives and maintaining our focus on maximizing cash flow. With respect to each business unit, our strategy includes: 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; (cid:129) employing our new product and business devel- opment capabilities to meet changing customer demands and ensure optimal utilization of capacity; (cid:129) utilizing ongoing continuous improvement meth- odologies to ensure operational efficiencies; and (cid:129) maintaining 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 continuous improvement methodol- ogies to increase productivity, reduce costs and expand capacity. Advanced Airlaid Material The markets served by this business unit are characterized by attractive growth opportunities. To take advantage of this, our strategy is focused on: (cid:129) maintaining and expanding relationships with customers that are market-leading consumer product companies; (cid:129) expanding geographic reach of markets served; (cid:129) more fully utilizing and maximizing production capacity; (cid:129) employing continuous improvement methodolo- gies and initiatives to reduce costs and improve efficiencies; and (cid:129) furthering our product innovation capabilities. 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, as opportu- nities warrant, 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 benefit 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 inte- grated four acquisitions. In February 2010, we further diversified our global footprint with the Concert acquisi- tion, a technology and product innovation leader in technically demanding segments of the airlaid market, most notably feminine hygiene. We expect this acquisition will enable us to grow with our customers who are industry leading consumer products companies for femi- nine hygiene and adult incontinence products and com- plements our long-term strategy of driving growth in our markets in part through acquisitions. Glatfelter 2010 Annual Report 5 Concentration of Customers For each of the past three years, no single customer represented more than 10% of our consolidated net sales. However, as discussed in Item 1A Risk Factors, one customer accounted for the majority of Advanced Airlaid Materials net sales in 2010. 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 2011, we expect capital expenditures to total approximately $60 million to $65 million. Environmental Matters We are subject to laws and regulations which operate to protect the environment as well as human health and safety. We have, at various times, incurred significant costs to comply with those regulations, as new regulations are developed or regula- tory priorities change. Currently, we anticipate that we could incur material capital and operating costs to com- ply with several air quality regulations including the U.S. EPA Best Available Retrofit Technology rule (BART; otherwise known as the Regional Haze Rule) and the Boiler Maximum Achievable Control Technology rule (Boiler MACT). Although we are in the process of analyz- ing the potential impact of these requirements, compli- ance could require significant capital expenditures. For a discussion of other environmental matters, see Item 8 – Financial Statements and Supplementary Data – Note 20. Employees The following table summarizes our workforce as of December 31, 2010: Location U.S. Corporate/Spring Grove Chillicothe/Fremont International Gernsbach, Germany Scaër, France Lydney, England Caerphilly, Wales Philippines Falkenhagen, Germany Gatineau, Canada Total Hourly(1) Salaried Start End Union Contract Period 969 1,399 603 1,051 366 348 Jan. 2011 Aug. 2009 Jan. 2014 Aug. 2012 United Steelworkers International Union and the Office and Professional Employees International Union, 602 118 283 125 92 425 324 364 70 211 83 63 344 240 238 Sept. 2010 Nov. 2012 Nov. 2008 Nov. 2012 Feb. 2011 Jan. 2011 Sept. 2007 Feb. 2012 Jan. 2012 Sept. 2012 48 72 42 29 81 84 n/a Jan. 2010 Dec. 2013 n/a Works Council Industriegewerkschaft Bergbau, Chemie, Energie-IG BCE Confederation Generale des Travailleurs & Force Ouvriere Unite the Union General Maintenance & Boiler’s Newtech Pulp Workers Union & Federation of Democratic Labor Org. La fraternité inter-provinciale des ouvriers en électricités Le syndicat canadien des communications, de l’énergie et du papier Total worldwide employees 4,337 3,029 1,308 Jul. 2010 Dec. 2011 (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. 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 6 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. 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 be adversely affected in the event of weak global economic conditions and by softness in targeted markets. Our results could be adversely affected if economic conditions 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 products are also significantly affected by changes in industry capacity and output levels. There have been periods of supply/demand imbalance in our industry which have caused wood pulp, fluff pulp and selling prices to be volatile. The timing and magnitude of price increases or decreases in these markets have generally varied by region and by product type. A sustained period of weak demand or excess supply would likely adversely affect pulp, fluff pulp and selling 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 approxi- mately 85% of their annual pulp requirements. Our Philippine mill purchases abaca fiber to produce abaca pulp, which we use to manufacture our paper for tea bags and single serve coffee products at our Gernsbach, Scaër and Lydney facilities. However, at cer- tain times in the past, the supply of abaca fiber has been constrained due to factors such as weather related damage to the source crop as well as selection by land owners of alternative uses of land in lieu of fiber producing activities. Our Advanced Airlaid Materials business unit requires access to sufficient quantities of fluff pulp, the supply of which is subject to availability of certain softwoods. Softwood availability can be limited by many factors, including, weather in regions where softwoods are abundant. The cost of many of our production materials, 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 facility, and the Composite Fibers and Advanced Airlaid Materials business units’ facilities. In addition, our vendors’ liquidity may be impacted by the economy creating supply shortages. Although we have contractual cost pass-through arrangements with certain customers we may not be able to fully pass increased raw materials or energy costs on to all customers if the market will not bear the higher price or where existing agreements with our customers limit price increases. If price adjustments 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 industries in which we compete have been adversely affected by capacity exceeding the demand for products and by declining uncoated free sheet demand. As a result, steps have been taken 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 producers to enter our markets when they are unable to Glatfelter 2010 Annual Report 7 compete or when demand softens in their tradi- tional markets; We are subject to substantial costs and potential liability for environmental matters. We are subject to various environmental laws and regulations that govern our operations, including 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. Despite the December 2009 and March 2011 favor- able rulings in the pending Fox River litigation, we continue to 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. There can be no assurance that we will not be required to ultimately pay material amounts to resolve our liability in the Fox River matter. We have financial reserves for environmental matters, including the Fox River site, but we cannot be certain that those reserves will be adequate to provide for future obligations related to these matters, that our share of costs and/or damages for these matters will not exceed our available resources, or that such obligations will not have a long-term, material adverse effect on our consolidated financial position, liquidity or results of operations. Our environmental issues are complicated and should be reviewed in context; please see a more detailed discussion of these matters in Item 8 – Financial Statements and Supplementary Data – Note 20. (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) the impact of replacement or disruptive technologies; (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 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. 8 The Advanced Airlaid Materials business unit generates a substantial portion of its revenue from one customer serving the feminine hygiene products market, the loss of which could have a material adverse effect on our results of operations. Advanced Airlaid Materials generates the majority of its net sales of feminine hygiene products in 2010 from one customer. The loss of a significant customer could have a material adverse effect on their operating results. In addition, sales in the feminine hygiene market accounted for approximately 81% of Advanced Airlaid Materials’ net sales in 2010. A decline in sales of feminine hygiene products or in sales of feminine hygiene products generally could have a material adverse effect on this unit’s operating results. Customers in the airlaid non-woven fabric material market, including the feminine hygiene market, may also switch to less expensive prod- ucts or otherwise reduce demand for Advanced Airlaid Material’s products, thus reducing the size of the markets in which it 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 envelope 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 structures. 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 resi- dential and commercial property downstream 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 liabili- ties 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 require a reliable and abundant supply of water. Such mills rely on a local water body or water source for their water needs and, therefore, are 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 curtail- ment 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. 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 paper for tea bags and single serve coffee products. Any interruption, loss or extended cur- tailment of operations at our Mindanao mill could mate- rially 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 Glatfelter 2010 Annual Report 9 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 Canada, Germany, France, the United Kingdom, and the Philippines. Our international sales and operations are subject to a number of special risks, in addition to the risks in our domestic sales and operations, including differing protections of intellectual property, trade barri- ers, 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 envi- ronments, 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 manufacturing facilities in Canada, Germany, France, the United Kingdom and the Philippines. 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, we generate substan- tially greater cash inflow in these currencies than we do outflow. However, with respect to the British Pound Sterling and the Philippine Peso, we have greater out- flows 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. 10 Substantially lower and more volatile mar- ket-based prices for sales of excess electricity compared to the fixed-price we historically received may prevent us from achieving the historical margins on our sales of excess elec- tricity in relation to our coal supply contract, which could have a material adverse effect on our consolidated financial position and results of operations. Because our Spring Grove facility produces more electricity than it requires for its operations, we sell the excess energy produced. Historically, we sold the excess electricity to the local power company under a fixed-price long-term contract, which expired March 31, 2010. We now sell our excess electricity at wholesale 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 historically received under the expired contract. 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. 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. The combination of market- based pricing for energy sales and the fixed pricing of the coal contract may limit our ability to generate the level of net revenues from energy sales that we histori- cally achieved and limit the overall profitability of our Specialty Papers business unit, which could have a mate- rial adverse affect on our consolidated financial position and results of operations. An IRS audit of our 2009 tax return could result in a change in the tax treatment of the alternative 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 had substantial alternative fuel mixture credits relating to these facilities. Our results of opera- tions in 2009 included, on a pre-tax basis, $107.8 million of alternative fuel mixture credits all of which has been used or realized in cash. 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. 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 20. 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 simultaneously fund our operations, finance capital expenditures, satisfy obligations and make dividend 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 We own substantially all of the land and buildings comprising our manufacturing facilities located in Penn- sylvania; Ohio; Canada; the United Kingdom; Germany; France; and the Philippines. Substantially all of the equip- ment used in our manufacturing and related operations is also owned. Our metallized paper production facility located in Caerphilly, Wales leases the building and land associated with its operations. We also lease office space for a sales and distribution office in Moscow, Russia, as well as our corporate offices located in York, Pennsylva- nia. 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. 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 EXECUTIVE OFFICERS The following table sets forth certain information with respect to our executive officers as of March 11, 2011. Name Age Office with the Company Dante C. Parrini John P. Jacunski Jonathan A. Bourget David C. Elder Thomas G. Jackson Debabrata Mukherjee Martin Rapp Mark A. Sullivan William T. Yanavitch II 46 45 46 42 45 41 51 56 50 President and Chief Executive Officer Senior Vice President and Chief Financial Officer Vice President & General Manager, Advanced Airlaid Materials Business Unit Vice President and Corporate Controller Vice President, General Counsel and Secretary Vice President & General Manager, Specialty Papers Business Unit Vice President & 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. Dante C. Parrini became President and Chief Executive Officer effective January 1, 2011. Prior to this appointment, he was Executive Vice President and Chief Operating Officer, a position he held since February 2005. Mr. Parrini joined us in 1997 and has previously served as Senior Vice President and General Manager, a position he held beginning in January 2003 and prior to that as Vice President responsible for Sales and Marketing. John P. Jacunski became Senior Vice President and Chief Financial Officer in July 2006. From October 2003 until July 2006, he was Vice President and Corpo- rate 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 consult- ing firm, where he served in various capacities. Jonathan A. Bourget joined us in July 2010 as Vice President & General Manager, Advanced Airlaid Materials Business Unit. From 2008 until joining our Company, Mr. Bourget was Vice President & General Manager of European operations at Polymer Group Inc. Prior to this, he held various positions of increasing Glatfelter 2010 Annual Report 11 responsibility, including General Manager Specialties Divi- sion in Europe, with Alcoa Inc. 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- 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. ITEM 4 [RESERVED] PART II ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MAT- TERS AND ISSUER PURCHASES OF EQUITY 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 2010 Fourth Third Second First 2009 Fourth Third Second First High Low Dividend $13.37 12.65 15.49 15.05 $ 12.58 12.14 11.59 9.80 $11.62 10.08 10.62 12.32 $ 10.01 7.91 6.00 4.57 $0.09 0.09 0.09 0.09 $ 0.09 0.09 0.09 0.09 As of March 11, 2011, we had 1,448 shareholders of record. 12 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, 2010, we compare our stock performance to the S&P Small Cap 600 Paper Products index. This index is comprised of Buckeye Technologies Inc., Clearwater Paper Corp., Kap- stone Paper & Packaging Corp., 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 the peer group (including reinvestment of dividends) was $100 on December 31, 2005 and charts it through December 31, 2010. $250 $200 $150 $100 $50 $0 12/05 12/06 12/07 12/08 12/09 12/10 Glatfelter Co. Russell 2000 S&P SmallCap 600 Paper Products ITEM 6 SELECTED FINANCIAL DATA As of or for the Year Ended December 31 Dollars in thousands, except per share Net sales Energy and related sales, net Total revenue Reversal of (charges for) shutdown and restructuring Gains on dispositions of plant, equipment and timberlands, net Net income (loss) Earnings (loss) per share Basic Diluted Total assets Total debt Shareholders’ equity Cash dividends declared per common share Capital expenditures Depreciation, depletion and amortization Shares outstanding Net tons sold Number of employees 2010(1) 2009(3) 2008 2007 2006 $1,455,331 10,653 $1,184,010 13,332 1,465,984 – 453 1,197,342 – 898 54,434(2) $ 123,442 $ $ 1.19 1.17 $1,341,747 333,022 552,442 0.36 36,491 65,839 45,976 927,853 4,337 $ 2.70 2.70 $1,190,294 254,583 510,704 0.36 26,257 61,256 45,706 818,905 3,546 $1,263,850 9,364 1,273,214 856 18,468 57,888 $ $ 1.28 1.27 $1,057,309 313,285 342,707 0.36 52,469 60,611 45,434 829,354 3,633 $1,148,323 9,445 $ 986,411 10,726 1,157,768 (35) 78,685 63,472 $ 997,137 (30,318) 17,394 $ (12,236) $ 1.41 1.40 $1,287,067 313,185 476,068 0.36 28,960 56,001 45,141 799,512 3,854 $ (0.27) (0.27) $1,225,643 397,613 388,368 0.36 44,460 50,021 44,821 721,892 3,704 (1) The information set forth above for 2010 includes the financial information for Concert Industries Corp. prospectively from the February 12, 2010 acquisition date. (2) During 2010, net income included a $23.2 million tax benefit from cellulosic biofuel production credits. (3) 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. Glatfelter 2010 Annual Report 13 ITEM 7 MANAGEMENT’S DISCUSSION ANDANAL- YSIS 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 state- ments of historical fact, including statements regarding industry prospects and future consolidated financial posi- tion or results of operations, made in this Report on Form 10-K are forward looking. We use words such as “anticipates”, “believes”, “expects”, “future”, “intends” and similar expressions to identify forward-looking state- ments. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from such expecta- tions. The following discussion includes forward-looking statements regarding expectations of, among others, non- cash pension expense, environmental costs, capital expen- ditures 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 mate- rially from our expectations. Accordingly, we identify the following important factors, among others, which could cause our results to differ from any results that might be projected, forecasted or estimated in any such forward- looking statements: 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 products; the impact of exposure to volatile market-based pricing for sales of excess electricity; the impact of competition, changes in industry production capacity, including the construction of new mills, the closing of mills and incremental changes due to capital expenditures or productiv- ity increases; the gain or loss of significant customers and/or on-going viability of such customers; cost and other effects of environmental compli- ance, cleanup, damages, remediation or restora- tion, or personal injury or property damages i. ii. iii. iv. v. vi. vii. viii. 14 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 environ- ments and fluctuations in currency exchange rates; geopolitical events, including war and terrorism; disruptions in production and/or increased costs due to labor disputes; the impact of unfavorable outcomes of audits by various state, federal or international tax authorities; enactment of adverse state, federal or foreign tax or other legislation or changes in government policy or regulation; adverse results in litigation; and our ability to finance, consummate and integrate acquisitions. ix. x. xi. xii. xiii. xiv. xv. Introduction We manufacture, both domestically and internationally, a wide array of specialty papers and fiber-based engineered materials. We manage our com- pany along three business units: (cid:129) Specialty Papers with revenues earned from the sale of carbonless papers and forms, book pub- lishing, envelope & converting, and engineered products; (cid:129) Composite Fibers with revenue from the sale of food & beverage filtration papers, metallized papers, composite laminates used for decorative furniture and flooring applications, and technical specialties; and (cid:129) Advanced Airlaid Materials with revenue from the sale of airlaid non-woven fabric like materials used in feminine hygiene products, adult inconti- nence products, cleaning pads and wipes, food pads, napkins and tablecloths, and baby wipes. Overview On February 12, 2010, we completed the acquisition of Concert Industries Corp. (“Concert”), a manufacturer of highly absorbent cellulose-based airlaid non-woven materials with annual revenue in 2009 of $203 million. Our results of operations for 2010 include the results of Concert (now operated as the Advanced Airlaid Materials business unit) prospectively since the acquisition was completed. Our reported results of operations for 2010 when RESULTS OF OPERATIONS compared to 2009 are lower primarily due to the higher amount of tax-related credits recorded in 2009 than in 2010 associated with cellulosic or alternative fuel mix- tures. For 2010, net income included a $23.2 million tax benefit from cellulosic biofuel credits compared to $95.8 million, after-tax, alternative fuel mixture credits during 2009. Our 2010 results include $9.1 million, after-tax, of acquisition and integration costs, together with a $1.7 million loss on forward foreign currency contracts that hedged the Canadian dollar purchase price, of the Concert acquisition. Interest expense increased $6.2 mil- lion in 2010 compared to 2009 due to financing part of the acquisition price. Operationally, our results were favorably affected by higher volumes shipped associated with improving demand in many of the markets served by our businesses and the inclusion of Concert. Higher average selling prices offset the adverse affect of rising input costs, particularly purchased pulp. Specialty Papers’ operating income totaled $58.4 million and $55.9 million for 2010 and 2009, respectively. The improvement in operating income was led by higher volumes shipped, higher average selling prices, productivity improvements and cost reduction initi- atives partially offset by lower sales of excess energy and renewable energy credits. During 2009, the weak eco- nomic 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 down- time totaling 33,019 tons of paper. Our Composite Fibers business unit’s operating income increased to $32.9 million from $21.9 million in 2009. Volumes shipped during 2010 increased 12.8% compared to 2009 as a result of the improving economic environment. Conversely, during 2009, as a result of weak demand and our inventory reduction efforts, we incurred unscheduled downtime totaling approximately 6,480 tons of paper, or 9.4% of the unit’s total capacity for the period. Advanced Airlaid Materials earned $4.4 million of operating income on sales of $193.5 million for the ten and one half months of operations since the date of acquisition. The results were adversely impacted primarily by rapidly rising input costs, a lag in the timing of cost- pass throughs and currency fluctuations. 2010 versus 2009 The following table sets forth summarized consoli- dated results of operations: In thousands, except per share Net sales Gross profit Operating income Net income Earnings per diluted share Year Ended December 31 2010 2009 $1,455,331 186,247 64,589 54,434 1.17 $1,184,010 269,764 160,405 123,442 2.70 The consolidated results of operations for 2010 and 2009 include the following items not considered to be part of our core business operations: In thousands, except per share 2010 Cellulosic biofuel credit Acquisition and integration costs Foreign currency hedge on acquisition price Timberland sales and related transaction costs 2009 Alternative fuel mixture credits Acquisition related costs After-tax Income (loss) Diluted EPS $23,184 (9,073) (1,673) $ 0.50 (0.20) (0.04) 1,063 0.02 $ 95,764 (1,768) $ 2.09 (0.04) These items increased earnings by $13.5 million, or $0.28 per diluted share in 2010. Comparatively, the items identified above increased earnings in 2009 by $94.0 million, or $2.05 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 Glatfelter 2010 Annual Report 15 this is a more meaningful representation of the operating performance of its core papermaking businesses, the profitability of business units and the extent of cash flow generated from these core operations. Such amounts are presented under the caption “Other and Unallocated.” This presentation is aligned with the management and operating structure of our company. It is also on this basis that the Company’s performance is evaluated inter- nally and by the Company’s Board of Directors. Business Unit Performance Dollars in millions Net sales Energy and related sales, net Total revenue Cost of products sold Gross profit SG&A Gains on dispositions of plant, equipment and timberlands, net Total operating income (loss) Nonoperating income (expense) Specialty Papers 2010 2009 Composite Fibers 2010 2009 $842.6 10.7 $791.9 13.3 853.3 740.2 113.1 54.7 – 58.4 – 805.2 693.9 111.3 55.4 – 55.9 – $419.2 – 419.2 350.5 $392.1 – 392.1 334.4 68.7 35.8 – 32.9 – 57.7 35.8 – 21.9 – Year Ended December 31 Advanced Airlaid Materials Other and Unallocated Total 2010 2009 2010 2009 2010 2009 $193.5 – $– – $ – – – – – – – 193.5 181.7 11.8 7.4 – 4.4 – 4.4 – – – 7.4 (7.4) 24.3 (0.5) (31.2) (31.1) $ – – $1,455.3 10.7 $1,184.0 13.3 – (100.7) 100.7 19.1 (0.9) 82.6 (17.3) 1,466.0 1,279.7 186.2 122.1 (0.5) 64.6 (31.1) 1,197.3 927.6 269.8 110.3 (0.9) 160.4 (17.3) Income (loss) before income taxes $ 58.4 $ 55.9 $ 32.9 $ 21.9 $ $ $(62.3) $ 65.3 $ 33.5 $ 143.1 Supplementary Data Net tons sold (in thousands) Depreciation, depletion and amortization Capital expenditures 764.7 $ 34.9 24.1 738.8 $ 37.5 14.2 90.4 $ 23.7 8.2 80.1 $ 23.7 12.1 $ 72.8 7.2 4.2 – $– – $ – – – $ – – – $ 927.9 65.8 36.5 $ 818.9 61.3 26.3 The sum of individual amounts set forth above may not agree to the consolidated financial statements included herein due to rounding. Sales and Costs of Products Sold In thousands Year Ended December 31 2010 2009 Change Net sales Energy and related sales – net $1,455,331 10,653 $1,184,010 13,332 $271,321 (2,679) Total revenues Costs of products sold (1) 1,465,984 1,279,737 1,197,342 927,578 268,642 352,159 Gross profit $ 186,247 $ 269,764 $ (83,517) Gross profit as a percent of Net sales 12.8% 22.8% (1) 2009 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 Advanced Airlaid Materials Total Percent of total 2010 2009 57.9% 66.9% 28.8 13.3 33.1 – 100.0% 100.0% The increase was primarily due to higher volumes shipped and a $24.0 million benefit from higher selling prices. Specialty Papers’ operating profit for 2010 improved by $2.5 million compared with 2009 primarily due to higher selling prices, a 3.5% increase in volumes shipped and the lack of market-related downtime. These favorable factors were partially offset by higher input costs, prima- rily pulp. In addition, higher maintenance costs largely associated with the annual mill outages and with unplanned production interruptions adversely impacted the year over year comparison. We sell excess power generated by the Spring Grove, PA facility. In addition, two of our facilities are registered generators of renewable energy credits (“RECs”). The following table summarizes this activity for 2010 and 2009: In thousands Energy sales Costs to produce Net Renewable energy credits 2010 2009 Change $ 14,296 (10,403) $ 20,128 (11,883) $(5,832) 1,480 3,893 6,760 8,245 5,087 (4,352) 1,673 $ 10,653 $ 13,332 $(2,679) Net sales Net sales for 2010 were $1,445.3 mil- Total lion, a 22.9% increase compared with $1,184.0 million for 2009, reflecting stronger business activity in the our Specialty Papers and Composite Fibers business units and the inclusion of Concert, now operated and reported as Advanced Airlaid Materials business unit, prospectively since the February 12, 2010 acquisition date. In the Specialty Papers business unit, net sales for 2010 increased $50.7 million, or 6.4%, to $842.6 million. RECs represent sales of certified credits earned related to burning renewable sources of energy such as black liquor and wood waste. We sell RECs into an emerging and somewhat illiquid market. The extent and value of future revenues from REC sales is dependent on many factors outside of management’s control. Therefore, we may not be able to generate consistent amounts of sales of RECs in future periods. 16 In Composite Fibers, net sales for 2010 were $419.2 million, an increase of $27.1 million, or 6.9%, from 2009. The improvement reflects strengthening demand in each of its product lines as volumes shipped increased 12.9%. On a constant currency basis, average selling prices were lower by $1.0 million, and the trans- lation of foreign currencies unfavorably affected net sales by approximately $15.0 million. Composite Fibers’ operating profit increased $11.0 million, or 50.2%, in the year over year compari- son. The improved performance was driven by the $10.8 million combined benefit from improved demand in markets served resulting in higher shipments and the elimination of market driven downtime. In addition, the production efficiencies from continuous improvement ini- tiatives more than offset the adverse effect of foreign currency translation adjustments. Results for Advanced Airlaid Materials are included from February 12, 2010, the date of the Concert acquisi- tion. This business unit’s results were unfavorably affected by rising input costs that outpaced the timing of increases in selling prices. In addition, results were adversely impacted by operating inefficiencies and by $1.4 million as a result of charging cost of products sold for the write-up of acquired inventory to fair value. Alternative Fuel Mixture Credits The U.S. Inter- nal 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 applica- tion to be registered as an alternative fuel mixer was approved. During 2009, we mixed and burned eligible alternative fuels, and earned $107.8 million of alternative fuel mixture credits. We record all alternative fuel mixture credits as a reduction to cost of goods sold. According to the Internal Revenue Code, the tax credit expired on December 31, 2009. Pension Expense The following table summa- rizes the amounts of pension expense recognized for 2010 compared to 2009: In thousands Recorded as: Costs of products sold SG&A expense Total Year Ended December 31 2010 2009 Change $7,056 2,185 $9,241 $4,936 2,097 $2,120 88 $7,033 $2,208 The amount of pension expense recognized each year is determined using various actuarial assumptions and certain other factors, including discount rates and the fair value of our pension assets as of the beginning of the year. The primary reason for the increase in pension expense in the comparison is due to decreases in discount rates used. Selling, general and administrative (“SG&A”) SG&A expenses increased $11.9 million in the year-to-year comparison and totaled $122.1 million for 2010. The increase was substantially all related to legal and professional fees related to the Concert acquisition, costs to integrate the acquired entities and the inclusion of its operations prospectively from the date of acquisition. Gain on Sales of Plant, Equipment and Timberlands, net During the years ended Decem- ber 31, 2010 and 2009, we completed the following sales of assets: Dollars in thousands Acres Proceeds Gain 2010 Timberlands Other Total 2009 Timberlands Other Total 164 n/a 319 n/a $387 177 $564 $ 951 – $ 951 $373 80 $453 $ 906 (8) $ 898 In connection with each of the asset sales set forth above, we received cash proceeds. Other nonoperating income (expense) For the year ended December 31, 2010, other non operating expense, net totaled $6.3 million. In connection with the Concert acquisition, we entered into a series of forward foreign currency contracts to hedge the acquisition’s Canadian dollar purchase price. All contracts were settled for cash during the first quarter of 2010 and resulted in a $3.4 million loss, net of realized currency translation gains, which is presented under the caption “Other-net” in the accompanying consolidated statements of income. In addition, in connection with purchase accounting for the Concert transaction, we recorded a $2.5 million reserve for tax risks, inclusive of accrued interest, existing at the time of the acquisition and at the same time recorded a $2.5 million receivable from the seller due to an indemnification agreement. During the fourth quarter, a tax ruling was issued that eliminated this tax risk and as a result we recognized an expense of $2.5 million which is presented under the caption “Other-net” in the accompanying consolidated statements of income to eliminate the receivable from the seller. We also recog- nized a $2.5 million tax benefit for this same item to eliminate the tax reserve previously established resulting in no net impact to earnings during 2010. Glatfelter 2010 Annual Report 17 Income taxes For 2010, we recorded income tax benefits of $20.9 million on $33.5 million of pretax income. The comparable amounts in the same period of 2009 were income tax expense of $19.7 million on $143.1 million of pretax income. The benefit in 2010 was due to $23.2 million of cellulosic biofuel credits, net, recorded as an income tax benefit in 2010 as discussed further below. We also recorded the $2.5 million tax benefit discussed in the previous paragraph, as well as a $6.4 mil- lion adjustment to reduce tax liabilities resulting from the expiration of statutes on uncertain tax positions and other factors. The tax provision in 2009 included a $27.1 million benefit from nontaxable alternative fuel mixture credit. In March Cellulosic Biofuel Production Credit 2010, our application to be registered as a cellulosic biofuel producer was approved by the Internal Revenue Service. The U.S. Internal Revenue Code provides for a non refundable tax credit equal to $1.01 per gallon for taxpayers that produce cellulosic biofuel. On July 9, 2010, the IRS Office of Chief Counsel issued a memoran- dum which concluded that black liquor sold or used in a taxpayer’s trade or business during calendar year 2009, qualifies for the cellulosic biofuel producer credit (“CBPC”). Accordingly, each gallon of black liquor we produced during calendar year 2009 qualifies for a non- refundable CBPC of $1.01 per gallon. In connection with the filing of our 2009 income tax return, we claimed $23.2 million, net of taxes, of CBPC. Subsequent to the end of 2010, we received a cash tax refund of $17.8 million, of which $2.7 million related to alternative fuel mixture credits earned in 2009. The CBPC claimed is attributable to black liquor produced and burned from January 1, 2009 through February 19, 2009, after which we began mixing black liquor and diesel fuel to qualify for alternative fuel mixture credits. In October 2010, the IRS issued further guidance concluding that both the alternative fuel mixture credit and the cellulosic biofuel production credit can be claimed in the same year, but only for different volumes of black liquor. With respect to CBPC, although we do not intend to claim any additional credits, we could amend our 2009 federal tax return and claim additional credits. If we were to elect to do so, we would be required to return cash already received from alternative fuel mixture credits, since we can only claim either the alternative fuel mixture credit or CBPC. The ability to realize the value of any additional CBPC depends on future taxable income. We continue to evaluate opportunities, if any, to claim additional CBPC from qualifying activities based on the results of our ongoing operations. Foreign Currency In 2010, we owned and oper- ated manufacturing facilities in Canada, Germany, France, 18 the United Kingdom and the Philippines. The functional currency in Canada is the U.S. dollar, in Germany and France it is the Euro, in the UK it is the British Pound Sterling, and in the Philippines it is the Peso. During 2010, Euro functional currency operations generated approxi- mately 25.5% of our sales and 24.6% of operating expenses and British Pound Sterling operations represented 8.8% of net sales and 8.7% 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 transla- tion 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, 2010 Favorable (unfavorable) $(15,000) 10,891 791 468 $ (2,850) 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. RESULTS OF OPERATIONS 2009 versus 2008 The following table sets forth summarized consoli- dated results of operations: In thousands, except per share Net sales Gross profit Operating income Net income Earnings per diluted share 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 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 Unit Performance Dollars in millions Net sales Energy and related 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, net Total operating income (loss) Nonoperating income (expense) Income (loss) before income taxes Supplementary Data Net tons sold (in thousands) Depreciation, depletion and amortization Capital expenditures Specialty Papers 2009 2008 Composite Fibers 2009 2008 Other and Unallocated 2009 2008 Total 2009 2008 Year Ended December 31 $791.9 13.3 805.2 693.9 111.3 55.4 – – 55.9 – $ 55.9 738.8 $ 37.5 14.2 $833.9 9.4 843.3 739.5 103.8 54.6 – – 49.2 – $ 49.2 743.8 $ 35.0 20.9 $392.1 – 392.1 334.4 57.7 35.8 – – 21.9 – $ 21.9 80.1 $ 23.7 12.1 $430.0 – 430.0 366.8 63.2 38.2 – – 25.0 – $ 25.0 85.6 $ 25.6 31.6 $ – – – (100.7) 100.7 19.1 – (0.9) 82.6 (17.3) $ 65.3 $ – – – $ – – – (10.8) 10.8 5.1 (0.9) (18.5) 25.1 (18.2) $ 6.9 $1,184.0 13.3 1,197.3 927.6 269.8 110.3 – (0.9) 160.4 (17.3) $ 143.1 $1,263.9 9.4 1,273.2 1,095.4 177.8 97.9 (0.9) (18.5) 99.2 (18.2) 81.0 $ $ – – – $ 818.9 61.3 26.3 $ 829.4 60.6 52.5 Sales and Costs of Products Sold In thousands Net sales Energy and related sales – net Total revenues Costs of products sold(1) Year Ended December 31 2009 2008 Change $1,184,010 $1,263,850 $ (79,840) 13,332 1,197,342 927,578 9,364 3,968 1,273,214 1,095,432 (75,872) (167,854) Gross profit $ 269,764 $ 177,782 $ 91,982 Gross profit as a percent of Net sales 22.8% 14.1% 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. We sell excess power generated by the Spring Grove, PA facility pursuant to a long-term contract that expired 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) 8,245 5,087 9,364 – $ 397 (1,516) (1,119) 5,087 (1) 2009 includes $107.8 million of alternative fuel mixture credits, net Renewable energy credits of related expenses. Total $ 13,332 $ 9,364 $ 3,968 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% 33.1 66.0% 34.0 100.0% 100.0% Net sales 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 Renewable energy credits (“RECs”) represent sales of certified credits earned related to burning renewable sources of energy such as black liquor and wood waste. 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. 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. Glatfelter 2010 Annual Report 19 Pension Expense/Income The following table summarizes the amounts of pension (expense) or income recognized for 2009 compared to 2008: In thousands Recorded as: Costs of products sold SG&A expense Total Year Ended December 31 2009 2008 Change $(4,936) (2,097) $(7,033) $11,067 4,995 $16,062 $(16,003) (7,092) $(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. The fair value of the plans’ assets declined approx- imately 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 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 acquisition. Gain on Sales of Plant, Equipment and Timberlands, net During the years ended Decem- ber 31, 2009 and 2008, we completed sales of timber- lands 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 – 951 $ $ 906 (8) 898 4,561 n/a $19,279 – $18,649 (181) $19,279 $18,468 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. LIQUIDITY AND CAPITAL RESOURCES Our business is capital intensive and requires signif- icant expenditures for new or enhanced equipment, for environmental compliance matters including, but not limited to, the Clean Air Act, to support our research and development efforts and for our business strategy. In addition, we have mandatory debt service requirements of both principal and interest. The following table sum- marizes cash flow information for each of the years presented: In thousands Year Ended December 31 2010 2009 Cash and cash equivalents at beginning of period $ 135,420 $ 32,234 In connection with each of the asset sales set forth Cash provided by (used for) 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% in 2008. 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 propor- tion 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 Operating activities Investing activities Financing activities Effect of exchange rate changes on cash Net cash (used) provided 168,005 (264,217) 59,681 (3,101) 163,868 12,544 (75,329) 2,103 (39,632) 103,186 Cash and cash equivalents at end of period $ 95,788 $135,420 At the end of the 2010, we had $95.8 million in cash and cash equivalents and $219.6 million available under our revolving credit agreement, which matures in May 2014. Operating cash flow improved by $4.1 million primarily due to cash received from alternative fuel mixture credits offset by less provision of cash from 20 working capital in 2010 than in 2009. In January 2009, we used $6.5 million to satisfy a commitment we had to fund certain Fox River environmental remediation activities. Net cash used by investing activities totaled $264.2 million in 2010 reflecting the Concert acquisition. Capital expenditures totaled $36.5 million and $26.2 mil- lion in 2010 and 2009, respectively. Capital expenditures are expected to approximate $60 million to $65 million in 2011. Net cash provided by financing activities totaled $59.7 million in 2010, reflecting increased borrowings to fund the Concert acquisition including the proceeds, net of debt issue costs and original issue discount, from the issuance of $100.0 million of senior notes, at 95% of par. In addition, during 2010, we refinanced our revolving credit facility and repaid a $14.0 million term loan. In 2009, net cash used for financing activities totaled $75.3 million, primarily reflecting reductions of debt including $34.0 million repaid in connection with the unwinding of the 2003 timberland installment sale. During 2010 and 2009, cash dividends paid on common stock totaled $16.7 million and $16.6 million, respectively. Our Board of Directors determines what, if any, dividends will be paid to our shareholders. Dividend payment decisions are based upon then-existing factors and conditions and, therefore, historical trends of divi- dend 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 Revolving credit facility, due May 2014 Term Loan, due April 2011 71⁄8% Notes, due May 2016 71⁄8% Notes, due May 2016 – net of original issue discount Term Loan, due January 2013 Total long-term debt Less current portion December 31 2010 2009 $ n/a – – 200,000 $ – n/a 14,000 200,000 95,529 36,695 332,224 – 36,695 250,695 (13,759) Long-term debt, excluding current portion $332,224 $236,936 Our credit agreement contains a number of custom- ary compliance covenants. In addition, the Senior Notes contain cross default provisions that could result in all such notes becoming due and payable in the event of a failure to repay debt outstanding under the credit agree- ment at maturity, or a default under the credit agree- ment, that accelerates the debt outstanding thereunder. As of December 31, 2010, we met all of the require- ments of our debt covenants. The significant terms of the debt instruments are more fully discussed in Item 8 – Financial Statements and Supplementary Data – Note 16. We are subject to various federal, state and local laws and regulations which operate to protect the environment as well as human health and safety. We have, at various times, incurred significant costs to comply with these regulations, as new regulations are developed or regulatory priorities change. Currently, we anticipate that we could incur material capital and operating costs to comply with several air quality regula- tions including the U.S. EPA Best Available Retrofit Tech- nology rule (BART; otherwise known as the Regional Haze Rule) and the Boiler Maximum Achievable Control Technology rule (Boiler MACT). Although we are in the process of analyzing the potential impact of these requirements, compliance could require significant capital expenditures. In addition, we may incur obligations to remove or mitigate any adverse effects on the environ- ment resulting from our operations, including the restora- tion of natural resources and liability for personal injury and for damages to property and natural resources. See Item 8 – Financial Statements and Supplementary Data – Note 20 for a summary of significant environmental matters. 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 20, an unfavorable outcome of various environmental matters could have a material adverse impact on our consolidated financial position, liquidity and/or results of operations. Off-Balance-Sheet Arrangements As of December 31, 2010 and 2009, we had not entered into any off-balance-sheet arrangements. Financial derivative instruments to which we are a party and guarantees of indebtedness, which solely consist of obligations of sub- sidiaries and a partnership, are reflected in the condensed consolidated balance sheets included herein in Item 8 – Financial Statements and Supplementary Data. Glatfelter 2010 Annual Report 21 Contractual Obligations The following table sets forth contractual obligations as of December 31, 2010: 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, 2012 to 2013 2014 to 2015 2016 and beyond $ 80 8 33 17 $138 $43 3 5 18 $69 $311 7 9 42 $369 Total 2011 $456 26 135 94 $ 22 8 88 17 $711 $135 (1) Represents principal and interest payments due on long-term debt. At December 31, 2010, we had $300.0 million of debt maturing in May 2016 and bearing a fixed rate of interest at 71⁄8%, payable semiannually, and a $36.7 million note maturing in January 2013 bearing interest at six-month reserve adjusted LIBOR plus a margin rate of 1.66% per annum. (2) Represents rental agreements for various land, buildings, vehicles, 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, 2010 or expectations based on historical experience and/or current market conditions. (4) Primarily represents expected benefits to be paid pursuant to retirement medical 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 8, “Income Taxes”, such amounts totaled $38.7 million at December 31, 2010. Critical Accounting Policies and Estimates The preceding discussion and analysis of our consol- idated financial position and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting prin- ciples generally accepted in the United States of America. The preparation of these consolidated financial state- ments requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contin- gent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inven- tories, long-lived assets, pension and post-retirement obligations, environmental 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. 22 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, goodwill and other intangible assets period- ically or whenever events or changes in circumstances indicate that the carrying amounts may not be recover- able. Our evaluations include analyses based on the cash flows generated by the underlying assets, profitability information, including 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 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 Consoli- dated Financial Statements. Refer to Item 8 – Financial State- ments and Supplementary Data – Notes to Consolidated 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 – Senior Notes At variable interest rates Weighted-average interest rate Fixed interest rate debt – Senior Notes Variable interest rate debt 2011 Year Ended December 31 2013 2014 2012 At December 31, 2010 2015 Carrying Value Fair Value $295,874 36,695 $296,600 36,695 $297,389 1,407 $298,244 – $299,171 – $295,529 36,695 $304,115 37,780 $332,224 $341,895 7.13% 1.66% 7.13% 1.66% 7.13% 1.66% 7.13% – 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, 2010. Fair values included herein have been determined based upon rates currently available to us for debt with similar terms and remaining maturities. that accrues interest based on 6 month LIBOR plus a margin. At December 31, 2010, the weighted-average interest rate paid was approximately 1.66%. A hypothet- ical 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. Our market risk exposure primarily results from changes in interest rates and currency exchange rates. At December 31, 2010, we had long-term debt outstanding of $332.2 million, of which $36.7 million or 10.0% was at variable interest rates. Variable-rate debt outstanding represents a cash collateralized borrowing incurred in connection with the 2007 installment timberland sale We are subject to certain risks associated with changes in foreign currency exchange rates to the extent our opera- tions are conducted in currencies other than the U.S. dollar. During 2010, Euro functional currency operations generated approximately 25.5% of our sales and 24.6% of operating expenses and British Pound Sterling operations represented 8.8% of net sales and 8.7% of operating expenses. Glatfelter 2010 Annual Report 23 ITEM 8 FINANCIAL STATEMENTS AND SUPPLE- MENTARY 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, 2010, 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). We excluded from our assessment, as permitted under the applicable SEC rules, regulations and related interpreta- tions, the internal control over financial reporting of Concert Industries Corp., which was acquired on Febru- ary 12, 2010, and whose total assets constitute 21% of total assets, and which represented 13% of total net sales, of the consolidated financial statement amounts as of and for the year ended December 31, 2010. Manage- ment has determined that the Company’s internal control over financial reporting as of December 31, 2010 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 24 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, 2010, 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, 2010. 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. 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, 2010, based on criteria established in Internal Control–Integrated Frame- work issued by the Committee of Sponsoring Organiza- tions of the Treadway Commission. As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting of Concert Indus- tries Corp., which was acquired on February 12, 2010 and whose total assets constitute 21% of total assets, and which represented 13% of total net sales, of the consolidated financial statement amounts as of and for the year ended December 31, 2010. Accordingly, our audit did not include the internal control over financial reporting at Concert Industries Corp. 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 Management’s Report on Internal Control Over Financial Reporting. Our responsibil- ity 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 reason- able 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, 2010, 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, 2010 of the Company and our report dated March 11, 2011 expressed an unqualified opinion on those financial statements and financial state- ment schedule. /s/ DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 11, 2011 Glatfelter 2010 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 accompanying consolidated balance sheets of P. H. Glatfelter Company and subsidiar- ies (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. 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, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, 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, presents fairly, in all material respects, the infor- mation 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, 2010, 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 11, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 11, 2011 26 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 Reversal 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 (benefit) provision Net income Weighted average shares outstanding Basic Diluted Earnings per share Basic Diluted 2010 Year Ended December 31 2009 2008 $1,455,331 10,653 $1,184,010 13,332 $1,263,850 9,364 1,465,984 1,279,737 1,197,342 927,578 1,273,214 1,095,432 186,247 122,111 – (453) 64,589 (25,547) 808 (6,321) (31,060) 33,529 (20,905) 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 $ 54,434 $ 123,442 $ 57,888 45,922 46,374 45,678 45,774 45,247 45,572 $ $ 1.19 1.17 $ 2.70 2.70 1.28 1.27 The accompanying notes are an integral part of the consolidated financial statements. Glatfelter 2010 Annual Report 27 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: 2010 – $3,118; 2009 – $2,888) 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: 2010 – 8,385,772; 2009 – 8,655,826) 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 2010 2009 $ 95,788 $ 135,420 141,208 201,077 64,617 502,690 608,170 230,887 119,319 168,370 96,947 520,056 470,632 199,606 $1,341,747 $1,190,294 $ – 798 98,594 4,190 248 109,316 213,146 332,224 94,918 149,017 789,305 – $ 13,759 3,888 63,604 4,170 440 100,249 186,110 236,936 96,668 159,876 679,590 – 544 48,145 749,453 (121,247) 676,895 (124,453) 544 46,746 711,765 (119,885) 639,170 (128,466) 552,442 510,704 $1,341,747 $1,190,294 The accompanying notes are an integral part of the consolidated financial statements. 28 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 Amortization of debt issuance costs and original issue discount 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 Proceeds from $100 million 71⁄8% note offering, net of original issue discount Payments of note offering and credit facility costs Net repayments of revolving credit facility Repayments of $100 million term loan facility Net (repayments of) proceeds from other short-term debt (Repayments of) proceeds from borrowing under Term Loans due 2013 Payment of dividends Proceeds and excess tax benefits from stock options exercised and proceeds from government grants Net cash provided (used) by financing activities Effect of exchange rate changes on cash Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at the beginning of period Cash and cash equivalents at the end of period Supplemental cash flow information Cash paid (received) for Interest Income taxes Year Ended December 31 2009 2010 2008 $ 54,434 $123,442 $ 57,888 65,839 2,758 8,637 – (16,815) (453) 5,767 54,880 (598) (7,592) (13,318) 21,064 (29) (1,490) (5,079) 61,256 1,690 6,343 – (22,981) (898) 4,599 (57,946) 16,542 28,207 1,451 2,390 (7,728) 6,676 825 168,005 163,868 (36,491) 564 – (228,290) (264,217) 95,000 (5,340) – (14,000) (3,208) – (16,746) 3,975 59,681 (3,101) (26,257) 951 37,850 – 12,544 – – (6,725) (16,000) (2,008) (34,000) (16,596) – (75,329) 2,103 60,611 1,654 (16,062) (856) 3,265 (18,468) 4,350 – (17,668) (9,975) 871 4,264 (13,012) (10,557) 7,120 53,425 (52,469) 19,279 – – (33,190) – – (24,197) (13,000) 2,927 36,695 (16,469) 1,165 (12,879) (4,955) (39,632) 135,420 $ 95,788 103,186 32,234 $135,420 2,401 29,833 $ 32,234 $ 23,193 (40,265) $ 17,338 16,634 $ 21,243 20,011 The accompanying notes are an integral part of the consolidated financial statements. Glatfelter 2010 Annual Report 29 P. H. GLATFELTER COMPANY and SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the Years Ended December 31, 2010, 2009 and 2008 In thousands Balance at January 1, 2008 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 Tax effect on employee stock options exercised Cash dividends declared ($0.36 per share) Share-based compensation expense Delivery of treasury shares Performance Shares 401(k) plans Director compensation Employee stock options exercised – net Common Stock Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Shareholders’ Equity $ 544 $ 44,697 $ 563,608 $ 4,061 $ (136,842) $ 476,068 57,888 57,888 (32,029) (148,165) (180,194) (180,194) (122,306) 38 (16,495) 3,244 (339) 1,520 163 814 1,400 1,768 206 957 (16,495) 38 3,244 (1,739) (248) (43) (143) Balance at December 31, 2008 544 45,806 605,001 (176,133) (132,511) 342,707 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 123,442 123,442 11,941 44,307 56,248 56,248 179,690 (16,678) 3,502 (203) 1,522 164 1,280 2,517 248 (16,678) 3,502 (1,483) (995) (84) Balance at December 31, 2009 544 46,746 711,765 (119,885) (128,466) 510,704 Comprehensive income Net income Foreign currency translation adjustments Change in benefit plans’ net funded status, net of taxes of $9,905 Other comprehensive income Comprehensive income 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 54,434 54,434 (17,227) 15,865 (1,362) (1,362) 53,072 (50) (16,746) 3,962 (490) 1,642 163 185 1,662 1,960 179 212 (16,746) (50) 3,962 (2,152) (318) (16) (27) Balance at December 31, 2010 $544 $48,145 $749,453 $(121,247) $(124,453) $552,442 30 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 fiber- based engineered materials. Headquartered in York, Penn- sylvania, our manufacturing facilities are located in Spring Grove, Pennsylvania; Chillicothe and Freemont, Ohio; Gatineau, Quebec Canada; Gloucestershire (Lydney), England; Caerphilly, Wales; Gernsbach and Falkenhagen, Germany; Scaër, France; and the Philippines. Our products are marketed worldwide, either through wholesale paper merchants, 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 the average cost method. 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. 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, on a discounted cash flow basis, during the third quarter of each year for impairment. Impairment losses, if any, are recognized for the amount by which the carrying value of the reporting unit exceeds its fair value. The carrying value of a reporting unit is defined using an enterprise premise which is generally determined by the difference between the unit’s assets and operating liabilities. 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 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 Glatfelter 2010 Annual Report 31 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. 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 interpretation of FASB Statement No. 109”). 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 transac- tions and calculations where the ultimate tax determina- tion 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 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 Foreign currency translation gains and losses and the effect of exchange rate changes on transactions designated as hedges of net foreign investments are included as a component of other comprehensive 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. Estimated costs for sales incentives, discounts and sales returns and allow- ances are recorded as sales reductions in the period in which the related revenue is recognized. 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 32 Statements of Income. Our fixed-price contract to sell electricity generated in excess of our own use expired March 31, 2010. Subsequent to the expiration, we now sell excess power at market-rates. 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 (Loss) at December 31, 2010 consisted of a loss of $120.4 million from additional defined benefit liabilities, net of tax, and $0.8 million of losses 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. We use the following valuation techniques to mea- sure fair value for our assets and liabilities: allocation of the purchase price to assets acquired and liabilities assumed were required. 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. 3. ACQUISITIONS On February 12, 2010, we completed the acquisi- tion of all the issued and outstanding stock of Concert Industries Corp. (“Concert”), a manufacturer of highly absorbent cellulose based airlaid non-woven materials, for cash totaling $231.1 million based on the currency exchange rates on the closing date, and net of post- closing working capital adjustments. Concert 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 materials used in products such as feminine hygiene and adult incontinence products, pre-moistened cleaning wipes, food pads, napkins and tablecloths, and baby wipes. The acquisition of Concert affords us the opportunity to grow with our customers who are the industry leaders in feminine hygiene and adult incontinence products. We believe that our acquisi- tion of Concert provides us with an industry-leading global business that sells highly specialized, engineered fiber-based materials to niche markets with substantial barriers to entry. The share purchase agreement provides for, among other terms, indemnification provisions for claims that may arise, including among others, uncertain tax posi- tions and other third party claims. We and the sellers reached agreement on working capital related adjustments that reduced the purchase price by $4.7 million. In addition, as a result of further evaluation of asset appraisals, contingencies and other factors, in accordance with FASB ASC 805, Business Combinations, we have determined that certain retro- spective adjustments to the February 12, 2010 provisional The following summarizes the impact of the adjust- ments recorded in 2010 and retrospectively reflected in the financial statements. This provisional purchase price allocation is based on information currently available to management: In thousands Assets Cash Accounts receivable Inventory Prepaid and other current assets Plant, equipment and timberlands Intangible assets Deferred tax assets and other assets Total Liabilities Accounts payable and accrued expenses Deferred tax liabilities Other long term liabilities Total Total purchase price As originally presented Adjustment Adjusted $ 2,792 24,703 28,034 5,941 177,253 3,138 20,738 262,599 25,322 1,267 212 26,801 $235,798 $ – – – (1,316) 8,301 1,902 (5,830) 3,057 611 3,852 3,310 7,773 $(4,716) $2,792 24,703 28,034 4,625 185,554 5,040 14,908 265,656 25,933 5,119 3,522 34,574 $231,082 The adjustments set forth above did not materially impact previously reported results of operations, earnings per share, or cash flows. We are in the process of finalizing certain contin- gencies and the impact on taxes of any final adjustments to such necessary to account for the Concert transaction in accordance with the acquisition method of accounting set forth in FASB ASC 805. Accordingly, the provisional purchase price allocation set forth above is based on all information available to us at the present time and is subject to change, and such changes could be material. For purposes of allocating the total purchase price, assets acquired and liabilities assumed are recorded at their estimated fair market value. The allocation set forth above is based on management’s estimate of the fair value using valuation techniques such as discounted cash flow models, appraisals and similar methodologies. The amount allocated to intangible assets represents the estimated value of technology and customer sales con- tracts and relationships. Deferred tax assets reflect the estimated value of future tax deductions acquired in the transaction. Acquired property plant and equipment are being depreciated on a straight-line basis with estimated remaining lives ranging from 5 years to 40 years. Intan- gible assets are being amortized on a straight-line basis over an estimated remaining life of 11 to 20 years reflecting the expected future value. During 2010, we incurred legal, professional and advisory costs directly related to the Concert acquisition totaling $6.9 million. All such costs are presented under Glatfelter 2010 Annual Report 33 the caption “Selling, general and administrative expenses” in the accompanying consolidated statements of income. Deferred financing fees incurred in connection with issuing debt related to the acquisition totaled $3.0 million. The unamortized fees are recorded in the accompanying consolidated balance sheet under the cap- tion “Other assets”. In addition, in connection with the Concert acquisi- tion, we entered into a series of forward foreign currency contracts to hedge the acquisition’s Canadian dollar purchase price. All contracts were settled for cash during the first quarter of 2010 and resulted in a $3.4 million loss, net of realized currency translation gains, which is presented under the caption “Other-net” in the accompa- nying consolidated statements of income for the year ended December 31, 2010. Our results of operations for the year ended Decem- ber 31, 2010 include the results of Concert prospectively since the acquisition was completed on February 12, 2010. All such results are reported herein as the Advanced Airlaid Materials business unit, a new report- able segment. Net sales and operating income of Concert included in our consolidated results of operations totaled $193.5 million and $4.4 million, respectively, for 2010. The unaudited pro-forma results presented below include the effects of the acquisition as if it had been consummated as of January 1, 2009. The pro forma results include the amortization associated with the acquired intangible assets and interest expense associ- ated with debt used to fund the acquisition, as well as fair value adjustments for plant, equipment and timber- lands. To better reflect the combined operating results, material non-recurring charges directly attributable to the acquisition have been excluded. The unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved. 4. 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 earned $107.8 million of alternative fuel mixture credits for the alternative fuel mixture consumed during the period February 20, 2009 through December 31, 2009. We record all alternative fuel mixture credits as a reduction to cost of goods sold and the net credit claimed is recorded in 2009 under the caption “Prepaid expenses and other current assets” in the accompanying Consolidated Balance Sheets. The alternative fuel mixture credit expired on December 31, 2009. For information related to the Cellulosic Biofuel Credit, see Note 8 – Income Taxes. 5. ENERGY AND RELATED SALES, NET We sell excess power generated by the Spring Grove, PA facility. Prior to the March 31, 2010 expiration of a long-term contract, all sales were at a fixed price. Subsequently, we sell excess power at prevailing market rates. We also sell renewable energy credits generated by the Spring Grove, PA and Chillicothe, OH facilities repre- senting 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 2010 2009 2008 $14,296 (10,403) 3,893 6,760 $10,653 $20,128 (11,883) 8,245 5,087 $13,332 $19,731 (10,367) 9,364 – $9,364 In thousands, except per share Pro forma Net sales Net income Diluted earnings per share Year Ended December 31 2010 2009 $1,480,980 69,116 1.49 $1,388,120 135,713 2.96 6. GAIN ON DISPOSITIONS OF PLANT, EQUIP- MENT AND TIMBERLANDS During 2010, 2009 and 2008, we completed the following sales of assets: Dollars in thousands Acres Proceeds Gain For purposes of presenting the above pro forma financial information, non-recurring legal, professional and transaction costs directly related to the acquisition have been eliminated. This pro forma financial informa- tion is not necessarily indicative of what the operating results would have been had the acquisition been com- pleted at the beginning of the respective period nor is it indicative of future results. 2010 Timberlands Other Total 2009 Timberlands Other Total 2008 Timberlands Other Total 34 164 n/a 319 n/a $ $ $ $ 387 177 564 951 – 951 $ $ $ $ 373 80 453 906 (8) 898 4,561 n/a $19,279 – $19,279 $18,649 (181) $18,468 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 retired chief executive officer, and his spouse. The 246 acres of timberlands had been independently appraised and marketed for public sale by us. Based on those appraisals and the marketing process that was pursued, we and our Board believed that the sale price agreed to with the Glatfelters constituted fair market value for the timberland. 7. EARNINGS PER SHARE The following table sets forth the details of basic and diluted earnings per share (EPS): In thousands, except per share 2010 2009 2008 Net income 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 $54,434 $123,442 $57,888 45,922 45,678 45,247 452 96 325 46,374 $1.19 1.17 45,774 2.70 2.70 $ 45,572 $ 1.28 1.27 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 2010 2009 2008 1,405 2,215 1,132 8. 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 (benefit)/provision for income taxes from opera- tions consisted of the following: In thousands Current taxes Federal State Foreign Deferred taxes and other Federal State Foreign Income tax (benefit)/provision Year Ended December 31 2009 2010 2008 $ (8,238) (392) 4,540 (4,090) (17,530) (131) 846 (16,815) $(20,905) $ 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 The amounts set forth above for total deferred taxes and other included a deferred tax benefit of $17.6 million in 2010, a deferred tax benefit of $23.0 million in 2009 and a deferred tax provision of $3.0 million in 2008, respectively. Other taxes totaled $0.8 million, $0.0 million, and $0.2 million in 2010, 2009 and 2008, respectively, related to uncertain tax positions expected to be taken in future tax filings. The following are the domestic and foreign compo- nents of pretax income from operations: In thousands United States Foreign Total pretax income Year Ended December 31 2009 2010 2008 $ 2,384 31,145 $33,529 $122,657 20,489 $143,146 $61,387 19,639 $81,026 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 (benefit)/provision is as follows: 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 Change in unrecognized tax benefits, net Cellulosic Biofuel Credit, net of incremental state tax and manufacturing deduction benefit Adjustment for prior year estimates Alternative fuel mixture credits Valuation allowance release Other (Benefit)/provision for income taxes Year Ended December 31 2010 2008 2009 35.0% 35.0% 35.0% 1.4 (4.9) 1.5 (7.8) (12.4) 0.7 (0.5) (0.3) (1.8) 8.0 3.1 (2.5) – (5.7) 2.5 (69.3) (6.8) – – 1.0 – – (26.4) – (0.9) (62.3)% 13.8% 28.6% – – – (1.8) (2.0) The sources of deferred income taxes were as follows at December 31: 2010 2009 Current Asset (Liability) Non current Asset (Liability) $ 5,628 3,850 $ 10,422 4,070 1,807 692 449 – 348 78 8,002 20,854 (2,925) $17,929 18,225 (98,012) (43,428) (14,030) – 5,617 57,547 (59,589) (22,895) $(82,484) Current Asset (Liability) $ 7,404 3,367 1,708 12 660 (4) 438 258 – 13,843 (2,379) $11,464 Non- current Asset (Liability) $ 9,677 3,934 19,637 (100,071) (38,000) (14,070) – 4,608 29,238 (85,047) (9,789) $ (94,836) In thousands Reserves Compensation Post-retirement benefits Property Pension Installment sales Inventories Other Tax carryforwards Subtotal Valuation allowance Total The increase in the valuation allowance of $13.7 mil- lion from 2009 is primarily related to the establishment of a valuation allowance for certain acquired deferred tax assets related to Concert. Glatfelter 2010 Annual Report 35 In connection with the filing of our 2009 income tax return, we claimed $23.2 million, net of taxes, of CBPC. The CBPC claimed is attributable to black liquor produced and burned from January 1, 2009 through February 19, 2009, after which we began mixing black liquor and diesel fuel to qualify for alternative fuel mixture credits. With respect to CBPC, although we do not intend to claim any additional credits, we could amend our 2009 federal tax return and claim additional credits. If we were to elect to do so, we would be required to return cash already received from alternative fuel mixture credits, since we can only claim either the alternative fuel mixture credit or CBPC. The ability to realize the value of any additional CBPC depends on future taxable income. We continue to evaluate opportunities, if any, to claim additional CBPC from qualifying activities based on the results of our ongoing operations. As of December 31, 2010, December 31, 2009 and December 31, 2008, we had $38.7 million, $40.1 million and $29.2 million of gross unrecognized tax benefits, respectively. As of December 31, 2010, if such benefits were to be recognized, approximately $35 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 Acquisition related: Purchase accounting Decrease for prior years(1) Increases in tax positions for current year Settlements Lapse in statute of limitations 2010 2009 2008 $40.1 1.6 (1.8) $29.2 0.7 – $26.1 0.4 – 3.2 (2.2) 1.9 – (4.1) – – 11.2 (0.8) (0.2) – – 3.2 – (0.5) Balance at December 31 $38.7 $40.1 $29.2 (1) in connection with purchase accounting for the Concert transaction, we recorded a $2.2 million reserve for an uncertain tax position and at the same time recorded a receivable from the seller due to an indemnification agreement. Prior to the end of 2010, a tax rul- ing was issued that eliminated this tax risk resulting in the elimina- tion of both items. 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 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 2010 2009 $17,929 12,434 – 94,918 $11,519 1,832 55 96,668 At December 31, 2010, we had state and foreign tax net operating loss (“NOL”) carryforwards of $78.6 mil- lion and $273.0 million, respectively. These NOL carryfor- wards are available to offset future taxable income, if any. The state NOL carryforwards expire between 2014 and 2027; certain foreign NOL carryforwards expire between 2013 and 2030. In addition, we had federal foreign tax credit carryforwards of $0.3 million, which expire in 2013, various state tax credit carryforwards totaling $0.4 million, which expire between 2014 and 2027, and foreign tax credits of $3.2 million which expire between 2019 and 2030. We have established a valuation allowance of $25.8 million against the net deferred tax assets, prima- rily due to the uncertainty regarding the ability to utilize state and foreign tax NOL carryforwards and certain deferred foreign tax credits. Tax credits and other incentives reduce tax expense in the year the credits are claimed. In 2010, we recorded tax credits of $2.6 million related to Research and Devel- opment credits and the fuels tax credits. In 2009 and 2008 similar tax credits of $2.6 million and $4.7 million, respectively, were recorded. At December 31, 2010 and 2009, unremitted earn- ings of subsidiaries outside the United States deemed to be permanently reinvested totaled $160.8 million and $134.6 million, respectively. Because the unremitted earnings of subsidiaries are deemed to be permanently reinvested as of December 31, 2010, no deferred tax liability has been recognized in our consolidated financial statements. In March 2010, our application to be registered as a cellulosic biofuel producer was approved by the Internal Revenue Service. The U.S. Internal Revenue Code provides a non refundable tax credit equal to $1.01 per gallon for taxpayers that produce cellulosic biofuel. In a memoran- dum issued in July 2010, the Internal Revenue Service issued guidance concluding that black liquor sold or used before January 1, 2010, qualifies for the cellulosic biofuel producer credit (“CBPC”) and no further certification of eligibility was needed. 36 following table summarizes tax years that remain subject to examination by major jurisdiction: record any penalties associated with uncertain tax posi- tions during 2010 or 2009. Jurisdiction United States Federal State Canada(1) Germany(1) France United Kingdom Philippines Open Tax Years Examinations not yet initiated Examination in progress 2007 – 2010 2005 – 2010 2006 – 2010 2008 – 2010 2007 – 2010 2007 – 2010 2010 N/A 2004 & 2006–2008 2008 – 2009 2003 – 2009 N/A N/A 2007 – 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 $8.2 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. The Company accrued minimal interest, net of reversals during 2010, and in total, as of December 31, 2010, has recognized a liability for interest of $3.8 million. During 2009, the Company accrued interest of $1.1 million, and in total, as of December 31, 2009 has recognized a liability for interest of $3.8 million. During 2008, the Company accrued interest of $0.8 million. We did not 9. 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, 2010, 2,661,632 shares of common stock were available for future issuance under the LTIP. Since the approval of the LTIP, we have issued to eligible participants restricted stock units and stock only stock appreciation rights (“SOSARs”). Restricted Stock Units (“RSU”) Awards of RSUs are made under the LTIP. Under terms of the awards, 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 Beginning balance Granted Forfeited Restriction lapsed/shares delivered Ending balance Dollars in thousands Compensation expense 2010 2009 2008 564,037 203,889 (37,368) (150,757) 579,801 486,988 205,360 (8,700) (119,611) 564,037 505,173 137,649 (25,214) (130,620) 486,988 $1,708 $1,622 $1,772 The weighted average grant fair value per unit for awards in 2010, 2009 and 2008 was $13.24, $10.11 and $14.82, respectively. As of December 31, 2010, unrecognized compensation expense for outstanding RSUs totaled $3.4 million. The weighted average remain- ing period over which the expense will be recognized is 3.6 years. Glatfelter 2010 Annual Report 37 Stock Only Stock Appreciation Rights The following table sets forth information related to outstanding SOSARS. 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 1,762,020 470,520 – (170,663) 2,061,877 1,135,281 2,059,524 2010 Weighted- Average Exercise Price $11.84 13.77 11.81 12.28 12.78 $ 4.65 2,179 2.61% 2.48 42.34 6yrs Shares 718,810 1,043,210 – – 1,762,020 390,575 1,676,227 2009 Weighted- Average Exercise Price $14.63 9.91 – – $11.84 14.89 $ 2.83 $2,957 3.63% 2.26 40.59 6yrs Shares 484,800 284,240 – (50,230) 718,810 150,967 690,418 2008 Weighted- Average Exercise Price $15.30 13.49 – 14.63 $14.63 15.30 $ 3.77 $1,002 2.67% 3.71 32.09 6yrs Compensation expense (in thousands) $ 2,254 $ 1,880 $ 1,472 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. As of December 31, 2010, the intrinsic value of SOSARs vested and expected to vest totaled $2.3 million. 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 Non-Qualified Options $10.78 to $12.41 12.95 to 14.44 15.44 to 17.16 17.54 to 18.78 Shares 36,250 132,700 178,100 15,000 362,050 2010 Weighted- Average Exercise Price $14.20 – 12.95 13.09 $14.49 Shares 453,050 – (14,250) (76,750) 362,050 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 Options Outstanding Weighted- Average Remaining Contractual Life 3.0 1.9 1.0 1.3 1.5 Weighted- Average Exercise Price $11.24 13.71 15.47 17.54 Options Exercisable Weighted- Average Exercise Price $11.24 13.71 15.47 17.54 Shares 36,250 132,700 178,100 15,000 362,050 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. As of December 31, 2010, the intrinsic value of outstanding stock options totaled $0.04 million. 10. RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS We provide non-contributory retirement benefits under both funded and unfunded plans to all U.S. employ- ees and to certain non-U.S. employees. U.S. benefits are based on either a final average pay formula or a cash balance formula for salaried employees, and on a unit- benefit formula for bargained hourly employees. Non-U.S. 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 U.S.-based retired employees and exclude all salaried employees hired after January 1, 2008. These benefits include a comprehensive medical plan for retirees prior to age 65 and fixed supplemental premium pay- ments to certain retirees over age 65 to help defray the costs of Medicare. The plan is partially funded and claims are paid as reported. Pension Benefits 2010 2009 Other Benefits 2009 2010 $406.1 9.5 23.9 1.2 17.9 (24.3) $434.3 $386.3 8.6 23.4 1.9 12.9 (27.0) $406.1 $62.6 2.9 3.4 – (5.7) (4.7) $58.5 $485.7 63.2 1.8 (24.3) $400.6 110.0 2.1 (27.0) $6.3 0.9 3.7 (4.7) $58.6 2.6 3.5 – 1.3 (3.4) $62.6 $5.7 1.6 2.4 (3.4) In millions Change in Benefit Obligation Balance at beginning of year Service cost Interest cost Plan amendments Actuarial (gain)/loss 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 Benefits paid Fair value of plan assets at end of year Funded status at end of year The weighted-average assumptions used in comput- ing the benefit obligations above were as follows: Pension Benefits 2010 2009 Other Benefits 2010 2009 Discount rate – benefit obligation Future compensation growth rate 5.80% 6.10% 5.10% 5.90% 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 5.00% to 6.10% for the pension plans and for other benefit plans ranged from 4.65% to 5.20%. 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 2010 $37.1 32.0 – 2009 $33.3 29.2 – Net periodic benefit cost (income) includes the following components: 526.4 $ 92.1 485.7 $ 79.6 6.2 $(52.3) 6.3 $(56.3) In millions Year Ended December 31 2009 2010 2008 The net prepaid pension cost for qualified pension plans is primarily included in “Other long-term 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 Consolidated Balance Sheets at December 31, 2010 and 2009. 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 2010 2009 Other Benefits 2010 2009 $129.2 (8.6) (28.5) $ 92.1 $112.9 (1.8) (31.5) $ 79.6 $ – (3.9) (48.4) $(52.3) $ – (4.6) (51.7) $(56.3) The components of amounts recognized as “Accu- mulated other comprehensive income” consist of the following on a pre-tax basis: In millions Pension Benefits 2010 2009 Other Benefits 2010 2009 Prior service cost/(credit) Net actuarial loss $ 15.5 170.8 $ 16.5 189.2 $(4.2) 14.1 $(5.3) 21.5 The accumulated benefit obligation for all defined benefit pension plans was $417.1 million and $390.9 mil- lion at December 31, 2010 and 2009, respectively. 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/(credit) Amortization of actuarial loss Total net periodic benefit cost $ 9.5 23.9 (40.3) 2.5 13.6 $ 9.2 $ 2.9 3.4 (0.5) (1.2) 1.5 $ 6.1 $ 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 The actuarial net (gain) loss and prior service cost for our defined benefit pension plans that will be amor- tized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $14.1 million and $2.4 million, respectively. The compa- rable amounts of expected amortization for other benefit plans are $1.1 million and a credit of $(1.2) million, respectively. Glatfelter 2010 Annual Report 39 Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) were as follows: In millions 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 2010 2009 $ (4.5) 1.2 (2.5) (13.6) (19.4) $(57.7) 1.9 (2.2) (12.6) (70.6) $(10.2) $(63.6) $ (6.0) 1.2 (1.5) (6.3) $ 0.2 1.2 (2.1) (0.7) $ (0.2) $ 5.8 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 2010 2008 2009 6.10% 6.25% 6.25% 4.0 8.5 4.0 8.5 4.0 8.5 5.90 8.5 6.25% 6.25% 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 2010 2009 8.10% 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 Effect on: One Percentage Point increase decrease Post-retirement benefit obligation Total of service and interest cost components $3.9 0.5 $(3.5) (0.5) Plan Assets All pension plan assets in the U.S. are invested through a single master trust fund. The strategic asset 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 embod- ied in the Employee Retirement Income Security Act of 40 1974 (ERISA). These principles include discharging our investment 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 thereunder. 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: Domestic Equity – Large cap Small and mid cap International equity Real Estate Investment Trusts (REIT) Fixed income , cash and cash equivalents Diversification is achieved by: 39% 13 13 5 30 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. The Investment Policy statement lists specific cate- gories of securities or activities that are prohibited includ- ing options, futures, commodities, hedge funds, limited partnerships, and our stock. The table below presents the fair values of our benefit plan assets by level within the fair value hierar- chy, as described in Note 2: 11. INVENTORIES Inventories, net of reserves were as follows: in millions Domestic Equity Large cap Small and mid cap International equity REIT Fixed income Cash and equivalents Total 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, 2010 Total Level 1 Level 2 Level 3 $185.8 67.5 93.7 24.1 147.4 14.1 $532.6 $185.8 67.5 57.8 24.1 59.5 0.2 $394.9 $ – – 35.9 – 87.9 13.9 $137.7 $– – – – – – $– 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 2010. Benefit payments expected to be made in 2011 under our non-qualified pension plans and other benefit plans are summarized below: In thousands Nonqualified pension plans Other benefit plans $8,573 4,917 The following benefit payments under all pension and other benefit plans, and giving effect to expected future service, as appropriate, are expected to be paid: In thousands Raw materials In-process and finished Supplies Total 2010 2009 $ 52,538 94,118 54,421 $ 44,150 78,340 45,880 $201,077 $168,370 We value all of our U.S. inventories on the LIFO method. If we had valued these inventories using the first-in, first-out method, inventories would have been $20.2 million and $16.9 million higher than reported at December 31, 2010 and 2009, respectively. During 2010 and 2009, we liquidated certain LIFO inventories, the effect of which did not have a significant impact on results of operations. 12. 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 2010 2009 $ 185,469 1,080,065 109,168 (807,441) $ 136,260 970,708 101,327 (773,057) 567,261 30,904 8,829 1,176 435,238 23,947 10,300 1,147 $ 608,170 $ 470,632 In thousands 2011 2012 2013 2014 2015 2016 through 2020 Pension Benefits Other Benefits 13. GOODWILL AND INTANGIBLE ASSETS $ 37,148 30,119 30,459 30,927 31,522 162,117 $ 4,917 4,971 4,986 5,382 5,500 30,339 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: 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 $1.0 million, $0.9 million and $0.9 million in 2010, 2009 and 2008, respectively. In thousands Goodwill – Composite Fibers Specialty Papers Customer relationships Composite Fibers Technology and related Customer relationships and related Advanced Airlaid Materials Technology and related Customer relationships and related Total intangibles Accumulated amortization Net intangibles December 31 2010 2009 $16,483 $17,331 $ 6,155 $ 6,155 4,194 1,799 1,594 3,350 4,373 1,867 – – 17,092 (5,245) 12,395 (3,525) $11,847 $ 8,870 The decrease 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 Glatfelter 2010 Annual Report 41 over periods ranging from 3 years to 14 years and technology and related intangible assets are amortized over period ranging from 14 years to 20 years. The following table sets forth information pertaining to amor- tization of intangible assets: In thousands Aggregate amortization expense: Estimated amortization expense: 2011 2012 2013 2014 2015 2010 2009 $1,763 $981 $1,811 1,770 1,317 1,317 1,317 The remaining weighted average useful life of intan- gible assets was 10 years at December 31, 2010. 14. OTHER LONG-TERM ASSETS Other long-term assets consist of the following: In thousands Pension Installment note receivable Goodwill and intangibles Other Total December 31 2010 2009 $129,207 43,183 28,330 30,167 $112,903 43,183 26,201 17,319 $230,887 $199,606 15. 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 2010 2009 $ 47,205 $ 46,141 13,491 2,192 16,086 30,342 6,476 4,684 14,195 28,753 $109,316 $100,249 16. LONG-TERM DEBT Long-term debt is summarized as follows: In thousands Revolving credit facility, due April 2011 Revolving credit facility, due May 2014 Term Loan, due April 2011 71⁄8% Notes, due May 2016 71⁄8% Notes, due May 2016 – net of original issue discount Term Loan, due January 2013 Total long-term debt Less current portion December 31 2010 2009 $ n/a – – 200,000 $ – n/a 14,000 200,000 95,529 36,695 332,224 – – 36,695 250,695 (13,759) Long-term debt, excluding current portion $332,224 $236,936 May 31, 2014 and replaced and terminated our old revolving credit agreement which was due to mature April 2011. For all US dollar denominated borrowings under the new agreement, the interest rate is either, at our option, (a) the bank’s base rate plus an applicable margin (the base rate is the greater of the bank’s prime rate, the federal funds rate plus 50 basis points, or the daily LIBOR rate plus 100 basis points); or (b) daily LIBOR rate plus an applicable margin ranging from 175 basis points to 275 basis points according to our corporate credit rating determined by S&P and Moody’s. For non-US dollar denominated borrowings, interest is based on (b) above. The credit agreement contains a number of 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, limits certain intercompany financing arrangements, make acquisitions and engage in mergers or consolidations. We are also required to comply with specified financial tests and ratios, each as defined in the credit agreement, including: i) maximum net debt to earnings before interest, taxes, depreciation and amorti- zation (“EBITDA”) ratio; and ii) a consolidated EBITDA to interest expense ratio. A breach of these requirements would give rise to certain remedies under the credit agreement, among which are the termination of the agreement and accelerated repayment of the outstanding borrowings plus accrued and unpaid interest under the credit facility. On April 28, 2006 we completed an offering of $200.0 million aggregate principal amount of our 7- 1⁄8% Senior Notes due 2016 (“71⁄8% Notes”). Net pro- ceeds 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. On February 5, 2010, we issued an additional $100 million in aggregate principal amount of 71⁄8% Notes due 2016 (together with the April 28, 2006 offering, the “Senior Notes”). The notes were issued at 95.0% of the principal amount. Net proceeds from this offering after deducting offering fees and expenses, were used to fund, in part, the Concert acquisition. The original issue discount is being accreted as a charge to income on the effective interest method. On April 29, 2010, we entered into a new four-year, $225 million, multi-currency, revolving credit agreement with a consortium of banks. The new agreement matures Interest on the Senior Notes accrues at the rate of 71⁄8% per annum and is payable semiannually in arrears on May 1 and November 1. 42 The Senior Notes contain cross default provisions The following schedule sets forth the maturity of that could result in all such notes becoming due and payable in the event of a failure to repay debt outstand- ing under the credit agreement at maturity or a default under the credit agreement that accelerates the debt outstanding thereunder. As of December 31, 2010, we were not aware of any violations 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 the year ended December 31, 2010, GPW Virginia received aggre- gate interest income of $1.0 million under the Glawson note receivable and the Company Note and, in turn, incurred interest expense of $0.7 million under the 2008 Term Loan. Under terms of the above transaction, minimum credit ratings must be maintained by the letter of credit issuing bank. An “event of default” is deemed to have occurred under the debt instrument governing the Note Payable unless actions are taken to cure such default within 60 days from the date such credit rating falls below the specified minimum. Potential remedial actions include: (i) amending the terms of the applicable debt instrument; (ii) a replacement of the letter of credit with an appropriately rated institution; or (iii) repaying the Note Payable. our long-term debt during the indicated year: In thousands 2011 2012 2013 2014 2015 Thereafter $– – 36,695 – – 300,000 P. H. Glatfelter Company guarantees all debt obli- gations of its subsidiaries. All such obligations are recorded in these consolidated financial statements. As of December 31, 2010 and 2009, we had $5.4 million and $5.7 million, respectively, of letters of credit issued to us by certain financial institutions. Such letters of credit reduce amounts available under our revolving credit facility. The letters of credit outstanding as of December 31, 2010, primarily provide financial assurances for the benefit of certain state workers compensation insurance agencies in conjunction with our self-insurance program. We bear the credit risk on this amount to the extent that we do not comply with the provisions of certain agreements. No amounts are out- standing under the letters of credit. 17. ASSET RETIREMENT OBLIGATION During 2008, we recorded $11.5 million, net present value, of asset retirement obligations related to the legal requirement to close several lagoons at the Spring Grove, PA facility. Historically, lagoons were used to dispose of residual waste material. Closure of the lagoons, which is expected to occur over the next six years, will be accom- plished by filling the lagoons, installing a non-permeable liner which will be covered with soil to construct the required cap over the lagoons. The amount referred to above, in addition to 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 the reserve for asset retirement obligations for the periods indicated: In thousands Beginning balance Upward revision Payments Accretion Ending balance 2010 2009 $(11,292) – 2,179 (604) $(11,606) (600) 1,535 (621) $ (9,717) $(11,292) Of the total liability at the end of 2010, $1.5 million is recorded in the accompanying consolidated balance sheet under the caption “Other current liabilities” and $8.2 million is recorded under the caption “Other long-term liabilities.” The comparable amounts as of December 31, 2009 were $2.4 million and $8.9 million, respectively. Glatfelter 2010 Annual Report 43 18. FAIR VALUE OF FINANCIAL INSTRUMENTS AND FINANCIAL DERIVATIVES 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 Variable rate debt Total December 31, 2010 Carrying Value Fair Value December 31, 2009 Fair Value Carrying Value $295,529 36,695 $332,224 $304,115 37,780 $341,895 $200,000 50,695 $250,695 $196,750 51,209 $247,959 As of December 31, 2010 and 2009, we had $300.0 million and $200.0 million, respectively, of 71⁄8% fixed rate debt. The amount outstanding as of the end of 2010 includes $100.0 million that is recorded net of unamortized original issue discount. All of this fixed rate debt is publicly registered, but is thinly traded. Accord- ingly, the values set forth above are based on debt instruments with similar characteristics, or Level 2. The fair value of the remaining debt instrument was esti- mated using a discounted cash flow model based on independent sources, or Level 3. As part of our overall risk management practices, we enter into foreign exchange forward contracts prima- rily designed to mitigate the impact that changes in currency exchange rates have on intercompany financing transactions and to hedge exposure to certain foreign currency denominated receivables and payables. None of these contracts are designated as hedges for financial accounting purposes and, accordingly, changes in value of the foreign exchange forward contract and the offset- ting underlying intercompany transactions are reflected in the accompanying statement of operations under the caption “Other – net.” For the year ended December 31, 2010, our results of operations included a $0.4 million net loss from forward foreign currency exchange con- tracts. This activity was substantially all offset by adjust- ments to translate the underlying intercompany financing transactions. The fair values of the foreign exchange forward contracts are considered to be Level 2. The following table sets forth the notional values of outstanding foreign exchange forward contracts together with the unrealized fair value as of December 31, 2010: December 31, 2010 Sell euro for US$ Buy euro for British pound Notional Amount (millions) u57.0 u3.0 Sell Philippine peso for US$ PHP 247.0 Fair Value (thousands) Balance Sheet Location $(563.0) Other current liabilities (14.0) (4.0) Other current liabilities Other current liabilities 44 Each of the contracts set forth above have a maturity of one month from the date the respective contract was entered into. We are exposed to credit risk related to this activity arising in the event of the inability of a counterparty to meet its obligations to us under the terms of these contracts. This exposure is generally limited to the amounts, if any, by which the counterparty’s obligations exceed our obligation to them. Our policy is to enter into such financial instruments with financial institutions which meet certain minimum debt ratings. 19. SHAREHOLDERS’ EQUITY The following table summarizes outstanding shares of common stock: In thousands Year Ended December 31, 2009 2008 2010 Shares outstanding at beginning of year Treasury shares issued for: Restricted stock awards 401(k) plan Director compensation Employee stock options exercised Shares outstanding at end of year 45,706 45,434 45,143 112 132 12 14 45,976 86 169 17 – 45,706 94 119 14 64 45,434 20. 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 2011 2012 2013 2014 2015 Thereafter Leases Other $7,975 4,629 3,207 1,676 1,332 7,171 $87,946 52,817 30,474 2,777 2,602 9,149 Other contractual obligations primarily represent minimum purchase commitments under energy and pulp wood supply contracts and other purchase obligations. At December 31, 2010, required minimum annual payments due under operating leases and other similar contractual obligations aggregated $26.0 million and $185.8 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 our 1979 acquisition of the Bergstrom Paper Company, we acquired a facility located at the Site (the “Neenah Facility”). The Neenah Facility used wastepaper as a source of fiber. Discharges to the lower Fox River from the Neenah Facility that may have contained PCBs from wastepaper may have occurred from 1954 to the late 1970s. We believe that any PCBs that the Neenah Facility may have discharged into the lower Fox River resulted from the presence of PCBs in NCR»-brand carbonless copy paper in the wastepaper that was recycled at the Neenah Facility. We closed the Neenah Facility in June 2006. The United States, the State of Wisconsin and various state and federal governmental agencies (collec- tively, the “Governments”), as well as other entities (including local Native American tribes), have found PCBs in sediments in the bed of the Fox River, apparently from a number of sources at municipal and industrial facilities along the upstream and downstream portions of the Site. The Governments have identified manufacturing and recy- cling of NCR»-brand carbonless copy paper as the princi- pal source of that contamination. The United States Environmental Protection Agency (“EPA”) has divided the lower Fox River and the Bay of Green Bay site into five “operable units” (the “OUs”), including the most upstream (“OU1”) and four down- stream reaches of the river and bay (“OU2-5”). OU1 extends from primarily Lake Winnebago to the dam at Appleton, and is comprised of Little Lake Butte des Morts. The Neenah Facility discharged its wastewater into OU1. Our liabilities, if any, for this contamination primarily arise under the federal Comprehensive Environmental, Response, Compensation and Liability Act (“CERCLA” or “Superfund”), pursuant to which the Governments have sought to recover “response actions” or “response costs,” which are the costs of studying and cleaning up contamination. Other agencies and natural resource trustee agencies (collectively, the “Trustees”) have sought to recover natural resource damages (“NRDs”), including natural resource damage assessment costs. We are one of eight entities that have been formally notified that they are potentially responsible parties (“PRPs”) under CERCLA for response costs or NRDs. Others, including the United States and the State of Wisconsin, may also be liable for some or all of the costs of NRD at this Site. The Governments have sought to recover response actions, response costs, and NRDs from us through three principal enforcement actions. OU1 CD. On October 1, 2003, the United States and the State of Wisconsin commenced an action cap- tioned United States v. P.H. Glatfelter Co. against us and WTM I Co. in the United States District Court for the Eastern District of Wisconsin and simultaneously lodged a consent decree (“OU1 CD”) that the court entered on April 12, 2004. Under that OU1 CD, and an amendment dated August 2008, we and WTM I, with a limited fixed contribution from Menasha Corp. and funds provided by the United States from an agreement with others, have implemented the remedy for OU1. We have also resolved claims for all Governmental response costs in OU1 after July 2003 and made a payment on NRDs. That remedy is complete. We have continuing operation and mainte- nance obligations that we expect to fund from contribu- tions we and WTM I have already made to an escrow account for OU1 under the OU1 CD. OU2-5 UAO. In November 2007, the United States Environmental Protection Agency (“EPA”) issued an administrative order for remedial action (“UAO”) to Appleton Papers Inc. (“API”), CBC Coating, Inc. (formerly known as Riverside Paper Corporation), Georgia-Pacific Consumer Products, L.P. (formerly known as Fort James Operating Company), Menasha Corporation, NCR Corpo- ration, Glatfelter, U.S. Paper Mills Corp., and WTM I Company (“WTM”) directing those respondents to imple- ment the remedy in OU2-5. Shortly following issuance of the UAO, API and NCR commenced litigation against us and others, as described below. Accordingly, we have no vehicle for complying with the UAO’s overall requirements other than answering a judgment in the litigation, and we have so informed EPA, but, to minimize disruptions, have paid certain de minimis amounts to EPA for oversight costs under the UAO. Government Action. On October 14, 2010, the United States and the State of Wisconsin filed an action in the United States District Court for the Eastern District of Wisconsin captioned United States v. NCR Corp. (the “Government Action”) against 12 parties, including us. The Government Action seeks to recover from each of the defendants, jointly and severally, all of the govern- ments’ past costs of response, which amount to in excess of $16.5 million to date, a declaration as to liability for all of the governments’ future costs of response, and compensation for natural resource damages, as well as a declaration as to liability for compliance with the UAO for OU2-5. We are engaged in litigation to allocate costs and NRDs among the parties responsible for this site. Whiting Litigation. On January 7, 2008, NCR and API commenced litigation in the United States District Court for the Eastern District of Wisconsin captioned Appleton Papers Inc. v. George A. Whiting Paper Co., seeking to reallocate costs and damages allegedly incurred or paid or to be incurred or paid by NCR or API (the “Whiting Litigation”). At present, the case involves allocation claims among the two plaintiffs and 28 Glatfelter 2010 Annual Report 45 defendants including us. We and other defendants coun- terclaimed against NCR and API. Claims against governments. The Whiting Litiga- tion involves claims by certain parties against federal agencies who are responsible parties for this site. In the Government Action many defendants, including us, asserted counterclaims against the United States and the State of Wisconsin. Settlements. Certain parties have resolved their liability to the United States affording them contribution protection. These settlements are embodied in consent decrees. Notably, we entered into the OU1 CD. Also, in a case captioned United States v. George A. Whiting Paper Co., the district court entered two consent decrees under which 13 de minimis defendants in the Whiting Litigation settled with the United States and Wisconsin. NCR and API appealed and await disposition by the Court of Appeals for the Seventh Circuit. Further, Georgia-Pacific Consumer Products LP, has entered into a consent decree resolving its liability for NRDs and on October 14, 2010, lodged a consent decree in the Government Action that would resolve all of its liabilities except for the down- stream portion of the OU4 remedy. The court has not yet entered that consent decree. Finally, the United States has lodged a consent decree that would resolve the liability of itself and two municipalities. We oppose entry of that consent decree. Cleanup Decisions. The extent of our exposure depends, in large part, on the decisions made by EPA and the Wisconsin Department of Natural Resources (“WDNR”) as to how the Site will be cleaned up and the costs and timing of those response actions. The nature of the response actions has been highly controversial. Between 2002 and 2008, the EPA issued records of decision (“RODs”) regarding required remedial actions for the OUs. Some of those RODs have been amended We contend that the remedy for OU2-5 is arbitrary and capricious. We and others may litigate that issue in the Government Action. If we were to be successful in modifying any existing selected remedy, our exposure could be reduced materially. NRD Assessment. We are engaged in disputes as to (i) whether various documents prepared by the Trustees taken together constitute a sufficient NRD assessment under applicable regulations, and (ii) on a number of legal grounds, whether the Trustees may recover from us on the specific NRD claims they have made. Past Cost Demand. We are also disputing a demand by EPA that we and six other parties reimburse EPA for approximately $17.6 million in costs that EPA claims it incurred. 46 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. Based upon estimates made by the Governments and independent estimates commissioned by various poten- tially responsible parties, we have no reason to disagree with the Governments’ assertion that total past and future costs and NRDs at this site may exceed $1 billion and that $1.5 billion is a reasonable “outside estimate.” NRDs. Of that amount, the Trustees’ assessment documents claimed that we are jointly and severally responsible for NRDs with a value between $176 million and $333 million. They now claim that this range should be inflated to 2009 dollars and then certain unreim- bursed past assessment costs should be added, so that the range of their claim would be $287 million to $423 million. We deny liability for most of these NRDs and believe that even if anyone is liable, that we are not jointly and severally liable for the full amount. Moreover, we believe that the Trustees may not legally pursue this claim at this late date, as the limitations period for NRD claims is three years from discovery. Allocation and Divisibility. We contend that we are not jointly and severally liable for costs or damages arising from the presence of PCBs downstream of OU1. In addition, we contend that NCR or other sources of NCR»-brand carbonless copy paper that our Neenah Mill recycled bear most, if not all, of the responsibility for costs and damages arising from the presence of PCBs in OU1 and downstream. On December 16, 2009, the court granted motions for summary judgment in our favor in the Whiting Litigation holding that neither NCR nor API may seek contribution from us or other recyclers under CERCLA. The Court made no ruling as to any other allocation, the liability of NCR or API to us for costs we have incurred, or our liability to the Governments or Trustees. NCR and API have stated their intention to appeal, but an appeal is not yet timely because the court has not entered a final judgment. We also filed counterclaims against NCR and API to recover the costs we have incurred and may later incur and the damages we have paid and may later pay in connection with the Site. Other defendants have similar claims. On March 1, 2011, the district court granted our summary judgment motions on those counterclaims in part and denied them in part. While we are still evaluat- ing the court’s opinion, the court granted a declaration that NCR and API are liable to us (and to others) in contribution for 100% of any costs of response (that is, clean up) that we may be required to pay for work in OU2-5 in the future. The court requires further proceedings to decide whether or to what extent NCR and API owe contribution to us and others for costs that we and others incurred in the past and costs that we and others incurred in connection with OU1. We are uncertain as to the court’s ruling with respect to our claim that NCR and API owe contribution to us (and others) for NRDs or natural resource damage assessment costs that we have paid or may be required to pay in the future. Reserves for the Site. As of December 31, 2010, our reserve for our claimed liability at the Site, including our remediation and ongoing monitoring obli- gations at OU1, our claimed liability for the remediation of the rest of the Site, our claimed liability for NRDs associated with PCB contamination at the Site and all pending, threatened or asserted and unasserted claims against us relating to PCB contamination at the Site totaled $17.0 million. No additional amounts were accrued during the three year period ended December 31, 2010. Of our total reserve for the Fox River, $0.2 million is recorded in the accompanying consolidated balance sheets under the caption “Environmental liabilities” and the remainder is recorded under the caption “Other long term liabilities.” Although we believe that amounts already funded by us and WTM to implement the OU1 remedy are adequate and no payments have been required since January 2009, there can be no assurance that these amounts will in fact suffice. WTM has filed a bankruptcy petition in the Bankruptcy Court in Richmond; accord- ingly, there can be no assurance that WTM will be able to fulfill its obligation to pay half of any additional costs, if required. We believe that we have strong defenses to liability for further remediation downstream of OU1, including the existence of ample data that indicate that PCBs did not leave OU1 in concentrations that could have caused or contributed to the need for additional cleanup down- stream. Others, including the EPA and other PRPs, dis- agree with us and, as a result, the EPA has issued a UAO to us and to others to perform the additional remedial work, and filed the Government Action seeking, in part, the same relief. NCR and API commenced the Whiting Litigation and joined us and others as defen- dants, but, to this point, have not prevailed. Even if we are not successful in establishing that we have no further remediation liability, we do not believe that we would be allocated a significant percent- age share of liability in any equitable allocation of the remediation costs and natural resource damages. The accompanying consolidated financial statements do not include reserves for defense costs for the Whiting Litiga- tion, the Government Action, or any future defense costs related to our involvement at the Site, which could be significant. In setting our reserve for the Site, we have assessed our legal defenses, including our successful defenses to the allegations made in the Whiting Litigation, and assumed that we will not bear the entire cost of remediation or damages to the exclusion of other known PRPs at the Site, who are also potentially jointly and severally liable. The existence and ability of other PRPs to participate has also been taken into account in setting our reserve, and is generally based on our evaluation of recent publicly available financial information on each PRP and any known insurance, indemnity or cost sharing agreements between PRPs and third parties. In addition, our assessment is based upon the magnitude, nature, location and circumstances associated with the various discharges of PCBs to the river and the relationship of those discharges to identified contamination. We will continue to evaluate our exposure and the level of our reserves, including, but not limited to, our potential share of the costs and NRDs, if any, associated with the Site. The amount and timing of future expenditures for environmental compliance, cleanup, remediation and per- sonal injury, NRDs and property damage liabilities cannot be ascertained with any certainty due to, among other things, the unknown extent and nature of any contami- nation, the response actions that may ultimately be required, the availability of remediation equipment, and landfill space, and the number and financial resources of any other PRPs. Other Information. The Governments have pub- lished studies estimating the amount of PCBs discharged by each identified PRP’s facility to the lower Fox River and Green Bay. These reports estimate the Neenah Facility’s share of the mass of PCBs discharged to be as high as 27%. We do not believe the discharge mass estimates used in these studies are accurate because (a) the studies themselves disclose that they are not accurate and (b) the PCB mass estimates contained in the studies are based on assumptions that are unsup- ported by existing data on the Site. We believe that the Neenah Facility’s volumetric contribution of PCB mass is significantly lower than the estimates set forth in these studies. In any event, based upon the court’s December 16, 2009, and March 1, 2011, rulings in the Whiting Litiga- tion, as well as certain other procedural orders, we continue to believe that an allocation in proportion to mass of PCBs discharged would not constitute an equita- ble allocation of the potential liability for the contamina- tion at the Fox River. We contend that other factors, such as the location of contamination, the location of Glatfelter 2010 Annual Report 47 discharge, and a party’s role in causing discharge, must be considered in order for the allocation to be equitable. We previously entered into interim cost-sharing agreements with six of the other PRPs, which provided for those PRPs to share certain costs relating to scientific studies of PCBs discharged at the Site (“Interim Cost Sharing Agreements”). These Interim Cost Sharing 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. 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 costs associated with the Fox River matter may exceed our cost estimates and the aggregate amounts accrued for the Fox River matter by amounts that are insignificant or that could range up to $265 million over an undeterminable period that could range beyond 15 years. We believe that the likelihood of an outcome in the upper end of the monetary range is significantly less than other possible outcomes within the range and that the possibility of an outcome in excess of the upper end of the monetary range is remote. The two summary judgments in our favor in the Whiting Litiga- tion, if sustained on appeal, suggest 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 make an outcome in the upper end of the range more likely. Summary. Our current assessment is that we will be able to manage this environmental matter without a long-term, material adverse impact on the Company. This matter could, however, at any particular time or for any particular year or years, have a material adverse effect on our consolidated financial position, liquidity and/or results of operations or could result in a default under our loan covenants. Moreover, there can be no assurance that our reserves will be adequate to provide for future obligations related to this matter, that our share of costs and/or damages will not exceed our available resources, or that such obligations will not have a long-term, 48 material adverse effect on our consolidated financial position, liquidity or results of operations. Should a court grant the United States or the State of Wisconsin relief which requires us either to perform directly or to contrib- ute significant amounts towards remedial action down- stream of OU1 or to natural resource damages, those developments could have a material adverse effect on our consolidated financial position, liquidity and results of operations and might result in a default under our loan covenants. 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. 21. SEGMENT AND GEOGRAPHIC INFORMATION The following tables set forth profitability and other information by business unit: For the Year Ended December 31, 2010 In millions Specialty Papers Composite Fibers Advanced Airlaid Materials Other and Unallocated Net sales Energy and related sales, net Total revenue Cost of products sold Gross profit SG&A Gains on dispositions of plant, equipment and timberlands, net Total operating income (loss) Non-operating income (expense) Income (loss) before income taxes Supplementary Data Plant, equipment and timberlands, net Capital expenditures Depreciation, depletion and amortization $842.6 10.7 853.3 740.2 113.1 54.7 – 58.4 – $419.2 – 419.2 350.5 68.7 35.8 – 32.9 – $193.5 – 193.5 181.7 11.8 7.4 – 4.4 – $ – – – 7.4 (7.4) 24.3 (0.5) (31.2) (31.1) Total $1,455.3 10.7 1,466.0 1,279.7 186.2 122.1 (0.5) 64.6 (31.1) $ 58.4 $ 32.9 $ 4.4 $(62.3) $ 33.5 $251.3 24.1 34.9 $181.6 8.2 23.7 $175.3 4.2 7.2 $ – – – $ 608.2 36.5 65.8 For the Year Ended December 31, 2009 In millions Specialty Papers Composite Fibers Advanced Airlaid Materials Other and Unallocated Net sales Energy and related sales, net Total revenue Cost of products sold Gross profit SG&A Gains on dispositions of plant, equipment and timberlands, net Total operating income (loss) Non-operating income (expense) Income (loss) before income taxes Supplementary Data Plant, equipment and timberlands, net Capital expenditures Depreciation, depletion and amortization $791.9 13.3 805.2 693.9 111.3 55.4 – 55.9 – $392.1 – 392.1 334.4 57.7 35.8 – 21.9 – $ 55.9 $ 21.9 $262.8 14.2 37.5 $207.8 12.1 23.7 $– – – – – – – – – $– $– – – For the Year Ended December 31, 2008 In millions Specialty Papers Composite Fibers Advanced Airlaid Materials Other and Unallocated Net sales Energy and related sales, net Total revenue Cost of products sold Gross profit SG&A Reversal of shutdown and restructuring charges Gains on dispositions of plant, equipment and timberlands, net Total operating income (loss) Non-operating income (expense) Income (loss) before income taxes Supplementary Data Plant, equipment and timberlands, net Capital expenditures Depreciation, depletion and amortization $833.9 9.4 843.3 739.5 103.8 54.6 – – 49.2 – $430.0 – 430.0 366.8 63.2 38.2 – – 25.0 – $ 49.2 $ 25.0 $284.7 20.9 35.0 $208.9 31.6 25.6 $– – – – – – – – – $ - $– – Total $1,184.0 13.3 1,197.3 927.6 269.8 110.3 (0.9) 160.4 (17.3) $ – – – (100.7) 100.7 19.1 (0.9) 82.6 (17.3) $ 65.3 $ 143.1 $ – – – $ 470.6 26.3 61.3 Total $1,263.9 9.4 1,273.2 1,095.4 177.8 97.9 (0.9) (18.5) 99.2 (18.2) $ – – – (10.8) 10.8 5.1 (0.9) (18.5) 25.1 (18.2) $ 6.9 $ 81.0 $ – – – $ 493.6 52.5 60.6 The sum of individual amounts set forth above may not agree to the consolidated financial statements included herein due to rounding. Glatfelter 2010 Annual Report 49 Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management 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 the Company’s performance is evaluated inter- nally and by the Company’s Board of Directors. Our 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-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, FDA- compliant food and beverage applications, 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 2010 2009 2008 $359,033 168,155 157,202 155,257 2,967 $320,088 176,646 146,812 143,490 4,879 $338,067 201,040 138,293 149,372 7,127 $842,614 $791,915 $833,899 Our Composite Fibers business unit serves cus- tomers globally and focuses on higher-value-added prod- ucts in the following markets: (cid:129) Food & Beverage paper used for tea bags and single serve coffee products; (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. Composite Fibers’ revenue composition by market consisted of the following for the years indicated: In thousands 2010 2009 2008 Food & beverage Metallized Composite laminates Technical specialties and other Total $242,882 88,753 50,801 36,781 $233,899 81,388 46,442 30,366 $252,545 85,719 58,705 32,983 $419,217 $392,095 $429,952 50 On February 12, 2010, we acquired Concert Indus- tries Corp., which we now operate as the Advanced Airlaid Materials business unit. Founded in 1993 and based in Gatineau, Quebec, Canada, 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. These products include: In thousands Feminine hygiene Adult incontinence Home care Food pads Other Total 2010 $157,691 6,146 17,902 8,200 3,560 $193,499 (cid:129) feminine hygiene; (cid:129) adult incontinence; (cid:129) home care such as specialty wipes; (cid:129) table top and towels; and (cid:129) food pads and other. No individual customer accounted for more than 10% of our consolidated net sales in 2010, 2009 or 2008. However, one customer accounted for the majority of Advanced Airlaid Materials net sales in 2010. 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 Canada Other Total 2010 Plant, Equipment and Timberlands – Net $251,318 198,585 55,672 80,177 22,418 2009 Plant, Equipment and Timberlands – Net $262,807 124,881 60,104 – 22,840 Net sales $ 824,833 191,660 125,047 – 42,470 Net sales $ 880,089 327,952 128,598 75,195 43,497 2008 Plant, Equipment and Timberlands – Net $284,689 131,304 53,054 – 24,517 Net sales $ 869,325 216,011 134,212 – 44,302 $1,455,331 $608,170 $1,184,010 $470,632 $1,263,850 $493,564 Glatfelter 2010 Annual Report 51 22. GUARANTOR FINANCIAL STATEMENTS Our Senior Notes are 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, 2010, 2009 and 2008 and our consolidating balance sheets as of December 31, 2010 and 2009. 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. We have reclassified certain interest income amounts in 2008 of $4.9 million in total from Other – net, to Interest Expense, net, to conform to the 2010 and 2009 presentation. This reclassification had no effect on the reported amounts of Interest Income, Interest Expense, or Other – net for any period presented in our accompanying consolidated statement of operations. Condensed Consolidating Statement of Income for the year ended December 31, 2010 In thousands Net sales Energy and related 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 Other non-operating income (expense) Interest expense, net Other – net Total other income (expense) Income (loss) before income taxes Income tax provision (benefit) Net income (loss) Parent Company $842,615 10,653 853,268 753,562 99,706 73,802 (123) 26,027 (24,963) 24,428 (535) 25,492 (28,942) $54,434 Guarantors $49,919 – 49,919 43,468 6,451 2,287 (373) 4,537 7,445 (1,218) 6,227 10,764 2,463 $8,301 Non Guarantors Adjustments/ Eliminations $612,716 – 612,716 532,454 $(49,919) – (49,919) (49,747) Consolidated $1,455,331 10,653 1,465,984 1,279,737 80,262 46,022 43 34,197 (5,906) 330 (5,576) 28,621 6,142 (172) – – (172) (1,315) (29,861) (31,176) (31,348) (568) 186,247 122,111 (453) 64,589 (24,739) (6,321) (31,060) 33,529 (20,905) $22,479 $(30,780) $54,434 Condensed Consolidating Statement of Income for the year ended December 31, 2009 In thousands Net sales Energy and related 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 Other non-operating income (expense) Interest expense, net Other – net Total other income (expense) Income (loss) before income taxes Income tax provision (benefit) Net income (loss) 52 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 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) Other non-operating income (expense) Interest expense, net Other – net Total other income (expense) Income (loss) before income taxes Income tax provision (benefit) Net income (loss) 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 (1,293) 17,729 16,436 74,523 16,635 (12,518) (1,402) 11,116 29,049 11,486 $429,950 – 429,950 367,005 62,945 39,562 – – 23,383 (5,810) (1,779) (7,589) 15,794 4,211 $(45,640) – (45,640) (45,446) (194) – – – (194) (23,600) (14,546) (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 (18,185) 2 (18,183) 81,026 23,138 $57,888 Condensed Consolidating Balance Sheet as of December 31, 2010 In thousands Assets Current 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 $61,953 230,957 244,157 773,254 $91 380,986 7,161 167,877 $33,744 203,048 356,836 103,250 $– (408,089) 16 (813,494) $95,788 406,902 608,170 230,887 $1,310,321 $556,115 $696,878 $(1,221,567) $1,341,747 $277,343 295,529 70,575 114,432 757,879 552,442 $3,672 – 14,836 13,210 31,718 524,397 $336,679 36,695 42,204 9,999 425,577 271,301 $(404,548) – (32,697) 11,376 (425,869) (795,698) $213,146 332,224 94,918 149,017 789,305 552,442 Total liabilities and shareholders’ equity $1,310,321 $556,115 $696,878 $(1,221,567) $1,341,747 Glatfelter 2010 Annual Report 53 Condensed Consolidating Balance Sheet as of December 31, 2009 In thousands Assets Current 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 Condensed Consolidating Statement of Cash Flows for the year ended December 31, 2010 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 Acquisitions, net of cash acquired 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 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 $(6,114) $106,448 $68,986 $(1,315) $168,005 (23,367) 124 (8,257) – (695) 387 (105,294) – (12,429) 53 6,895 (228,290) (31,500) (105,602) (233,771) 75,660 (16,746) (40,292) – 3,975 22,597 (15,017) 76,970 $61,953 – – (425) (1,315) – (1,740) (894) 985 $91 (3,208) – 147,373 – – 144,165 (3,101) (23,721) 57,465 $33,744 – – 106,656 – 106,656 – – (106,656) 1,315 – (105,341) – – $– (36,491) 564 – (228,290) (264,217) 72,452 (16,746) – – 3,975 59,681 (3,101) (39,632) 135,420 95,788 54 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 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 Glatfelter 2010 Annual Report 55 23. QUARTERLY RESULTS (UNAUDITED) In thousands, except per share Net sales 2010 2009 First Second Third Fourth $337,275 362,781 379,097 376,178 $291,552 278,979 312,358 301,121 Gross Profit Net Income (loss) 2010 $44,216 35,460 55,740 50,831 2009 $43,314 59,001 82,465 84,984 2010 $ (374) 103 39,437 15,268 2009 $11,538 19,870 45,994 46,040 Diluted Earnings (loss) Per Share 2010 $(0.01) – 0.85 0.33 2009 $0.25 0.43 1.00 1.00 The information set forth above includes the following, on an after-tax basis: In thousands First Second Third Fourth Alternative Fuel Mixture/Cellulosic Biofuel Credits Gains (losses) on Sales of Plant, Equipment and Timberlands Acquisition Integration Costs/Foreign currency Hedge Loss 2010 $ – – 23,100 84 2009 $ – 30,418 32,890 32,456 2010 $ – 99 – 964 2009 $ 378 (441) (5) 65 2010 $(9,078) (915) (407) (345) 2009 $– – – (1,768) 56 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES 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, 2010, 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. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during the three months ended December 31, 2010, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting 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 30, 2011. Our board of directors has determined that, based on the relevant experience of the members of the Audit Committee, all members are audit committee financial experts as this term is set forth in the applicable regulations of the SEC. 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 30, 2011. ITEM 12 SECURITYOWNERSHIP OF CERTAIN BEN- EFICIAL OWNERS AND MANAGEMENT The information required under this Item is incorpo- rated herein by reference to our Proxy Statement, to be dated on or about March 30, 2011. 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 30, 2011. 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 30, 2011. 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 2010 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, 2010, 2009 and 2008 Consolidated Balance Sheets as of December 31, 2010 and 2009 Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2010, 2009 and 2008 Notes to Consolidated Financial Statements for the Years Ended December 31, 2010, 2009 and 2008 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, 2010 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 2(a) 2009 Form 10-K 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. Articles of Incorporation, as amended through December 20, 2007 (restated for the purpose of filing on EDGAR) By-Laws as amended through March 3, 2011 Indenture, dated as of February 5, 2010 by and between the Company, Guarantors named therein 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 2(b) 3(b) 3.2 4.1 4.1 4.3 Registration Rights Agreement, dated February 5, 2010, among the Company, the Guarantors 4.2 named therein and the Initial Purchasers P. H. Glatfelter Company Amended and Restated Management Incentive Plan, effective January 1, 2010** P. H. Glatfelter Company Supplemental Executive Retirement Plan, as amended and restated effective April 23, 1998 and further amended December 20, 2000** P. H. Glatfelter Company Supplemental Management Pension Plan, effective as of April 23, 1998** P. H. Glatfelter Company Amended and Restated Long-Term Incentive Plan** 3 (b) (a) (b) 4.1 (a) 4.2 10 (b) (c) (a) (b) (c) (d) (e) (A) Form of Top Management Restricted Stock Unit Award Certificate.** (e) (B) Form of Non-Employee Director Restricted Stock Unit Award Certificate** 10.1 10(c) 10(f) 10.1 10.2 10.3 (f) (g) (h) (h) (i) (j) P. H. Glatfelter Company Deferred Compensation Plan for Directors, effective as of April 22, 10(h) 1998** Change in Control Employment Agreement by and between P.H. Glatfelter Company and George H. Glatfelter II, dated as of December 8, 2008 Form of Change in Control Employment Agreement by and between P. H. Glatfelter Company (A) and certain employees, dated as of December 8, 2008** Schedule of Change in Control Employment Agreements** Guidelines for Executive Severance** 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 10(i) 10(j) 10(j)A 10.2 10(i) (k) Non-Competition and Non-Solicitation Agreement by and between P. H. Glatfelter Company and 10.1 Dante C. Parrini, dated July 2, 2010.** 58 2009 Form 10-K 2007 Form 10-K March 3, 2011 Form 8-K February 5, 2010 Form 8-K May 3, 2006 Form 8-K September 22, 2006 Form S-4/A February 5, 2010 Form 8-K May 5, 2010 Form 8-K 2000 Form 10-K** 1998 Form 10-K** May 5, 2009 Form 8-K May 5, 2009 Form 8-K April 27, 2005 Form 8-K 1998 Form 10-K** 2008 Form 10-K 2008 Form 10-K 2008 Form 10-K July 6, 2010 Form 8-K 1996 Form 10-K July 2, 2010 Form 8-K Exhibit Number Description of Documents Incorporated by Reference to Exhibit Filing (l) Credit Agreement, dated as of April 29, 2010, by and among the Company, certain of the 10.1 Company’s subsidiaries as borrowers, certain of the Company’s subsidiaries as guarantors, the banks party thereto, PNC Bank, National Association, as agent for the banks under the Credit Agreement, PNC Capital Markets LLC and Citizens Bank of Pennsylvania, as joint arrangers and bookrunners, Citizens Bank of Pennsylvania, as syndication agent. (m) Consent Decree for Remedial Design and Remedial Action at Operable Unit 1 of the Lower Fox 10.3(a) 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.) (m) (A) Agreed Supplement to Consent Decree between United States of America and the State of 10.3(b) (m) (B) (n) (o) (p) (q) (r) (s) (t) (u) (v) 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.) Amended Consent Decree for Remedial Design and Remedial Action at Operable Unit 1 of the Lower Fox River and Green Bay Site by and among the United States of America and the State of Wisconsin v. P. H. Glatfelter and WTM I Company (f/k/a Wisconsin Tissue Mills Inc.), certain Appendices have been intentionally omitted, copies of which can be obtained free of charge from the Registrant) 10.3(c) 10.3(d) Administrative Order for Remedial Action dated November 13, 2007; issued by the United 10.2 States Environmental Protection Agency 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** 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(r) 10(t) 10.3 10(t) 10.1 (w) Term Loan Agreement dated January 15, 2008, among GPW Virginia Timberlands LLC, certain 10.2 14 21 23 31.1 31.2 32.1 32.2 lenders party thereto and SunTrust Bank, in its capacity as agent for such lenders 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 Dante C. Parrini, President and Chief Executive Officer of Glatfelter, pursuant to 14 Section 302 (a) of the Sarbanes-Oxley Act Of 2002, filed herewith 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 Dante C. Parrini, President 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 ** Management contract or compensatory plan June 30, 2010 Form 10-Q June 30, 2010 Form 10-Q June 30, 2010 Form 10-Q June 30, 2010 Form 10-Q June 30, 2010 Form 10-Q Nov 19, 2007 Form 8-K 2006 Form 10-K 2007 Form 10-K May 5, 2009 Form 8-K 2006 Form 10-K Sept. 30, 2007 Form 10-Q June 30, 2010 Form 10-Q 2003 Form 10-K Glatfelter 2010 Annual Report 59 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 11, 2011 P. H. GLATFELTER COMPANY (Registrant) By /s/ Dante C. Parrini Dante C. Parrini President 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 11, 2011 /s/ Dante C. Parrini Dante C. Parrini President and Chief Executive Officer Principal Executive Officer and Director March 11, 2011 John P. Jacunski /s/ John P. Jacunski Senior Vice President and Chief Financial Officer Principal Financial Officer March 11, 2011 /s/ David C. Elder David C. Elder Vice President and Corporate Controller Controller and Chief Accounting Officer March 11, 2011 /s/ George H. Glatfelter II George H. Glatfelter II Chairman of the Board March 11, 2011 Kathleen A. Dahlberg /s/ Kathleen A. Dahlberg March 11, 2011 /s/ Nicholas DeBenedictis Nicholas DeBenedictis March 11, 2011 Richard C. Ill /s/ Richard C. Ill March 11, 2011 J. Robert Hall /s/ J. Robert Hall March 11, 2011 Ronald J. Naples /s/ Ronald J. Naples March 11, 2011 Richard L. Smoot /s/ Richard L. Smoot March 11, 2011 Lee C. Stewart /s/ Lee C. Stewart 60 Director Director Director Director Director Director Director CERTIFICATION PURSUANT TO SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002 I, Dante C. Parrini, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2010 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 11, 2011 By: /s/ Dante C. Parrini Dante C. Parrini President and Chief Executive Officer Glatfelter 2010 Annual Report 61 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, 2010 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 11, 2011 By: /s/ John P. Jacunski John P. Jacunski Senior Vice President and Chief Financial Officer 62 (This page intentionally left blank) Schedule II P. H. GLATFELTER COMPANY AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE For each of the three years ended December 31, 2010 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 2010 $2,888 1,269 (993) (46) $3,118 2009 $2,633 506 (306) 55 $2,888 2008 $3,117 (36) (296) (152) $2,633 2010 $2,789 3,593 (3,517) (20) $2,845 2009 $3,369 3,575 (4,197) 42 $2,789 2008 $4,345 6,620 (6,045) (1,551) $3,369 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. Glatfelter 2010 Annual Report 63 SaleS OfficeS Spring Grove, Pennsylvania Falkenhagen, Germany Scaër, France lOcatiOnS 228 South Main Street Spring Grove, PA 17362 Chillicothe, Ohio 232 East Eighth Street Chillicothe, OH 45601 Gainesville, Georgia 200 Broad Street, Suite 206 Gainesville, GA 30501 Gatineau, Canada 1680 rue Atmec Gatineau, QC J8P 7G7 Canada Gernsbach, Germany Hördener Straße 5 76593 Gernsbach Germany 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 232 East Eighth Street Chillicothe, OH 45601 Fremont Facility 2275 Commerce Drive Fremont, OH 43420 Glatfelter Pulp Wood Company 228 South Main Street Spring Grove, PA 17362 Gewerbepark Prignitz/Falkenhagen BP 2 Am Lehmberg 10 16928 Pritzwalk Germany 29390 Scaër France Hong Kong Lydney, United Kingdom P.O. Box No. 13158 Church Road Lydney, Gloucestershire GL15 5EJ United Kingdom Central Post Office, Hong Kong Moscow, Russia Chechersky proezd, 24 Moscow, 117042 Caerphilly, United Kingdom Russia Pontygwindy Industrial Estate Caerphilly, Mid Glamorgan CF83 3HU United Kingdom 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 Office Century Financial Tower, A205 No. 1 Suhua Road Suzhou-SIP, Jiangsu 215021 China Hong Kong P.O. Box No. 13158 Central Post Office, Hong Kong Glatfelter Russia, LLC Chechersky proezd, 24 Moscow, 117042 Russia 2 0 1 0 A n n uA l R e p oR t the continuity of change P . H . G l a t f e l t e r C o mP a n y • 9 6 S o u tH G e o rG e S t r e e t • S u i t e 5 0 0 • y o r k , Pa 1 7 4 0 1 • w w w .G l a t f e l t e r .C o m p . H . G l A t f e l t e R C o m p A n n n n y y y y 2 0 1 0 a n n u a l R e p o R t © 2 01 1 Glatfe lte r 

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