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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2009
or
o
  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)
  23-0628360
(IRS Employer Identification No.)
96 South George Street, Suite 500
York, Pennsylvania 17401
(Address of principal executive offices)
  (717) 225-4711
(Registrant’s telephone number, including area code)
 
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 Act.  Yes o     No þ.
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ.
 
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 þ     No o.
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark 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.  o
 
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 o Accelerated filer þ Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ.
 
Based on the closing price as of June 30, 2009, the aggregate market value of the Common Stock of the Registrant held by non-affiliates was $404.7 million.
 
Common Stock outstanding on March 12, 2010 totaled 45,751,906 shares.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the following documents are incorporated by reference in this Annual Report on Form 10-K:
 
Proxy Statement to be dated on or about March 29, 2010 (Part III).
 


 

 
P. H. GLATFELTER COMPANY
ANNUAL REPORT ON FORM 10-K
For the Year Ended

DECEMBER 31, 2009
 
Table of Contents
 
                     
        Page
 
                   
               
        Business       1  
        Risk Factors       6  
        Unresolved Staff Comments       11  
        Properties       11  
        Legal Proceedings       12  
        [Reserved]       12  
          Executive Officers       12  
               
  PART II                  
               
        Market for Registrant’s Common Equity, Related
  Stockholder Matters and Issuer
  Purchases of Equity Securities
      13  
        Selected Financial Data       14  
        Management’s Discussion and Analysis of Financial
  Condition and Results of Operations
      15  
        Quantitative and Qualitative Disclosures about
  Market Risk
      24  
        Financial Statements and Supplementary Data       25  
        Changes in and Disagreements With Accountants on Accounting and
  Financial Disclosures
      57  
        Controls and Procedures       57  
        Other Information       57  
               
  PART III                  
               
        Directors, Executive Officers and Corporate Governance       57  
        Executive Compensation       57  
        Security Ownership of Certain Beneficial Owners
  and Management and Related Stockholder
  Matters
      57  
        Certain Relationships and Related Transactions, and
  Director Independence
      57  
        Principal Accountant Fees and Services       57  
               
  PART IV                  
               
        Exhibits, Financial Statement Schedules       58  
       
    61  
       
    62  
               
                64  
 EXHIBIT 2.(A)
 EXHIBIT 2(B)
 EXHIBIT 10.(J)(A)
 EXHIBIT 10(Q)
 EXHIBIT 10(R)
 EXHIBIT 21
 EXHIBIT 23
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2


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PART I
 
ITEM 1   BUSINESS
 
Overview  Glatfelter began operations in 1864 and today, we believe we are one of the world’s leading manufacturers of specialty papers and fiber-based engineered products. Headquartered in York, Pennsylvania, we own and operate manufacturing facilities located in Pennsylvania, Ohio, Germany, the United Kingdom, France, the Philippines and Canada.
 
We manufacture a broad and diverse line of products serving customers in numerous markets. Many of the markets in which we operate are characterized by higher-value-added products and, in some cases, by higher growth prospects and lower cyclicality than commodity paper markets. Examples of some of our markets and product applications include:
 
  •  papers for carbonless and forms products and specialized envelopes
 
  •  filtration papers for the tea and coffee industry
 
  •  book publishing papers
 
  •  metallized papers for packaging and bottled beverage labels
 
  •  overlay papers for decorative laminate, flooring and furniture applications
 
  •  papers for a wide variety of other specialty products including postage stamps, playing cards, greeting cards, digital imaging papers and FDA grades
 
Recent Developments  On February 12, 2010, we completed the acquisition of Concert Industries Corp. (“Concert”), a privately-held, leading supplier of airlaid non-woven fabric-like material, for $234.4 million based on the currency exchange rates on the closing date. Concert, with approximately 590 employees, has operations located in Gatineau, Quebec, Canada and Falkenhagen, Brandenburg, Germany. Annual revenues totaled $203.0 million in 2009.
 
Concert manufactures highly absorbent cellulose based airlaid non-woven material used in products such as feminine hygiene and adult incontinence products, baby wipes, pre-moistened cleaning wipes, napkins and tablecloths, and food pads.
 
Acquisitions  Over the past four years we completed the following additional acquisitions:
 
                                   
              Est
  Primary
   
          Purchase
  Annual
  Paper
   
  Dollars in millions   Date     Price   Revenue   Products    
 
 
                                   
Business Location
                                 
                                   
Lydney, England
    Mar ’06       $ 65.0     $ 75.0     Tea bags &
coffee papers
   
                                   
Chillicothe, Ohio
    Apr ’06         83.3       440.0     Carbonless &
forms
   
                                   
Caerphilly, Wales
    Nov ’07         12.6       53.4     Metallized    
 
 
 
These strategic acquisitions significantly increased our revenues and provided us with additional operating scale, increased production capacity, and an expansion of our geographic reach.
 
Our Business Units  Prior to the completion of the Concert acquisition, we managed our business as two distinct units: (i) the North America-based Specialty Papers business unit; and (ii) the Europe-based Composite Fibers business unit. Consolidated net sales and the relative net sales contribution of each of our business units for the past three years are summarized below:
 
                               
  Dollars in thousands   2009     2008   2007    
 
                               
Net sales
  $ 1,184,010       $ 1,263,850     $ 1,148,323      
                               
Business unit contribution
                             
                               
Specialty Papers
    66.9 %       66.0 %     69.9 %    
                               
Composite Fibers
    33.1         34.0       30.1      
                               
                               
Total
    100.0 %       100.0 %     100.0 %    
                               
 
Net tons sold by each business unit for the past three years were as follows:
 
                               
    2009     2008   2007    
 
                               
Specialty Papers
    738,841         743,755       726,657      
                               
Composite Fibers
    80,064         85,599       72,855      
                               
                               
Total
    818,905         829,354       799,512      
                               
 
Specialty Papers  Our North America-based Specialty Papers business unit focuses on producing papers for the following markets:
 
  •  Carbonless & forms papers for credit card receipts, multi-part forms, security papers and other end-user 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; and
 
  •  Engineered products for digital imaging, transfer, casting, release, postal, playing card and other niche specialty applications.
 
The markets in which Specialty Papers competes have undergone significant and rapid consolidation over the past several years resulting in fewer, more globally

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focused producers. Over 80% of the North American market share is now served by five paper companies, of which Glatfelter is one. Specialty Papers’ revenue composition by market consisted of the following for the years indicated:
 
                               
  In thousands   2009     2008   2007    
 
                               
Carbonless & forms
  $ 320,088       $ 338,067     $ 345,785      
                               
Book publishing
    176,646         201,040       185,343      
                               
Envelope & converting
    146,812         138,293       116,797      
                               
Engineered products
    143,490         149,372       136,785      
                               
Other
    4,879         7,127       17,583      
                               
                               
Total
  $ 791,915       $ 833,899     $ 802,293      
 
 
 
We believe we are one of the leading suppliers of book publishing papers in the United States and the second leading carbonless paper producer. Although the market for carbonless papers in North America is declining approximately 8% to 10% per year, and in 2009, in part due to the recession, this decline was greater, we have been successful in executing our strategy to replace this lost volume with products such as envelope and converting papers, forms and other products. Specialty Papers also produces paper that is converted into specialized 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 products include those designed for multiple end uses, such as papers for pressure-sensitive postage stamps, greeting and playing cards, conical cups, digital imaging applications 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 typically command higher per ton prices and generally exhibit greater pricing stability relative to commodity grade paper products.
 
Composite Fibers  Our Composite Fibers business unit, based in Gernsbach, Germany, serves customers globally and focuses on higher-value-added products in the following markets:
 
  •  Food & Beverage paper used for tea bags and coffee pods/pads;
 
  •  Metallized products used in the labeling of beer bottles, innerliners, gift wrap, self-adhesive labels and other consumer products applications;
 
  •  Composite Laminates papers used in production of decorative laminates, furniture and flooring applications; and
 
  •  Technical Specialties is a diverse line of paper products used in batteries, medical masks and other highly engineered applications.
 
We believe this business unit maintains a market leadership position in the tea bag and coffee pods/pads and filters market and the composite laminates market. Since the completion of the Caerphilly acquisition, we have the second largest market share for metallized products globally. Composite Fibers’ revenue composition by market consisted of the following for the years indicated:
 
                               
  In thousands   2009     2008   2007    
 
                               
Food & beverage
  $ 233,899       $ 252,545     $ 218,961      
                               
Metallized
    81,388         85,719       45,426      
                               
Composite laminates
    46,442         58,705       52,972      
                               
Technical specialties and other
    30,366         32,983       28,671      
                               
                               
Total
  $ 392,095       $ 429,952     $ 346,030      
 
 
 
Our focus on products made from abaca pulp has made us the world’s largest producer of tea bag and coffee pods/pads filter papers. Many of this unit’s papers are technically sophisticated. Most of the papers produced in the Composite Fibers business unit, except for metallized papers, are extremely lightweight and require very specialized fibers. Our engineering capabilities, specifically designed papermaking equipment and customer orientation position us well to compete in these global markets.
 
Additional financial information for each of our business units is included in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 8 – Financial Statements and Supplementary Data, Note 22.
 
We intend to manage the operations of Concert Industries as a separate business unit to be known as Advanced Airlaid Materials.
 
Our Competitive Strengths  Since commencing operations over 145 years ago, we believe that Glatfelter has developed into one of the world’s leading

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manufacturers of specialty papers and engineered products. We believe that the following competitive strengths have contributed to our success:
 
  •  Broad and diverse product portfolio.  We manufacture a very large portfolio of specialized paper products which diversifies our revenue base, enabling us to access a variety of end-markets and to pursue a wide range of customers. We have the ability to shift production in order to capitalize on market opportunities. The breadth and global reach of our product range help cushion the impact of external economic influences on us.
 
  •  Leading market positions in higher-value, niche segments.  We have focused our resources to achieve market-leading positions in certain higher-value, niche segments. Our products include various highly specialized paper products designed for technically demanding end uses. Consequently, many of our products achieve premium pricing relative to that of commodity paper grades. In each of the past three years, approximately 77%, 81% and 81% respectively, of our sales were derived from these higher-value, niche products. The specialized nature of these products generally provides greater pricing stability relative to commodity paper products.
 
  •  Integrated and flexible production.  As a nearly fully integrated producer, we are able to mitigate adverse fluctuations in the costs of certain raw materials and energy. In Specialty Papers, our Spring Grove and Chillicothe facilities are vertically integrated operations producing in excess of 85% of the annual pulp required for their paper production. Our Spring Grove and Chillicothe facilities also generate 100% of the steam and substantially all of the electricity required for their operations. The flexible operating platform of our Specialty Papers business offers the following unique benefits:
 
  •  the capability to manufacture a broad and diverse product portfolio;
 
  •  the ability to shift manufacturing capacity among product lines;
 
  •  the flexibility to maximize manufacturing efficiencies in response to changing market dynamics; and
 
  •  support for our New Product Development initiatives.
 
In Composite Fibers, our Philippine mill processes abaca fiber to produce abaca pulp, a key raw material used by this business unit. The Philippine mill produces approximately 80% of the annual abaca pulp required for Composite Fibers’ production requirements.
 
  •  Customer-centric business focus.  We offer a unique and diverse product line that can be customized to serve the individual needs of our customers. This allows us to develop close relationships with our key customers and to be adaptable in our product development, manufacturing, sales and marketing practices to meet changing customer needs. We believe that this approach has led to the development of excellent customer relationships, defensible market positions, and increased pricing stability relative to commodity paper producers. Additionally, our customer-centric focus has been a key driver to our success in new product development.
 
  •  Significant investment in product development.  In order to keep up with our customers’ ever-changing needs, we continually enhance our product offerings through significant investment in product development. In each of the past three years, we invested approximately $8 million in product development activities. We derive a significant portion of our revenue from products developed, enhanced or improved as a result of these activities. Revenue generated from products developed, enhanced or improved within the five previous years as a result of these activities represented in excess of 50% of net sales in each of the past three years ended December 31, 2009.
 
Our Business Strategy  Our vision is to become the global supplier of choice in specialty papers and engineered products. We are continuously developing and refining our strategies to strengthen our business and position it for the future. Execution of our strategies is dependent on our customer relationships, technology, operational flexibility and our new product development efforts. Components of our strategy include:
 
Specialty Papers  The North American uncoated free sheet market has been challenged by a supply and demand imbalance, particularly for commodity-like products. 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:
 
  •  leveraging our flexible operating platform to optimize product mix by shifting production among facilities to more closely match output with changing demand trends;

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  •  employing our new product development capabilities to meet changing customer demands and to replace declining carbonless volumes;
 
  •  employing a low-cost approach to our manufacturing activities and continuously implementing cost reduction initiatives; and
 
  •  improving business processes and deploying continuous improvement capabilities to maintain superior customer service.
 
Composite Fibers  The markets served by this business unit are characterized by long-term growth opportunities. To take advantage of this, our strategy is focused on:
 
  •  capturing world-wide growth in Composite Fibers’ core markets of food & beverage, composite laminates and metallized papers;
 
  •  enhancing product mix across all of the business unit’s markets by utilizing new product development capabilities; and
 
  •  implementing cost reduction initiatives including, among others, work-force efficiencies and improved supply chain management.
 
Balance Sheet  We are focused on prudent financial management and the maintenance of a conservative capital structure. By aggressively managing working capital to maximize cash flow from operations, making disciplined capital expenditure decisions and monetizing the value of our timberland assets, we are able to maintain a strong balance sheet, thereby preserving the flexibility to pursue strategic opportunities that will 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 fully integrated three acquisitions. In November 2007, we expanded our growth platform in metallized products and created a major increase in our European production scale through our acquisition of Metallised Products Limited and its facility located in Caerphilly, United Kingdom. Our acquisition of the carbonless business operations of NewPage Corporation in April 2006 permitted us to take advantage of that operation’s scale and efficient manufacturing environment to expand our higher-value-added Specialty Papers business unit. Lastly, our acquisition of the Lydney mill from J R Crompton Ltd. in March 2006 further strengthened our leading position in tea bags and coffee filter papers. We expect that our purchase of Concert will enable us to grow with the industry leaders in feminine hygiene and adult incontinence products and complements our long-term strategy of driving growth in our markets in part through acquisitions.
 
Raw Material and Energy  The following table provides an overview of the estimated amount of principal raw materials (“PRM”) expected to be used in 2010 by each of our manufacturing facilities:
 
                       
    Estimated Annual
         
    Quantity (short
    Percent of PRM
   
    tons)     Purchased    
 
 
Specialty Papers
                     
Spring Grove
                     
Pulpwood(1)
    1,051,000         92      
Wood – and other pulps
    272,800         16      
Chillicothe(1)
                     
Pulpwood
    1,270,000         100      
Wood – and other pulps
    384,900         10      
Composite Fibers
                     
Abaca fiber
    17,000         100      
Wood- and other pulps
    40,200         100      
Abaca pulp
    16,000         13      
Synthetic fiber
    10,200         100      
Metallized base stock
    33,000         100      
 
 
 
(1) Pulpwood is used to produce woodpulp.
 
(2) The information set forth above does not include the raw material needs of Concert Industries which was acquired on February 12, 2010.
 
Our Spring Grove, Pennsylvania and Chillicothe, Ohio mills are vertically integrated operations producing in excess of 85% of the combined annual pulp required for paper production. The principal raw material used to produce this pulp is pulpwood, including both hardwoods and softwoods. Hardwoods are available within a 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.
 
In addition to integrated pulp making, both the Spring Grove and Chillicothe facilities generate 100% of the steam and 100% and 80%, respectively, of their electricity needs. Principal fuel sources vary by facility and include over 600,000 tons of coal, 870,000 MMBTUs of natural gas, as well as recycled pulping chemicals, bark, wood waste, and fuel oil. Spring Grove’s coal needs are met under a three year contract that expires at the end of 2012 and Chillicothe’s coal needs are supplied under two contracts that expire in the fourth quarter of 2010.
 
Energy and related sales activities  The Spring Grove facility produces more electricity than it requires. Excess electricity is sold to the local power company under a long-term co-generation contract expiring March 31, 2010. Anticipating the 2010 expiration of our co-generation contract, we became a member of PJM

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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 price at which energy is sold together with volatility in input costs, primarily related to coal. The Gernsbach, Scaër and Lydney facilities generate all of the steam required for their operations. The Gernsbach facility generated approximately 19.5% of its 2009 electricity needs and purchased the balance. The Scaër and Lydney facilities purchased 100% of their 2009 electric power requirements. Natural gas was used to produce substantially all internally generated energy at the Gernsbach, Scaër and Lydney facilities during 2009.
 
Our mill in the Philippines processes abaca fiber to produce a specialized pulp. This abaca pulp production provides a unique advantage by supplying a key raw material used by our Composite Fibers business unit. The supply of abaca fiber was somewhat constrained in 2008. As a result, the Composite Fibers business unit slowed its paper machines and used substitute grades of abaca and substitute fibers to meet customer demands. In addition, events may arise from the relatively unstable political and economic environment in which the 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 operations. We target to have approximately one month of fiber supply in stock and one month of fiber supply at sea available to us. In addition, we have established contingency plans for alternative sources of abaca pulp. However, the cost of obtaining abaca pulp from such alternative sources, if available, would likely be much higher.
 
Alternative Fuel Mixture Credits  The U.S. Internal Revenue Code provides a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses. The credit, equal to $0.50 per gallon of alternative fuel contained in the mixture, is refundable to the taxpayer. We began mixing black liquor and diesel fuel in late February 2009. On May 11, 2009, we were notified by the Internal Revenue Service that our application to be registered as an alternative fuel mixer was approved. Since we began mixing and burning eligible alternative fuels, we earned $107.8 million of alternative fuel mixture credits.
 
According to the Internal Revenue Code, the tax credit expired on December 31, 2009. Accordingly, we do not expect to be eligible for additional credits.
 
Based on information currently available, we believe that we will continue to have ready access, for the foreseeable future, to all principal raw materials used in the production of our products. The cost of our raw materials is subject to significant change, including, but not limited to, the costs of wood, pulp products, certain commodity chemicals and energy.
 
Concentration of Customers  For each of the past three years, no single customer represented more than 10% of our consolidated net sales.
 
Competition  Our industry is highly competitive. We compete on the basis of product quality, customer service, product development, price and distribution. We offer our products throughout the United States and globally in approximately 85 countries, exclusive of the Concert acquisition. Competition in the markets in which we participate comes from companies of various sizes, some of which have greater financial and other capital resources than we do.
 
There are a number of companies in the United States that manufacture printing and converting papers. We believe we are one of the leading producers of book publishing papers and compete in these markets with, among others, Domtar and Fraser. In the envelope sector we compete with, among others, International Paper, Domtar and Blue Ridge. In the carbonless paper and forms market, we compete with Appleton Papers and, to a lesser extent, Nekoosa Papers, Inc. In our Specialty Papers’ engineered products markets and for the Composite Fibers business unit’s 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 compete with specialty divisions of large companies such as, among others, Ahlstrom, International Paper, Sappi and Stora Enso. 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.

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Capital Expenditures  Our business is capital intensive and requires extensive expenditures for new and enhanced equipment. These capital investments are necessary for environmental compliance, normal upgrades or replacements, business strategy and research and development. For 2010, we expect capital expenditures to total approximately $45 million to $50 million, inclusive of Concert.
 
Environmental Matters  We are subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of our mills. To comply with environmental laws and regulations, we have incurred substantial capital and operating expenditures in past years. For a discussion of environmental matters, see Item 8 – Financial Statements and Supplementary Data – Note 21.
 
Employees  The following table summarizes our workforce as of December 31, 2009:
 
                                             
                Contract Period    
Location(3)   Total   Hourly   Salaried   Start   End   Union
 
 
                                             
U.S.
                                           
                                             
Corporate/Spring Grove
    943       581 (1)     362       Jan. 2008       Jan. 2011     United Steelworkers International
                                             
Chillicothe/Fremont
    1,424       1,073 (1)     351       Aug. 2009       Aug. 2012     Union and the Office and Professional
Employees International Union,
                                             
International
                                           
                                             
Gernsbach
    579       222 (1)     357       (2)           Industriegewerkschaft
Bergbau, Chemie, Energie-IG BCE
                                             
Scaër
    118       69 (1)     49       (2)           Confederation Generale des
Travailleurs & Force Ouvriere
                                             
Lydney
    278       213 (1)     65       (2)           Unite the Union
                                             
Caerphilly
    112       82 (1)     30       (2)           General Maintenance & Boiler’s
                                             
Philippines
    92       61 (1)     31       (2)           Newtech Pulp Workers Union
                         
                         
                                             
Total worldwide employees
    3,546       2,301       1,245                      
 
 
 
(1) Generally, the majority of the hourly employees included in the table above are covered by terms and conditions of the collective bargaining agreements with the respective labor organization indicated.
 
(2) Employees of these facilities are generally covered by one-year labor agreements. Negotiations to renew the agreements are underway at various times during the year. The terms and conditions of the existing agreements will remain in effect until new agreements are reached.
 
(3) The data does not include Concert, which employs approximately 590 people.
 
We consider the overall relationship with our employees to be satisfactory.
 
Available Information  On our investor relations page of our Corporate website at www.glatfelter.com we make available free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and other related information as soon as reasonably practical after they are filed with the Securities and Exchange Commission. In addition, our website includes a Corporate Governance page consisting of, among others, our Governance Principles and Code of Business Conduct, and biographies of our Board of Directors and Executive Officers, Audit, Compensation, Finance and Nominating Committees of the Board of Directors and their respective Charters, Code of Business Ethics for the CEO and Senior Financial Officers of Glatfelter, our “whistle-blower” policy and other related material. We satisfy the disclosure requirement for any future amendments to, or waivers from, our Code of Business Conduct or Code of Business Ethics for the CEO and Senior Financial Officers by posting such information on our website. We will provide a copy of the Code of Business Conduct or Code of Business Ethics for the CEO and Senior Financial Officers, without charge, to any person who requests one, by calling (717) 225-2724.
 
ITEM 1A   RISK FACTORS
 
Our business and financial performance may be adversely affected by the adverse global economic environment or downturns in the target markets that we serve.
 
Demand for our products in the markets we serve is primarily driven by demand for our customers’ products, which is often affected by general economic conditions. Downturns in our target markets could result in decreased demand for our products. In particular, our businesses may continue to be adversely affected by the global economic downturn and by softness in targeted markets. Our results could be adversely affected if economic conditions further weaken or fail to continue to improve. Also, there may be periods during which demand for our products is insufficient to enable us to operate our production facilities in an economical manner. The economic impact may cause customer insolvencies 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.

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In addition to fluctuations in demand for our products in the markets we serve, the markets for our paper products are also significantly affected by changes in industry capacity and output levels. There have been periods of supply/demand imbalance in the pulp and paper industry, which have caused pulp and paper prices to be volatile. The timing and magnitude of price increases or decreases in the pulp and paper market have generally varied by region and by product type. A sustained period of weak demand or excess supply would likely adversely affect pulp and paper prices. This could have a material adverse affect on our operating and financial results.
 
The cost of raw materials and energy used to manufacture our products could increase and the availability of certain raw materials could become constrained.
 
We require access to sufficient and reasonably priced quantities of pulpwood, purchased pulps, pulp substitutes, abaca fiber and certain other raw materials. Our Spring Grove and Chillicothe locations are vertically integrated manufacturing facilities that generate in excess of 85% of their annual pulp requirements. However, as a result of selling timberlands over the past two years, purchased timber will represent a larger source of the total pulpwood used in our operations.
 
Our Philippine mill purchases abaca fiber to produce abaca pulp, which we use to manufacture our tea bag and coffee pods/pads and filter paper products at our Gernsbach, Scaër and Lydney facilities. However, in the past the supply of abaca fiber has been constrained unexpectedly due to severe weather related damage to the source crop as well as selection by land owners of alternative uses of land in lieu of fiber producing activities. As a result of supply constraints, pricing pressure persists.
 
The cost of many of our production materials and costs, including petroleum based chemicals and freight charges, are influenced by the cost of oil. In addition, coal is a principal source of fuel for both the Spring Grove and Chillicothe facilities and natural gas is used as a source of fuel for our Chillicothe and Composite Fibers’ business unit facilities. Also, in prior years other input costs such as caustic, starch and others, have exhibited extreme upward pricing pressure. In addition, our vendors’ liquidity may be impacted by the economy creating supply shortages.
 
We may not be able to pass increased raw materials or energy costs on to our customers if the market will not bear the higher price or where existing agreements with our customers limit price increases. If price 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 paper industry in which we compete has been adversely affected by paper producing capacity exceeding the demand for products and by declining uncoated free sheet demand. As a result, the uncoated free sheet industry has taken steps to reduce underperforming capacity. However, slowing demand or increased competition could force us to lower our prices or to offer additional services at a higher cost to us, which could reduce our gross margins and net income. The greater financial resources of certain of our competitors may enable them to commit larger amounts of capital in response to changing market conditions. Certain competitors may also have the ability to develop product or service innovations that could put us at a competitive disadvantage.
 
Some of the factors that may adversely affect our ability to compete in the markets in which we participate include:
 
  •  the entry of new competitors into the markets we serve, including foreign producers;
 
  •  the willingness of commodity-based paper producers to enter our specialty markets when they are unable to compete or when demand softens in their traditional markets;
 
  •  the aggressiveness of our competitors’ pricing strategies, which could force us to decrease prices in order to maintain market share;
 
  •  our failure to anticipate and respond to changing customer preferences;
 
  •  the impact of emerging electronic-based substitutes for certain of our products such as book publishing and envelope;
 
  •  our inability to develop new, improved or enhanced products; and
 
  •  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

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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:
 
  •  anticipate and properly identify our customers’ needs and industry trends;
 
  •  price our products competitively;
 
  •  develop and commercialize new products and applications in a timely manner;
 
  •  differentiate our products from our competitors’ products; and
 
  •  invest in research and development activities efficiently.
 
Our inability to develop new products could adversely impact our business and ultimately harm our profitability.
 
We are subject to substantial costs and potential liability for environmental matters.
 
We are subject to various environmental laws and regulations that govern our operations, including discharges 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 environmental 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 burdensome and that capital and operating expenditures necessary 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 environmental compliance. In addition, we may incur obligations to remove or mitigate any adverse effects on the environment, such as air and water quality, resulting from mills we operate or have operated. Potential obligations include compensation for the restoration of natural resources, personal injury and property damages.
 
We have exposure to liability for remediation and other costs related to the presence of polychlorinated biphenyls in the lower Fox River on which our former Neenah, Wisconsin mill was located. In December 2009, the United States District Court for the Eastern District of Wisconsin issued a favorable order in the pending litigation relating to the Fox River site that while not fully resolving our liability at the site, essentially dismissed the plaintiffs’ claims against the defendants. The plaintiffs have filed a notice of appeal of this order. There can be no assurance that we will be able to successfully defend against such appeal. We have financial reserves for environmental matters, including the Fox River site, but we cannot be certain that those reserves will be 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 21.
 
We may not be able to successfully integrate the Concert acquisition or realize the potential benefits of the acquisition, which could have a material adverse effect on our results of operations.
 
We may not be able to combine successfully the operations of Concert with our operations. The integration of Concert with our operations will require significant attention from management and may impose substantial demands for other resources. Acquisitions inherently involve risks, including those associated with assimilating and integrating different business operations, corporate cultures, personnel, infrastructures and technologies or products and increasing the scope, geographic diversity and complexity of our operations. There may be additional costs or liabilities that are not currently anticipated, including unexpected loss of key employees or customers of Concert and hiring additional management and other critical personnel. The acquisition may also be disruptive to our ongoing business and may not be successfully received by our customers. The purchase of Concert also involved a significant capital commitment, and the return that we achieve on any capital invested may be less than the return that we would achieve on our other projects or investments. Any of these factors could adversely affect our operations, financial results and liquidity.
 
Furthermore, we may not realize the potential benefits of the acquisition. Historically, Concert has been dependent upon a limited number of customers and product markets for a significant portion of its net sales. One customer accounted for the majority of Concert’s net sales for the three years ended December 31, 2009. The loss of a significant customer could have a material adverse effect on Concert’s operating results. In addition,

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Concert’s sales in the feminine hygiene market accounted for over three-fourths of its net sales in 2009. A decline in Concert’s sales of feminine hygiene products or in sales of feminine hygiene products generally could have a material adverse effect on Concert’s operating results. Customers in the airlaid non-woven fabric material market, including the feminine hygiene market, may also switch to less expensive products or otherwise reduce demand for Concert’s products, thus reducing the size of the markets in which Concert currently sells its products. Any of the foregoing could result in our failing to realize the benefits of the acquisition, which could have a material adverse effect on our financial performance and business prospects.
 
Our operations may be impaired and we may be exposed to potential losses and liability as a result of natural disasters, acts of terrorism or sabotage or similar events.
 
Natural disasters, such as earthquakes, flooding or fire, and acts of terrorism or sabotage affecting our operating activities and major facilities could materially and adversely affect our operations, our operating results and financial condition. In particular, we own and operate four dams in York County, Pennsylvania that were built to ensure a steady supply of water for the operation of our paper mill in Spring Grove, Pennsylvania, which is a primary manufacturing location for our book publishing papers and engineered products. Each of these dams is classified as “high hazard” by the Commonwealth of Pennsylvania because they are located in close proximity to inhabited areas and sudden failure would endanger occupants or residential, commercial or industrial 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 residential 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 liabilities incurred due to the failure of one of our dams may not be fully covered by our insurance policies or may substantially exceed the limits of our policies, and could materially and adversely affect our operating results and financial condition.
 
In addition, many of our paper making operations requires a reliable and abundant supply of water. Such mills rely on a local water body or water source for its water needs and, therefore, is particularly impacted by drought conditions or other natural or manmade interruptions to its water supplies. At various times and for differing periods, each of our mills has had to modify operations due to water shortages or low flow conditions in its principal water supplies. Any interruption or curtailment of operations at any of our paper mills due to drought or low flow conditions at the principal water source or another cause could materially and adversely affect our operating results and financial condition.
 
In addition, our pulp mill in Lanao del Norte on the Island of Mindanao in the Republic of the Philippines is located along the Pacific Rim in the world’s hazard belt. By virtue of its geographic location, this mill is subject to, among other types of natural disasters, floods, droughts, cyclones, typhoons, earthquakes, windstorms and volcanic activity. Moreover, the area of Lanao del Norte has been a target of terrorist activities, including bombings, by suspected members of the al-Qaeda-linked Islamist groups in the Philippines, such as the Abu Sayyaf and the Rajah Solaiman Group and other Islamic militant groups, most notably the Moro Islamic Liberation Front. The most common bomb targets in Lanao del Norte to date have been power transmission towers. Our pulp mill in Mindanao is located in a rural portion of the island and is susceptible to attacks or power interruptions. The Mindanao mill supplies approximately 80% of the abaca pulp that is used by our Composite Fibers business unit to manufacture our coffee and tea bag filter papers. Any interruption, loss or extended curtailment of operations at our Mindanao mill could materially and adversely affect our operating results and financial condition.
 
We have operations in a potentially politically and economically unstable location.
 
Our pulp mill in the Philippines is located in a region that is unstable and subject to political unrest. As discussed above, our Philippine pulp mill produces abaca pulp, a significant raw material used by our Composite Fibers business unit and is currently our main provider of abaca pulp. There are limited suitable alternative sources of readily available abaca pulp in the world. In the event of a disruption in supply from our Philippine mill, there is no guarantee that we could obtain adequate amounts of abaca pulp from alternative sources at a reasonable price or at all. As a consequence, any civil disturbance, unrest, political instability or other event that causes a disruption in supply could limit the availability of abaca pulp and would increase our cost of obtaining abaca pulp. Such occurrences could adversely impact our sales volumes, revenues and operating results.
 
Our international operations pose certain risks that may adversely impact sales and earnings.
 
We have significant operations and assets located in Germany, France, the United Kingdom, the Philippines and as a result of the recent completion of the Concert Industries acquisition, in Canada. Our international sales and operations are subject to a number of special risks,

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in addition to the risks in our domestic sales and operations, including differing protections of intellectual property, trade barriers, labor unrest, exchange controls, regional economic uncertainty, differing (and possibly more stringent) labor regulation, risk of governmental expropriation, domestic and foreign customs and tariffs, differing regulatory environments, difficulty in managing widespread operations and political instability. These factors may adversely affect our future profits. Also, in some foreign jurisdictions, we may be subject to laws limiting the right and ability of entities organized or operating therein to pay dividends or remit earnings to affiliated companies unless specified conditions are met. Any such limitations would restrict our flexibility in using funds generated in those jurisdictions.
 
Foreign currency exchange rate fluctuations could adversely affect our results of operations.
 
We own and operate paper and pulp mills in Germany, France, the United Kingdom and the Philippines and as a result of the recent completion of the Concert acquisition, in Canada. The majority of our business is transacted in U.S. dollars, however, a substantial portion of business is transacted in Euros, British Pound Sterling and Canadian dollars. With respect to the Euro and Canadian dollar, we generate substantially greater cash inflow in these currencies than we do outflow. However, with respect to the British Pound Sterling, we have greater outflows than inflows of this currency. As a result of these positions, we are exposed to changes in currency exchange rates.
 
Our ability to maintain our products’ price competitiveness is reliant, in part, on the relative strength of the currency in which the product is denominated compared to the currency of the market into which it is sold and the functional currency of our competitors. Changes in the rate of exchange of foreign currencies in relation to the U.S. dollar, and other currencies, may adversely impact our results of operations and our ability to offer products in certain markets at acceptable prices.
 
Substantially lower and more volatile market prices for sales of excess electricity compared to the price we currently receive may prevent us from achieving the historical margins on our sales of excess electricity in relation to our coal supply contract, which could have a material adverse affect on our consolidated financial position and results of operations.
 
We generate electricity at our Spring Grove facility using a variety of fuels, including coal. We purchase coal for this facility under a long-term, fixed price supply contract, which expires at the end of 2012. The current market price for coal is approximately 10% higher than the fixed price we pay under the contract. In addition, because our Spring Grove facility produces more electricity than it requires, we have historically sold the excess electricity to the local power company under a long-term co-generation contract, which expires March 31, 2010. The fixed price we receive for electricity under this contract is approximately 30% higher than current forward prices for electricity. We are unable to renew this co-generation contract upon its expiration on March 31, 2010 and will, instead, sell our excess electricity at market prices prevailing at the time of sale. Market prices for electricity have historically been volatile and may continue to be substantially lower than the price we currently receive under our expiring co-generation contract.
 
Our cost of coal, as well as the costs incurred for natural gas and other fuels used to generate electricity, have a major impact on the net revenue and overall profitability of our Specialty Paper business unit. By selling our excess electricity at market prices prevailing at the time of sale, we may not be able to continue to sell excess electricity at acceptable margins in relation to the prices under our coal supply contract, if at all. A reduction in these margins or an inability to sell our excess electricity could reduce the net revenues and overall profitability of our Specialty Papers business unit, which would have a material adverse affect on our consolidated financial position and results of operations.
 
The impairment of financial institutions may adversely affect us.
 
We, our customers and our vendors, have transactions and borrowing arrangements with U.S. and foreign commercial banks, and other financial institutions, some of whom may be exposed to ratings downgrade, bankruptcy, liquidity, default or similar risks, especially in connection with recent financial market turmoil. A ratings downgrade, bankruptcy, receivership, default or similar event involving such institutions may adversely affect the counterparty’s performance under letters of credit, limit our access to capital, impact the ability of our suppliers to provide us with raw materials needed for our production, impact our customers’ ability to meet obligations to us, or adversely affect our liquidity position, future business and results of operations.

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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 businesses 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 December 31, 2009, we will have substantial alternative fuel mixture credits relating to these facilities. Our results of operations in 2009 included, on a pre-tax basis, $107.8 million of alternative fuel mixture credits of which $29.7 million has been received in cash, $20.1 million was used to reduce estimated interim tax payments and $58.0 million will be claimed as refundable income tax credits and is expected to be realized in cash primarily in the first half of 2010. In the event that the IRS audits our tax return for the year ended December 31, 2009, the IRS may conclude that some or all of the credits claimed are subject to federal income taxes, which would subject us to additional tax liabilities and could have a material adverse effect on our results of operations and financial position.
 
In the event any of the above risk factors impact our business in a material way or in combination during the same period, we may be unable to generate sufficient cash flow to 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 combination of operating cash flow, cash and cash equivalents, our existing credit facility and other long-term debt. If we are unable to generate sufficient cash flow from these sources, we could be unable to meet our near and long-term cash needs or make dividend payments.
 
ITEM 1B   UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2   PROPERTIES
 
Our leased corporate offices are located in York, Pennsylvania. In addition, we lease office space for a sales and distribution office in Moscow, Russia. As of December 31, 2009, we owned and operated paper mills located in Pennsylvania; Ohio; the United Kingdom; Germany; and France. Our metallized paper production facility located in Caerphilly, Wales leases the building and land associated with its operations. We also own and operate a pulp mill in the Philippines. Substantially all of the equipment used in our papermaking and related operations is also owned. All of our properties, other than those that are leased, are free from any material liens or encumbrances. We consider all of our buildings to be in good structural condition and well maintained and our properties to be suitable and adequate for present operations.
 
The following table summarizes the estimated production capacity of each of our facilities as of December 31, 2009:
 
                     
Estimated Annual Production
   
Capacity (short tons)    
 
                     
Specialty Papers
                   
                     
Spring Grove
    332,000       Uncoated      
                     
      68,000       Coated      
                     
Chillicothe
    400,000       Uncoated      
                     
      7,500       Coated      
                     
Composite Fibers
                   
                     
Gernsbach
    40,000       Lightweight      
                     
      11,800       Metallized      
                     
Scaër
    6,000       Lightweight      
                     
Lydney
    16,800       Lightweight      
                     
Caerphilly
    17,000       Metallized      
                     
Philippines
    13,000       Abaca pulp      
                     
 
The Spring Grove facility includes five uncoated paper machines that have been rebuilt and modernized from time to time with the capacity to produce 332,000 tons. It has an off-line combi-blade coater and a Specialty Coater (“S-Coater”), which together yield a potential annual production capacity for coated paper of 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.

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The Chillicothe facility operates four paper machines which together yield a potential annual production capacity of uncoated and carbonless paper of approximately 400,000 tons. In addition, this location produces 7,500 tons per year of other coated paper. This facility also includes a pulpmill that has a production capacity of approximately 955 tons of bleached pulp per day.
 
The Composite Fibers business unit’s four facilities operate a combined ten papermaking machines with the capacity to produce approximately 60,700 tons of lightweight paper on an annual basis. In addition, the business unit has the capacity to produce an aggregate of 27,500 tons of metallized papers from its lacquering and metallizing operations in Gernsbach, Germany and Caerphilly, Wales.
 
Our facility in the Philippines consists of a pulpmill that supplies a majority of the abaca pulp requirements of the Composite Fibers paper mills.
 
Concert, which was acquired in February 2010, has annual rated capacity totaling approximately 84,000 metric tons of airlaid products.
 
ITEM 3   LEGAL PROCEEDINGS
 
We are involved in various lawsuits that we consider to be ordinary and incidental to our business. The ultimate outcome of these lawsuits cannot be predicted with certainty; however, we do not expect such lawsuits individually or in the aggregate, will have a material adverse effect on our consolidated financial position, liquidity or results of operations.
 
For a discussion of commitments, legal proceedings and related contingencies, see Item 8 – Financial Statements and Supplementary Data – Note 21.
 
ITEM 4   [RESERVED]
 
 
EXECUTIVE OFFICERS
 
The following table sets forth certain information with respect to our executive officers as of March 15, 2010.
 
                 
Name   Age   Office with the Company    
 
                 
George H. Glatfelter II
    58     Chairman and Chief Executive Officer    
                 
Dante C. Parrini
    45     Executive Vice President and Chief Operating Officer    
                 
John P. Jacunski
    44     Senior Vice President and Chief Financial Officer    
                 
David C. Elder
    41     Vice President and Corporate Controller    
                 
Thomas G. Jackson
    44     Vice President General Counsel and Corporate Secretary    
                 
Debabrata Mukherjee
    40     Vice President and General Manager, Specialty Papers Business Unit    
                 
Martin Rapp
    50     Vice President and General Manager, Composite Fibers Business Unit    
                 
Mark A. Sullivan
    55     Vice President Global Supply Chain    
                 
William T. Yanavitch II
    49     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 organizational meeting of the Board of Directors held immediately after the annual meeting of shareholders.
 
George H. Glatfelter II is our Chairman and Chief Executive Officer, positions he has held since February 2001. Mr. Glatfelter joined our company in January 1977. He also serves as a director of Met-Pro Corporation.
 
Dante C. Parrini became Executive Vice President and Chief Operating Officer in February 2005. Prior to this, Mr. Parrini was Senior Vice President and General Manager, a position he held beginning in January 2003. Mr. Parrini previously was Vice President responsible for Sales and Marketing.
 
John P. Jacunski became Senior Vice President & Chief Financial Officer in July 2006. From October 2003 until July 2006, he was Vice President and Corporate Controller. Mr. Jacunski was previously Vice President and Chief Financial Officer at WCI Steel, Inc. from June 1999 to October 2003. Prior to joining WCI, Mr. Jacunski was with KPMG, an international accounting and consulting firm, where he served in various capacities.
 
David C. Elder was appointed Vice President in March 2009 and has served as Corporate Controller and Chief Accounting Officer since July 2006. Prior to joining us in January 2006, Mr. Elder was Corporate Controller for YORK International Corporation, a position he held since December 2003. Prior thereto, he was the Director, Financial Planning and Analysis for YORK International Corporation from August 2000 to December 2003.

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Thomas G. Jackson became Vice President, General Counsel and Secretary in June 2008. Since joining us in November 2006, Mr. Jackson has held various positions 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 October 1999 to August 2005.
 
Debabrata Mukherjee was appointed Vice President & 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 – Composite 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 operations and supply chain management responsibilities during 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.
 
PART II
 
ITEM 5   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS 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   High   Low   Dividend    
 
                             
2009
                           
                             
Fourth
  $ 12.58     $ 10.01     $ 0.09      
                             
Third
    12.14       7.91       0.09      
                             
Second
    11.59       6.00       0.09      
                             
First
    9.80       4.57       0.09      
                             
                             
2008
                           
                             
Fourth
  $ 13.69     $ 7.50     $ 0.09      
                             
Third
    15.76       12.51       0.09      
                             
Second
    15.76       13.51       0.09      
                             
First
    15.44       12.85       0.09      
                             
 
As of March 12, 2010, we had 1,515 shareholders of record.

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STOCK PERFORMANCE GRAPH
 
The following graph compares the cumulative 5-year total return of our common stock with the cumulative total returns of both a peer group and a broad market index. For the year ended December 31, 2009, as a result of changes in our industry, including the bankruptcy of certain companies previously included in the old peer group, we now compare our stock performance to the S&P Small Cap 600 Paper Products index. This peer index is comprised of Buckeye Technologies Inc., Clearwater Paper Corp., Neenah Paper Inc., Schweitzer-Mauduit International and Wausau Paper Corp. The old peer group consisted of AbitibiBowater, Inc., Neenah Paper, Inc., Schweitzer-Mauduit International and Wausau Paper Corp.
 
In addition, the chart includes a comparison to the Russell 2000, which we believe is an appropriate benchmark index for stocks such as ours.
 
The graph assumes that the value of the investment in our common stock, in each index, and in each of the peer groups (including reinvestment of dividends) was $100 on December 31, 2004 and charts it through December 31, 2009.
 
(PERFORMANCE GRAPH)
 
 
ITEM 6   SELECTED FINANCIAL DATA
 
                                                 
  As of or for the year ended December 31
                           
  Dollars in thousands, except per share     2009(1)     2008   2007   2006   2005    
 
Net sales
    $ 1,184,010       $ 1,263,850     $ 1,148,323     $ 986,411     $ 579,121      
Energy sales, net
      13,332         9,364       9,445       10,726       10,078      
                                                 
Total revenue
      1,197,342         1,273,214       1,157,768       997,137       589,199      
Reversal of (shutdown and restructuring charges and unusual items)
              856       (35 )     (30,318 )     (1,564 )    
Gains on dispositions of plant, equipment and timberlands, net
      898         18,468       78,685       17,394       22,053      
Gains from insurance recoveries
                          205       20,151      
Net income (loss)
      123,442         57,888       63,472       (12,236 )     38,609      
Earnings (loss) per share
                                               
Basic
      2.70         1.28       1.41       (0.27 )     0.88      
Diluted
      2.70         1.27       1.40       (0.27 )     0.87      
Total assets
      1,190,294         1,057,309       1,287,067       1,225,643       1,044,977      
Total debt
      254,583         313,285       313,185       397,613       207,073      
Shareholders’ equity
      510,704         342,707       476,068       388,368       432,312      
Cash dividends declared per common share
      0.36         0.36       0.36       0.36       0.36      
Shares outstanding
      45,706         45,434       45,141       44,821       44,132      
Capital expenditures
      26,257         52,469       28,960       44,460       31,024      
Depreciation and amortization
      61,256         60,611       56,001       50,021       50,647      
Tons sold
      818,905         829,354       799,512       721,892       498,593      
Number of employees
      3,546         3,633       3,854       3,704       1,958      
                                                 
 
(1) During 2009, we recognized $107.8 million of alternative fuel mixture credits, all of which were recorded as a reduction to cost of products sold.

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ITEM 7   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future consolidated financial position or results of operations, made in this Report on Form 10-K are forward looking. We use words such as “anticipates”, “believes”, “expects”, “future”, “intends” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from such expectations. The following discussion includes forward-looking statements regarding expectations of, among others, net sales, costs of products sold, non-cash pension expense, environmental costs, capital expenditures and liquidity, all of which are inherently difficult to predict. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Accordingly, we identify the following important factors, among others, which could cause our results to differ from any results that might be projected, forecasted or estimated in any such forward-looking statements:
 
i.      variations in demand for our products including the impact of any unplanned market-related downtime, or variations in product pricing;
 
ii.     changes in the cost or availability of raw materials we use, in particular pulpwood, market pulp, pulp substitutes, caustic soda and abaca fiber;
 
iii.    changes in energy-related costs and commodity raw materials with an energy component;
 
iv.     our ability to develop new, high value-added Specialty Papers and Composite Fibers products;
 
v.      our inability to renew our electricity sales agreement resulting in market pricing that is currently below historical margins in relation to our current coal supply contract;
 
vi.     the impact of competition, changes in industry paper production capacity, including the construction of new mills, the closing of mills and incremental changes due to capital expenditures or productivity increases;
 
vii.    the impairment of financial institutions as a result of the current credit market conditions and any resulting impact on us, our customers or our vendors;
 
viii.    the gain or loss of significant customers and/or on-going viability of such customers;
 
ix.     cost and other effects of environmental compliance, cleanup, damages, remediation or restoration, or personal injury or property damages related thereto, such as the costs of natural resource restoration or damages related to the presence of polychlorinated biphenyls (“PCBs”) in the lower Fox River on which our former Neenah mill was located;
 
x.      risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates;
 
xi.     geopolitical events, including war and terrorism;
 
xii.    disruptions in production and/or increased costs due to labor disputes;
 
xiii.    enactment of adverse state, federal or foreign tax or other legislation or changes in government policy or regulation;
 
xiv.    adverse results in litigation; and
 
xv.     our ability to finance, consummate and integrate current or future acquisitions.
 
Introduction  We manufacture, both domestically and internationally, a wide array of specialty papers and engineered products. Substantially all of our revenue is earned from the sale of our products to customers in numerous markets, including book publishing, envelope & converting, carbonless papers and forms, food & beverage filter papers, decorative laminates for furniture and flooring, metallized papers and other highly technical niche markets.
 
Overview  Our results of operations for 2009 when compared with 2008 were impacted by the weak global economic conditions. Overall volumes shipped by Specialty Papers declined slightly and Composite Fibers declined 6.5% in the year-to-year comparison. As a result of the soft demand for most of our products and our efforts to reduce inventory, during the second quarter of 2009, we incurred significant market-related downtime at many of our facilities which adversely affected results of operations. This downtime continued within our Composite Fibers business unit into the third quarter, although to a lesser extent. For 2009, we generated $163.9 million of cash from operations, including alternative fuel mixture credits, as a result of improved operations, inventory reductions and effective working capital management initiatives.
 
During 2009, we registered two of our facilities with the U.S. Internal Revenue Service as alternative fuel mixers based on their use of black liquor as an

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alternative fuel source. Our 2009 results of operations included, on a pre-tax basis, $107.8 million of alternative fuel mixture credits, of which $29.7 million was received in cash and another $20.1 million was used to offset interim estimated tax payments. We expect to realize the remaining $58.0 million of credits in the form of non-taxable refundable income tax credits.
 
Specialty Papers’ operating income totaled $55.9 million and $49.2 million for 2009 and 2008, respectively. The improvement in operating income was led by productivity improvements and cost reduction initiatives and sales of renewable energy credits, partially offset by the adverse impact of lower volumes and selling prices. During 2009, the weak economic environment adversely affected demand in all markets served by Specialty Papers. As a result of weak demand in the first half of the year and our efforts to reduce inventory, this unit incurred market related downtime totaling 33,019 tons of paper. During the year, we reduced Specialty Papers’ inventories by 13.3%.
 
Our Composite Fibers business unit’s operating income declined to $21.9 million from $25.0 million in 2008. Volumes shipped during 2009 declined 6.5% compared to 2008 as a result of the weak economic environment and our customers’ actions to reduce their inventory levels. As a result of weak demand and our inventory reduction efforts, during 2009 we incurred unscheduled downtime totaling approximately 6,480 tons of paper, or 9.4% of the unit’s total capacity for the period.
 
In addition, our pre-tax results of operations in 2009 included $17.7 million of lower gains from the sale of timberlands than what was realized in 2008. We also recorded $7.0 million of pension expense in 2009 compared with pension income of $16.1 million in 2008.
 
RESULTS OF OPERATIONS
 
2009 versus 2008
 
The following table sets forth summarized results of operations:
 
                         
      Year Ended December 31    
  In thousands, except per share     2009     2008    
 
                         
Net sales
    $ 1,184,010       $ 1,263,850      
                         
Gross profit
      269,764         177,782      
                         
Operating income
      160,405         99,209      
                         
Net income
      123,442         57,888      
                         
Earnings per diluted share
      2.70         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:
 
                     
    After-tax
       
  In thousands, except per share   Income (loss)   Diluted EPS    
 
                     
2009
                   
                     
Alternative fuel mixture credits
  $ 95,764     $ 2.09      
                     
Acquisition related costs
    (1,768 )     (0.04 )    
                     
2008
                   
                     
Gains on sale of timberlands
  $ 10,984     $ 0.24      
                     
Reversal of shutdown and restructuring charges
    517       0.01      
                     
Acquisition integration costs
    (889 )     (0.02 )    
                     
 
These items increased earnings by $94.0 million, or $2.05 per diluted share in 2009. Comparatively, the items identified above increased earnings in 2008 by $10.6 million, or $0.23 per diluted share.
 
Business Units  Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the business unit are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the Business Unit Performance table.
 
Management evaluates results of operations of the business units before pension income or expense, alternative fuel mixture credits, charges related to the Fox River environmental reserves, restructuring related charges, unusual items, certain corporate level costs, and the effects of asset dispositions. Management believes that this is a more meaningful representation of the operating performance of its core papermaking businesses, the profitability of business units and the extent of cash flow generated from these core operations. Such amounts are presented under the caption “Other and Unallocated.” This presentation is aligned with the management and operating structure of our company. It is also on this basis that our performance is evaluated internally and by our Board of Directors.

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  Business Unit Performance
    Year Ended December 31
  In thousands, except tons     Specialty Papers   Composite Fibers   Other and Unallocated   Total    
 
      2009     2008   2009     2008   2009     2008   2009     2008    
                                                                               
Net sales
    $ 791,915       $ 833,899     $ 392,095       $ 429,952             $ (1 )   $ 1,184,010       $ 1,263,850      
                                                                               
Energy sales, net
      13,332         9,364                                   13,332         9,364      
                                                                               
                                                                               
Total revenue
      805,247         843,263       392,095         429,952               (1 )     1,197,342         1,273,214      
                                                                               
Cost of products sold
      693,949         739,481       334,378         366,791       (100,749 )       (10,840 )     927,578         1,095,432      
                                                                               
                                                                               
Gross profit (loss)
      111,298         103,782       57,717         63,161       100,749         10,839       269,764         177,782      
                                                                               
SG&A
      55,408         54,596       35,779         38,206       19,070         5,095       110,257         97,897      
                                                                               
Reversal of shutdown and restructuring charges
                                          (856 )             (856 )    
                                                                               
Gains on dispositions of plant, equipment and timberlands
                                  (898 )       (18,468 )     (898 )       (18,468 )    
                                                                               
                                                                               
Total operating income (loss)
      55,890         49,186       21,938         24,955       82,577         25,068       160,405         99,209      
                                                                               
Non operating income (expense)
                                  (17,259 )       (18,183 )     (17,259 )       (18,183 )    
                                                                               
                                                                               
Income (loss) before income taxes
    $ 55,890       $ 49,186     $ 21,938       $ 24,955     $ 65,318       $ 6,885     $ 143,146       $ 81,026      
                                                                               
                                                                               
Supplementary Data
                                                                             
                                                                               
Net tons sold
      738,841         743,755       80,064         85,599                     818,905         829,354      
                                                                               
Depreciation, depletion and amortization
    $ 37,520       $ 35,010     $ 23,736       $ 25,601     $       $     $ 61,256       $ 60,611      
                                                                               
Capital expenditures
      14,077         20,878       12,080         31,591       100               26,257         52,469      
                                                                               
 
Sales and Costs of Products Sold
 
                                 
      Year Ended December 31        
  In thousands     2009     2008   Change    
 
                                 
Net sales
    $ 1,184,010       $ 1,263,850     $ (79,840 )    
                                 
Energy and related sales – net
      13,332         9,364       3,968      
                                 
                                 
Total revenues
      1,197,342         1,273,214       (75,872 )    
                                 
Costs of products sold (1)
      927,578         1,095,432       (167,854 )    
                                 
                                 
Gross profit
    $ 269,764       $ 177,782     $ 91,982      
                                 
                                 
Gross profit as a percent of Net sales
      22.8 %       14.1 %            
                                 
 
(1) Includes $107.8 million of alternative fuel mixture credits, net of related expenses.
 
The following table sets forth the contribution to consolidated net sales by each business unit:
 
                         
      Percent of total    
      2009     2008    
 
                         
Business Unit
                       
                         
Specialty Papers
      66.9 %       66.0 %    
                         
Composite Fibers
      33.1         34.0      
                         
                         
Total
      100.0 %       100.0 %    
                         
 
Net sales  totaled $1,184.0 million for 2009, a decrease of $79.8 million, or 6.3%, compared to 2008.
 
In the Specialty Papers business unit, 2009 net sales decreased $42.0 million to $791.9 million. Operating income increased $6.7 million in the year over year comparison and totaled $55.9 million in 2009. The improvement in operating income was primarily due to $12.2 million of productivity efficiencies and cost reduction initiatives and $4.5 million of lower input costs. These favorable factors were offset by $7.6 million of lower volumes and mix impact and $2.1 million of lower selling prices. Operating income was also adversely impacted by the costs of unplanned downtime at the Spring Grove and Chillicothe facilities totaling approximately $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 expires March 31, 2010. The following table summarizes this activity for each of the past two years:
 
                                 
  In thousands     2009     2008   Change    
 
                                 
Energy sales
    $ 20,128       $ 19,731     $ 397      
                                 
Costs to produce
      (11,883 )       (10,367 )     (1,516 )    
                                 
                                 
Net
      8,245         9,364       (1,119 )    
                                 
Renewable energy credits
      5,087               5,087      
                                 
                                 
Total
    $ 13,332       $ 9,364     $ 3,968      
                                 
 
Renewable energy credits (“RECs”) represent sales of certified credits earned related to burning renewable sources of energy such as black liquor and wood waste. The market for such certificates is an emerging and somewhat illiquid market. The extent and value of future revenues from REC sales is dependent on many factors outside of management’s control. Therefore, we may not be able to generate additional sales of RECs in future periods. In addition, the certification by the Public Utility Commission of Ohio of our Chillicothe, OH facility as a renewable energy generator was appealed by a consumer advocacy group. While we believe the certification will be upheld, we are unable to predict its ultimate outcome.
 
In Composite Fibers, 2009 net sales were $392.1 million, a decline of $37.9 million from 2008. Operating income declined by $3.0 million in the comparison 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 products, 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.

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Energy and raw material costs in the Composite Fibers business unit were $3.9 million higher in 2009 than in 2008. Market-related downtime adversely impacted operating results by $7.4 million in 2009 compared to 2008.
 
Alternative Fuel Mixture Credits  The U.S. Internal Revenue Code provides a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses. The credit, equal to $0.50 per gallon of alternative fuel contained in the mixture, is refundable to the taxpayer. On May 11, 2009, we were notified by the Internal Revenue Service that our application to be registered as an alternative fuel mixer was approved. We received a payment from the Internal Revenue Service on June 30, 2009 in the amount of $29.7 million for the alternative fuel mixture consumed at our Spring Grove, PA and Chillicothe, OH facilities during the period February 20, 2009 through May 17, 2009. Since we began mixing and burning eligible alternative fuels, we have earned $107.8 million of alternative fuel mixture credits of which $29.7 million has been received in cash, $20.1 million was used to reduce estimated interim tax payments and $58.0 million will be claimed as refundable income tax credits and is expected to be realized in cash primarily in the first half of 2010. We record all alternative fuel mixture credits as a reduction to cost of goods sold.
 
According to the Internal Revenue Code, the tax credit expired on December 31, 2009.
 
Pension Expense/Income  The following table summarizes the amounts of pension expense or income recognized for 2009 compared to 2008:
 
                                 
      Year Ended December 31        
  In thousands     2009     2008   Change    
 
                                 
Recorded as:
                               
                                 
Costs of products sold
    $ (4,936 )     $ 11,067     $ (16,003 )    
                                 
SG&A expense
      (2,097 )       4,995       (7,092 )    
                                 
                                 
Total
    $ (7,033 )     $ 16,062     $ (23,095 )    
                                 
 
The amount of pension expense or income recognized each year is determined using various actuarial assumptions and certain other factors, including the fair value of our pension assets as of the beginning of the year. As discussed in Item 8 – Financial Statements – Note 11, the fair value of the plans’ assets declined approximately 29% during 2008. As a result, during 2009 we recognized net pension expense totaling approximately $7.0 million, on a pre-tax basis. However, we were not required to make cash contributions to our qualified defined benefit pension plans in 2009.
 
Selling, general and administrative (“SG&A”) SG&A expenses increased $12.4 million in the year-to-year comparison and totaled $110.3 million for 2009. In 2009, SG&A included $2.1 million of pension expense compared with $5.0 million of pension income in 2008. In addition, we incurred higher legal and professional fees related to the Fox River environmental matter and the Concert Industries acquisition.
 
Gain on Sales of Plant, Equipment and Timberlands  During the years ended December 31, 2009 and 2008, we completed sales of timberlands which are summarized by the following table:
 
                                 
  Dollars in thousands     Acres     Proceeds   Gain    
 
                                 
2009
                               
                                 
Timberlands
      319       $ 951     $ 906      
                                 
Other
      n/a               (8 )    
                                 
                                 
Total
              $ 951     $ 898      
                                 
                                 
2008
                               
                                 
Timberlands
      4,561       $ 19,279     $ 18,649      
                                 
Other
      n/a               (181 )    
                                 
                                 
Total
              $ 19,279     $ 18,468      
                                 
 
In connection with each of the asset sales set forth above, we received cash proceeds.
 
Income taxes  Our results of operations for 2009 reflect an effective tax rate of 13.8% compared to 28.6% a year ago. The lower tax rate in 2009 was primarily due to a tax benefit of $27.1 million due to nontaxable alternative fuel mixture credits, and from a lower proportion of timberland gains, which are taxed at a higher effective tax rate.
 
Foreign Currency  In 2009, we owned and operated paper and pulp mills in Germany, France, the United Kingdom and the Philippines. The functional currency in Germany and France is the Euro, in the UK it is the British Pound Sterling, and in the Philippines it is the Peso. During 2009, Euro functional currency operations generated approximately 19.8% of our sales and 18.9% of operating expenses and British Pound Sterling operations 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:
 
               
      Year Ended
   
  In thousands     December 31, 2009    
 
      Favorable
   
      (unfavorable)    
               
Net sales
    $ (22,975 )    
               
Costs of products sold
      24,116      
               
SG&A expenses
      3,233      
               
Income taxes and other
      883      
               
               
Net income
    $ 5,257      
               
 
The above table only presents the financial reporting impact of foreign currency translations. It does not

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present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.
 
RESULTS OF OPERATIONS
 
2008 versus 2007
 
The following table sets forth summarized results of operations:
 
                         
      Year Ended December 31    
  In thousands, except per share     2008     2007    
 
                         
Net sales
    $ 1,263,850       $ 1,148,323      
                         
Gross profit
      177,782         156,312      
                         
Operating income
      99,209         118,818      
                         
Net income
      57,888         63,472      
                         
Earnings per diluted share
      1.27         1.40      
                         
 
The consolidated results of operations for the years ended December 31, 2008 and 2007 include the following non-routine items:
 
                     
    After-tax
       
  In thousands, except per share   Income (loss)   Diluted EPS    
 
                     
2008
                   
                     
Gains on sale of timberlands
  $ 10,984     $ 0.24      
                     
Reversal of shutdown and restructuring charges
    517       0.01      
                     
Acquisition integration costs
    (889 )     (0.02 )    
                     
2007
                   
                     
Gains on sale of timberlands
  $ 44,052     $ 0.97      
                     
Environmental remediation
    (15,979 )     (0.35 )    
                     
Acquisition integration costs
    (1,569 )     (0.03 )    
                     
 
These items increased earnings by $10.6 million, or $0.23 per diluted share in 2008. Comparatively, the items identified above increased earnings in 2007 by $26.5 million, or $0.59 per diluted share.
                                                                               
  Business Unit Performance
    Year Ended December 31
  In thousands, except tons     Specialty Papers   Composite Fibers   Other and Unallocated   Total    
 
      2008     2007   2008     2007   2008     2007   2008     2007    
Net sales
    $ 833,899       $ 802,293     $ 429,952       $ 346,030     $ (1 )     $     $ 1,263,850       $ 1,148,323      
Energy sales, net
      9,364         9,445                                   9,364         9,445      
                                                                               
Total revenue
      843,263         811,738       429,952         346,030       (1 )             1,273,214         1,157,768      
Cost of products sold
      739,481         721,216       366,791         287,606       (10,840 )       (7,366 )     1,095,432         1,001,456      
                                                                               
Gross profit (loss)
      103,782         90,522       63,161         58,424       10,839         7,366       177,782         156,312      
SG&A
      54,596         56,561       38,206         32,541       5,095         27,042       97,897         116,144      
Shutdown and restructuring charges
                                  (856 )       35       (856 )       35      
Gains on dispositions of plant, equipment and timberlands
                                  (18,468 )       (78,685 )     (18,468 )       (78,685 )    
                                                                               
Total operating income (loss)
      49,186         33,961       24,955         25,883       25,068         58,974       99,209         118,818      
Non operating income (expense)
                                  (18,183 )       (24,884 )     (18,183 )       (24,884 )    
                                                                               
Income (loss) before income taxes
    $ 49,186       $ 33,961     $ 24,955       $ 25,883     $ 6,885       $ 34,090     $ 81,026       $ 93,934      
                                                                               
Supplementary Data
                                                                             
Net tons sold
      743,755         726,657       85,599         72,855                     829,354         799,512      
Depreciation, depletion and amortization
    $ 35,010       $ 34,882     $ 25,601       $ 21,119     $       $     $ 60,611       $ 56,001      
Capital expenditures
      20,878         17,395       31,591         11,565                     52,469         28,960      
                                                                               
 
Sales and Costs of Products Sold
 
                                 
      Year Ended December 31        
  In thousands     2008     2007   Change    
 
                                 
Net sales
    $ 1,263,850       $ 1,148,323     $ 115,527      
                                 
Energy sales – net
      9,364         9,445       (81 )    
                                 
                                 
Total revenues
      1,273,214         1,157,768       115,446      
                                 
Costs of products sold
      1,095,432         1,001,456       93,976      
                                 
                                 
Gross profit
    $ 177,782       $ 156,312     $ 21,470      
                                 
                                 
Gross profit as a percent of Net sales
      14.1 %       13.6 %            
                                 
 
The following table sets forth the contribution to consolidated net sales by each business unit:
 
                         
      Percent of total
      2008     2007    
 
                         
Business Unit
                       
                         
Specialty Papers
      66.0 %       69.9 %    
                         
Composite Fibers
      34.0         30.1      
                         
                         
Total
      100.0 %       100.0 %    
                         
 
Net sales  totaled $1,263.9 million for the year ended December 31, 2008, an increase of $115.5 million, or 10.1%, compared to the previous year.
 
In the Specialty Papers business unit, net sales for 2008 increased $31.6 million to $833.9 million and operating income totaled $49.2 million, an increase of $15.2 million over the previous year. The improved operating income is primarily due to progress achieved in executing Chillicothe’s profit improvement initiatives and improved operating efficiencies. Higher average selling prices contributed $36.4 million of the increase in net sales and volumes shipped increased 2.4%. These price and volume increases were partially offset by expected mix changes between carbonless papers and uncoated papers, as well as lower sales of scrap paper. The benefits of higher average selling prices were offset by $37.7 million of higher costs, largely driven by fiber and energy. Unplanned operating downtime at the Spring Grove and Chillicothe facilities also reduced operating results by $4.3 million in 2008 compared to 2007.
 
In Composite Fibers, net sales were $430.0 million for 2008, an increase of $83.9 million from the previous year. The completion of the November 30, 2007 Caerphilly acquisition accounted for $40.9 million of the increase in net sales, the translation of foreign currencies

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benefited net sales by $14.4 million and higher average selling prices contributed $16.3 million. Total volumes shipped by this business unit increased 17.5%, including a 4.3% increase in Food & Beverage paper product shipments. Shipments of Composite Laminates were down 1.5% primarily due to the weak housing and related markets.
 
Energy and raw material costs in the Composite Fibers business unit were $17.1 million higher than a year ago, increasing at a rate faster than average selling prices. Operating income for Composite Fibers declined $0.9 million in the comparison and totaled $25.0 million for 2008. During 2008, this unit’s results were adversely impacted by an aggregate of $6.2 million due to operating issues, market related downtime and accelerated depreciation related to completed or planned machine upgrades.
 
Non-Cash Pension Income  Non-cash pension income resulted from the over-funded status of our pension plans. The following summarizes non-cash pension income for 2008 compared to 2007:
 
                                 
      Year Ended December 31        
  In thousands     2008     2007   Change    
 
Recorded as:
                               
Costs of products sold
    $ 11,067       $ 8,846     $ 2,221      
SG&A expense
      4,995         4,050       945      
                                 
Total
    $ 16,062       $ 12,896     $ 3,166      
                                 
 
The amount of pension income recognized each year is determined using various actuarial assumptions and certain other factors, including the fair value of our pension assets as of the beginning of the year. As discussed in Item 8 – Financial Statements and Supplementary Data – Note 11, the fair value of the plans’ assets has declined approximately 29% since the beginning of 2008.
 
SG&A  expenses decreased $18.2 million in the year-to-year comparison and totaled $97.9 million in 2008 compared to $116.1 million a year ago. The decrease was primarily due to a $26.0 million charge for the Fox River environmental matter in 2007 partially offset by the inclusion in 2008 of a full year’s result for the Caerphilly acquisition.
 
Gain on Sales of Plant, Equipment and Timberlands  During 2008 and 2007, we completed sales of timberlands which are included in the following table:
 
                                 
  Dollars in thousands     Acres     Proceeds   Gain    
 
2008
                               
Timberlands
      4,561       $ 19,279     $ 18,649      
Other
      n/a               (181 )    
                                 
Total
              $ 19,279     $ 18,468      
                                 
2007
                               
Timberlands
      37,448       $ 84,409     $ 78,958      
Other
      n/a         377       (273 )    
                                 
Total
              $ 84,786     $ 78,685      
                                 
 
We received cash proceeds in connection with each of the asset sales set forth above, with the exception of the sale of approximately 26,000 acres of timberland completed in November 2007. In connection with that transaction, we formed GPW Virginia Timberlands LLC (“GPW Virginia”) as an indirect, wholly owned and bankruptcy-remote subsidiary of ours. GPW Virginia received as consideration for the timberland sold in that transaction a $43.2 million, interest-bearing note that matures in 2027 from the buyer, Glawson Investments Corp. (“Glawson”), a Georgia corporation, and GIC Investments LLC, a Delaware limited liability company owned by Glawson. The Glawson note receivable is fully secured by a letter of credit issued by The Royal Bank of Scotland plc. In January 2008, GPW Virginia monetized the Glawson note receivable by entering into a $36.7 million term loan agreement (the “2008 Term Loan”) with a financial institution. The 2008 Term Loan is secured by all of the assets of GPW Virginia, including the Glawson note receivable, the related letter of credit and additional notes with an aggregate principal amount of $9.2 million that we issued in favor of GPW Virginia (the “Company Note”). The 2008 Term Loan bears interest at a six month reserve adjusted LIBOR rate plus a margin rate of 1.20% per annum. Interest on the 2008 Term Loan is payable semiannually. The principal amount of the 2008 Term Loan is due on January 15, 2013, but GPW Virginia may prepay the 2008 Term Loan at any time, in whole or in part, without premium or penalty. During 2009, GPW Virginia received aggregate interest payments of $1.5 million under the Glawson note receivable and the Company Note and, in turn, made interest payments of $1.1 million under the 2008 Term Loan.
 
Income taxes  During 2008, we recorded income tax expense totaling $23.1 million on pre-tax income of $81.0 million. The comparable amounts in 2007 were income taxes of $30.5 million on a taxable income of $93.9 million. The effective rate in 2007 included a $5.7 million deferred income tax benefit related to the reduction of German corporate income tax rates passed into law July 2007. Overall, the decline in the effective tax rate from 2007 to 2008 was primarily due to higher gains from timberland sales in the prior year which are taxed at a higher rate.
 
Foreign Currency  In 2008, we owned and operated paper and pulp mills in Germany, France, the United Kingdom and the Philippines. The functional currency in Germany and France is the Euro, in the UK it is the British Pound Sterling, and in the Philippines it is the Peso. During 2008, Euro functional currency operations generated approximately 20.6% of our sales and 19.9% of operating expenses and British Pound Sterling operations represented 10.6% of net sales and 11.2% of operating expenses. The translation of the results from

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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:
 
             
    Year Ended
   
  In thousands   December 31, 2008    
 
    Favorable
   
    (unfavorable)    
             
Net sales
  $ 14,360      
             
Costs of products sold
    (10,435 )    
             
SG&A expenses
    (855 )    
             
Income taxes and other
    (1,033 )    
             
             
Net income
  $ 2,037      
             
 
The above table only presents the financial reporting impact of foreign currency translations. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Our business is capital intensive and requires significant 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 summarizes cash flow information for each of the years presented:
 
                         
      Year Ended December 31    
  In thousands     2009     2008    
 
                         
Cash and cash equivalents at beginning of period
    $ 32,234       $ 29,833      
                         
Cash provided by (used for)
                       
                         
Operating activities
      163,868         53,425      
                         
Investing activities
      12,544         (33,190 )    
                         
Financing activities
      (75,329 )       (12,879 )    
                         
Effect of exchange rate changes on cash
      2,103         (4,955 )    
                         
                         
Net cash provided
      103,186         2,401      
                         
                         
Cash and cash equivalents at end of period
    $ 135,420       $ 32,234      
                         
 
At the end of the 2009, we had $135.4 million in cash and cash equivalents and $194.3 million available under our revolving credit agreement, which matures in April 2011. Operating cash flow improved by $110.4 million primarily due to cash generated from working capital management initiatives including $28.2 million of cash in 2009 from reduced inventory compared with a use of $10.0 million in 2008 and $16.5 million from lower accounts receivable in 2009 compared with a $17.7 million use in 2008. In addition, $29.7 million of cash was received from alternative fuel mixture credits. In January 2009, we used $6.5 million to satisfy a commitment we had to fund certain Fox River environmental remediation activities.
 
Net cash provided from investing activities totaled $12.5 million in 2009 compared with a net use of $33.2 million in 2008. The improvement reflects the collection of a $37.9 million note receivable in connection with the unwinding of the 2003 timberland installment sale, and $26.2 million from reduced capital expenditures in connection with the deferral of discretionary capital expenditures.
 
Net cash used for financing activities totaled $75.3 million in 2009, primarily reflecting reductions of debt including $34.0 million repaid in connection with the above referenced unwinding of the 2003 timberland installment sale, term loan principal repayments of $16.0 million and reduced usage under our revolving credit facility.
 
During 2009 and 2008, cash dividends paid on common stock totaled $16.6 million and $16.5 million, respectively. Our Board of Directors determines what, if any, dividends will be paid to our shareholders. Dividend payment decisions are based upon then-existing factors and conditions and, therefore, historical trends of dividend payments are not necessarily indicative of future payments.
 
The following table sets forth our outstanding long-term indebtedness:
 
                         
      December 31    
  In thousands     2009     2008    
 
                         
Revolving credit facility, due April 2011
    $       $ 6,724      
                         
Term loan, due April 2011
      14,000         30,000      
                         
71/8% Notes, due May 2016
      200,000         200,000      
                         
2008 Term Loan, due January 2013
      36,695         36,695      
                         
Note payable, due March 2013
              34,000      
                         
                         
Total long-term debt
      250,695         307,419      
                         
Less current portion
      (13,759 )       (13,759 )    
                         
                         
Long-term debt, excluding current portion
    $ 236,936       $ 293,660      
                         
 
The significant terms of the debt instruments are more fully discussed in Item 8 – Financial Statements and Supplementary Data – Note 17.
 
We are subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of mills we operate, or have operated. To comply with environmental laws and regulations, we have incurred substantial capital and operating expenditures in past years. We anticipate that environmental regulation of our operations will continue to be burdensome and that capital and operating expenditures necessary to comply with environmental regulations will continue, and perhaps increase, in the future. In addition, we may incur obligations to remove or mitigate any adverse effects on the environment resulting from our operations, including the restoration of natural resources and liability for personal injury and for damages to property and natural resources. See Item 8 – Financial

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Statements and Supplementary Data – Note 21 for a summary of significant environmental matters.
 
On February 5, 2010, we and certain of our subsidiaries (the “Guarantors”) issued and sold $100 million in aggregate principal amount of 71/8% Senior Notes due 2016 (the “Notes”). The Notes were issued at 95.0% of the principal amount. We used the net proceeds from the sale, along with borrowings under our revolving credit facility and cash on hand, to fund the acquisition of Concert Industries Corp. See Item 8 – Financial Statements and Supplementary Data – Note 24 for a summary of these transactions.
 
We will pay interest on the Notes on May 1 and November 1 of each year, beginning on May 1, 2010. The Notes will mature on May 1, 2016. The Notes are senior unsecured obligations and will rank equally with our other and future senior unsecured obligations. The Notes are guaranteed, jointly and severally, on a senior unsecured basis, by certain of our current and future domestic subsidiaries.
 
We may redeem some or all of the notes at any time and from time to time on or after May 1, 2011 at the applicable redemption price plus accrued and unpaid interest to the date of redemption. We have the option to redeem the Notes in whole, but not in part, prior to May 1, 2011 at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest and a make-whole premium.
 
We expect to meet all of our near and long-term cash needs from a combination of operating cash flow, cash and cash equivalents, and our existing credit facilities. However, as discussed in Item 8 – Financial Statements and Supplementary Data – Note 21, an unfavorable outcome of various environmental matters could have a material adverse impact on our consolidated financial position, liquidity and/or results of operations.
 
Our credit agreement, as amended, contains a number of customary compliance covenants. In addition, both the Notes and our previously issued $200 million in aggregate principal amount of 71/8% Senior Notes due 2016 contain cross default provisions that could result in all such notes becoming due and payable in the event of a failure to repay debt outstanding under the credit agreement at maturity or a default under the credit agreement, that accelerates the debt outstanding thereunder. As of December 31, 2009, we met all of the requirements of our debt covenants.
 
Off-Balance-Sheet Arrangements  As of December 31, 2009 and 2008, we had not entered into any off-balance-sheet arrangements. Financial derivative instruments to which we are a party and guarantees of indebtedness, which solely consist of obligations of subsidiaries and a partnership, are reflected in the condensed consolidated balance sheets included herein in Item 8 – Financial Statements and Supplementary Data.
 
 
Contractual Obligations  The following table sets forth contractual obligations as of December 31, 2009:
 
                                             
        Payments Due During the Year
        Ended December 31,
            2011 to
  2013 to
  2015 and
   
  In millions   Total   2010   2012   2014   beyond    
 
                                             
Long-term debt(1)
  $ 344     $ 29     $ 30     $ 66     $ 219      
                                             
Operating leases(2)
    20       5       5       3       7      
                                             
Purchase obligations(3)
    163       94       69                  
                                             
Other long term obligations (4),(5)
    104       11       20       26       47      
     
     
                                             
Total
  $ 631     $ 139     $ 124     $ 95     $ 273      
                                             
 
(1) Represents principal and interest payments due on long-term debt. At December 31, 2009, we had $200.0 million of debt maturing in May 2016 and bearing a fixed rate of interest at 71/8%, payable semiannually, a $36.7 million note maturing in January 2013 bearing interest at six-month reserve adjusted LIBOR plus a margin rate of 1.20% per annum, and a $34.0 million note maturing in March 2013 and bearing a fixed rate of interest of 3.10%. The amounts set forth above do not include the $100 million Notes issued in February 2010 scheduled to mature in 2016.
 
(2) Represents rental agreements for various land buildings, and computer and office equipment.
 
(3) Represents open purchase order commitments and other obligations, primarily for raw material forward purchases and pulpwood contracts with minimum annual purchase obligations. In certain situations, prices are subject to variations based on market prices. In such situations, the information above is based on prices in effect at December 31, 2009 or expectations based on historical experience and/or current market conditions.
 
(4) Primarily represents expected benefits to be paid pursuant to medical retirement plans and nonqualified pension plans over the next ten years and expected costs of asset retirement obligations.
 
(5) Since we are unable to reasonably estimate the timing of ultimate payment, the amounts set forth above do not include any payments that may be made related to uncertain tax positions, including potential interest, accounted for in accordance with ASC 740-10-20. As discussed in more detail in Item 8 – Financial Statements, Note 9, “Income Taxes”, such amounts totaled $40.1 million at December 31, 2009.

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Critical Accounting Policies and Estimates  
The preceding discussion and analysis of our consolidated financial position and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, 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 significant and subjective estimates used in the preparation of our consolidated financial statements.
 
Inventory Reserves  We maintain reserves for excess and obsolete inventories to reflect our inventory at the lower of its stated cost or market value. Our estimate for excess and obsolete inventory is based upon our assumptions about future demand and market conditions. If actual conditions are less favorable than those we have projected, we may need to increase our reserves for excess and obsolete inventories. Any increases in our reserves will adversely impact our results of operations. The establishment of a reserve for excess and obsolete inventory establishes a new cost basis in the inventory. Such reserves are not reduced until the product is sold. If we are able to sell such inventory, any related reserves would be reversed in the period of sale.
 
Long-lived Assets  We evaluate the recoverability of our long-lived assets, including plant, equipment, timberlands and intangible assets periodically or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. 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 technologies. These accruals are adjusted periodically as assessment and remediation actions continue and/or further legal or technical information develops. Such undiscounted 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

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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 Consolidated Financial Statements. Refer to Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements for additional accounting policies.
 
 
ITEM 7A   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
                                                                 
      Year Ended December 31     At December 31, 2009    
       
  Dollars in thousands     2010   2011   2012   2013   2014     Carrying Value   Fair Value    
 
                                                                 
Long-term debt
                                                               
                                                                 
Average principal outstanding
                                                               
                                                                 
At fixed interest rates – Bond
    $ 200,000     $ 200,000     $ 200,000     $ 200,000     $ 200,000       $ 200,000     $ 196,750      
                                                                 
At variable interest rates
      43,815       36,815       36,695       1,407               50,695       51,209      
                                                                 
                                                                 
                                                $ 250,695     $ 247,959      
                                                                 
                                                                 
Weighted – average interest rate
                                                               
                                                                 
Fixed interest rate debt – Bond
      7.13 %     7.13 %     7.13 %     7.13 %     7.13 %                      
                                                                 
Variable interest rate debt
      1.57       1.65       1.66       1.66                              
                                                                 
 
The table above presents the average principal outstanding and related interest rates for the next five years for debt outstanding as of December 31, 2009. Fair values included herein have been determined based upon rates currently available to us for debt with similar terms and remaining maturities. The amounts set forth above do not give effect to the issuance in February 2010 of $100 million 71/8% senior notes due May 2016. These notes are described more fully in Item 8 – Financial Statements and Supplementary Data, Note 24.
 
Our market risk exposure primarily results from changes in interest rates and currency exchange rates. At December 31, 2009, we had long-term debt outstanding of $250.7 million, of which $50.7 million or 20.2% was at variable interest rates. Variable-rate debt outstanding represents i) borrowings under our revolving credit facility and term loans that accrue interest based on the domestic prime rate or a Eurocurrency rate, at our option, plus a margin; and ii) cash collateralized borrowing incurred in connection with the 2007 installment timberland sale that accrues interest based on 6 month LIBOR plus a margin. At December 31, 2009, the weighted-average interest rate paid was approximately 1.57%. A hypothetical 100 basis point increase or decrease in the interest rate on variable rate debt would increase or decrease annual interest expense by $0.4 million.
 
We are subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. dollar. During 2009, Euro functional currency operations generated approximately 19.8% of our sales and 18.9% of operating expenses and British Pound Sterling operations represented 10.6% of net sales and 10.8% of operating expenses.
 

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ITEM 8   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 
Management of P. H. Glatfelter Company (the “Company”) is responsible for establishing and maintaining 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 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 generally accepted in the United States.
 
As of December 31, 2009, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has determined that the Company’s internal control over financial reporting as of December 31, 2009 is effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States.
 
The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately 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 principles generally accepted in the United States, and that receipts and expenditures are being made only in accordance with authorizations of management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements.
 
The Company’s internal control over financial reporting as of December 31, 2009, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009.
 
The Company’s management, including the chief executive officer and chief financial officer, does not expect that our internal control over financial reporting will prevent or detect all errors and all frauds. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements 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 circumvented 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. Projections 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.
 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders of P. H. Glatfelter Company
 
We have audited the internal control over financial reporting of P. H. Glatfelter Company and subsidiaries (the “Company”) as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial 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 circumstances. 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 officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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. 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 dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of the inherent limitations of internal control 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 inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2009 of the Company and our report dated March 16, 2010 expressed an unqualified opinion on those financial statements and financial statement schedule.
 
/s/ DELOITTE & TOUCHE LLP
 
    Philadelphia, Pennsylvania
March 16, 2010
 

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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 subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures 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 statements present fairly, in all material respects, the financial position of P. H. Glatfelter Company and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.
 
/s/ DELOITTE & TOUCHE LLP
 
Philadelphia, Pennsylvania
March 16, 2010
 

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P. H. GLATFELTER COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
                                 
      Year Ended December 31    
 In thousands, except per share     2009     2008   2007    
 
Net sales
    $ 1,184,010       $ 1,263,850     $ 1,148,323      
Energy and related sales – net
      13,332         9,364       9,445      
                                 
Total revenues
      1,197,342         1,273,214       1,157,768      
Costs of products sold
      927,578         1,095,432       1,001,456      
                                 
Gross profit
      269,764         177,782       156,312      
Selling, general and administrative expenses
      110,257         97,897       116,144      
(Reversals of) Shutdown and restructuring charges
              (856 )     35      
Gains on disposition of plant, equipment and timberlands, net
      (898 )       (18,468 )     (78,685 )    
                                 
Operating income
      160,405         99,209       118,818      
Other nonoperating income (expense)
                               
Interest expense
      (19,220 )       (23,160 )     (29,022 )    
Interest income
      1,886         4,975       3,933      
Other – net
      75         2       205      
                                 
Total other nonoperating expense
      (17,259 )       (18,183 )     (24,884 )    
                                 
Income before income taxes
      143,146         81,026       93,934      
Income tax provision
      19,704         23,138       30,462      
                                 
Net income
    $ 123,442       $ 57,888     $ 63,472      
                                 
                                 
Weighted average shares outstanding
                               
Basic
      45,678         45,247       45,035      
Diluted
      45,774         45,572       45,422      
Earnings per share
                               
Basic
    $ 2.70       $ 1.28     $ 1.41      
Diluted
      2.70         1.27       1.40      
       
       
 
The accompanying notes are an integral part of the consolidated financial statements.

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P. H. GLATFELTER COMPANY and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
                         
      December 31    
  Dollars in thousands, except par values     2009     2008    
 
Assets
                       
Current assets
                       
Cash and cash equivalents
    $ 135,420       $ 32,234      
Accounts receivable (less allowance for doubtful accounts: 2009 – $2,888; 2008 – $2,633)
      119,319         132,635      
Inventories
      168,370         193,354      
Prepaid expenses and other current assets
      96,947         33,596      
                         
Total current assets
      520,056         391,819      
Plant, equipment and timberlands – net
      470,632         493,564      
Other long-term assets
      199,606         171,926      
                         
Total assets
    $ 1,190,294       $ 1,057,309      
                         
                         
Liabilities and Shareholders’ Equity
                       
Current liabilities
                       
Current portion of long-term debt
    $ 13,759       $ 13,759      
Short-term debt
      3,888         5,866      
Accounts payable
      63,604         59,750      
Dividends payable
      4,170         4,089      
Environmental liabilities
      440         5,734      
Other current liabilities
      100,249         100,904      
                         
Total current liabilities
      186,110         190,102      
Long-term debt
      236,936         293,660      
Deferred income taxes
      96,668         90,158      
Other long-term liabilities
      159,876         140,682      
                         
Total liabilities
      679,590         714,602      
Commitments and contingencies
                   
Shareholders’ equity
                       
Common stock, $.01 par value; authorized – 120,000,000 shares; issued – 54,361,980 shares (including shares in treasury: 2009 – 8,655,826; 2008 – 8,928,004)
      544         544      
Capital in excess of par value
      46,746         45,806      
Retained earnings
      711,765         605,001      
Accumulated other comprehensive income (loss)
      (119,885 )       (176,133 )    
                         
        639,170         475,218      
Less cost of common stock in treasury
      (128,466 )       (132,511 )    
                         
Total shareholders’ equity
      510,704         342,707      
                         
Total liabilities and shareholders’ equity
    $ 1,190,294       $ 1,057,309      
                         
                         
 
The accompanying notes are an integral part of the consolidated financial statements.

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P. H. GLATFELTER COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                                 
      Year Ended December 31    
  In thousands     2009     2008   2007    
 
Operating activities
                               
Net income
    $ 123,442       $ 57,888     $ 63,472      
Adjustments to reconcile to net cash provided by operations:
                               
Depreciation, depletion and amortization
      61,256         60,611       56,001      
Pension expense (income), net of unfunded benefits paid
      6,343         (16,062 )     (12,896 )    
(Reversals of) shutdown and restructuring charges
              (856 )     35      
Deferred income taxes
      (22,981 )       3,265       8,004      
Gains on dispositions of plant, equipment and timberlands, net
      (898 )       (18,468 )     (78,685 )    
Share-based compensation
      4,599         4,350       3,850      
Alternative fuel mixture credits, net of credits applied to taxes due
      (57,946 )                  
Change in operating assets and liabilities
                               
Accounts receivable
      16,542         (17,668 )     16,662      
Inventories
      28,207         (9,975 )     8,493      
Prepaid and other current assets
      1,451         871       (2,461 )    
Accounts payable
      2,390         4,264       (10,045 )    
Environmental matters
      (7,728 )       (13,012 )     26,000      
Accruals and other current liabilities
      6,676         (10,557 )     20,408      
Other
      2,515         8,774       1,494      
                                 
Net cash provided by operations
      163,868         53,425       100,332      
Investing activities
                               
Expenditures for purchases of plant, equipment and timberlands
      (26,257 )       (52,469 )     (28,960 )    
Proceeds from disposal of plant, equipment and timberlands
      951         19,279       41,616      
Proceeds from timberland installment sale note receivable
      37,850                    
Acquisitions, net of cash acquired
                    (7,923 )    
                                 
Net cash provided (used) by investing activities
      12,544         (33,190 )     4,733      
Financing activities
                               
Net repayments of revolving credit facility
      (6,725 )       (24,197 )     (30,656 )    
Net (repayments of) proceeds from other short-term debt
      (2,008 )       2,927       (6,916 )    
Repayments of $100 million term loan facility
      (16,000 )       (13,000 )     (53,000 )    
(Repayments of) proceeds from borrowing under Term Loans due 2013
      (34,000 )       36,695            
Payment of dividends
      (16,596 )       (16,469 )     (16,350 )    
Proceeds and excess tax benefits from stock options exercised and other
              1,165       7,551      
                                 
Net cash used by financing activities
      (75,329 )       (12,879 )     (99,371 )    
Effect of exchange rate changes on cash
      2,103         (4,955 )     2,154      
                                 
Net increase in cash and cash equivalents
      103,186         2,401       7,848      
Cash and cash equivalents at the beginning of period
      32,234         29,833       21,985      
                                 
Cash and cash equivalents at the end of period
    $ 135,420       $ 32,234     $ 29,833      
                                 
                                 
Supplemental cash flow information
                               
Cash paid for
                               
Interest
    $ 17,338       $ 21,243     $ 28,498      
Income taxes
      16,634         20,011       2,614      
                                 
 
The accompanying notes are an integral part of the consolidated financial statements.

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P. H. GLATFELTER COMPANY and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2009, 2008 and 2007
 
                                                     
                Accumulated
           
        Capital in
      Other
      Total
   
    Common
  Excess of
  Retained
  Comprehensive
  Treasury
  Shareholders’
   
In thousands   Stock   Par Value   Earnings   Income (Loss)   Stock   Equity    
 
 
                                                     
Balance at January 1, 2007
  $ 544     $ 42,288     $ 519,489     $ (32,337 )   $ (141,616 )   $ 388,368      
                                                     
Net income
                    63,472                       63,472      
                                                     
Foreign currency translation adjustments
                            24,966                      
                                                     
Change in benefit plans’ net funded status, net of tax benefit of $7,167
                            11,432                      
                                                     
                                                     
Other comprehensive income
                            36,398               36,398      
                                                     
                                                     
Comprehensive income
                                            99,870      
                                                     
Cumulative effect of adopting of FIN 48
                    (2,974 )                     (2,974 )    
                                                     
Tax effect on employee stock options exercised
            89                               89      
                                                     
Cash dividends declared ($0.36 per share)
                    (16,379 )                     (16,379 )    
                                                     
Share-based compensation expense – RSU
            2,348                               2,348      
                                                     
Delivery of treasury shares
                                                   
                                                     
Performance Shares
                                                   
                                                     
401(k) plans
            85                       3,049       3,134      
                                                     
Director compensation
            1                       162       163      
                                                     
Employee stock options exercised – net
            (114 )                     1,563       1,449      
         
         
                                                     
Balance at December 31, 2007
    544       44,697       563,608       4,061       (136,842 )     476,068      
                                                     
Comprehensive income
                                                   
                                                     
Net income
                    57,888                       57,888      
                                                     
Foreign currency translation adjustments
                            (32,029 )                    
                                                     
Change in benefit plans’ net funded status, net of tax benefit of $92,570
                            (148,165 )                    
                                                     
                                                     
Other comprehensive income
                            (180,194 )             (180,194 )    
                                                     
                                                     
Comprehensive income
                                            (122,306 )    
                                                     
Cumulative effect of adopting of FIN 48
                                                   
                                                     
Tax effect on employee stock options exercised
            38                               38      
                                                     
Cash dividends declared ($0.36 per share)
                    (16,495 )                     (16,495 )    
                                                     
Share-based compensation expense
            3,244                               3,244      
                                                     
Delivery of treasury shares
                                                   
                                                     
RSUs
            (1,739 )                     1,400       (339 )    
                                                     
401(k) plans
            (248 )                     1,768       1,520      
                                                     
Director compensation
            (43 )                     206       163      
                                                     
Employee stock options exercised – net
            (143 )                     957       814      
         
         
                                                     
Balance at December 31, 2008
    544       45,806       605,001       (176,133 )     (132,511 )     342,707      
                                                     
Comprehensive income
                                                   
                                                     
Net income
                    123,442                       123,442      
                                                     
Foreign currency translation adjustments
                            11,941                      
                                                     
Change in benefit plans’ net funded status, net of taxes of $27,164
                            44,307                      
                                                     
                                                     
Other comprehensive income
                            56,248               56,248      
                                                     
                                                     
Comprehensive income
                                            179,690      
                                                     
Cash dividends declared ($0.36 per share)
                    (16,678 )                     (16,678 )    
                                                     
Share-based compensation expense
            3,502                               3,502      
                                                     
Delivery of treasury shares
                                                   
                                                     
RSUs
            (1,483 )                     1,280       (203 )    
                                                     
401(k) plans
            (995 )                     2,517       1,522      
                                                     
Director compensation
            (84 )                     248       164      
         
         
                                                     
Balance at December 31, 2009
  $ 544     $ 46,746     $ 711,765     $ (119,885 )   $ (128,466 )   $ 510,704      
     
     
 
The accompanying notes are an integral part of the consolidated financial statements.

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P. H. GLATFELTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.   ORGANIZATION
 
P. H. Glatfelter Company and subsidiaries (“Glatfelter”) is a manufacturer of specialty papers and engineered products. Headquartered in York, Pennsylvania, our manufacturing facilities are located in Spring Grove, Pennsylvania; Chillicothe and Freemont, Ohio; Gloucestershire (Lydney), England; Caerphilly, Wales, Gernsbach, Germany; Scaër, France; and the Philippines. Our products are marketed throughout the United States and in over 85 other countries, either through wholesale paper merchants, brokers and agents or directly to customers.
 
2.   ACCOUNTING POLICIES
 
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 financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Management believes the estimates and assumptions used in the preparation of these consolidated financial statements are reasonable, based upon currently available facts and known circumstances, but recognizes that actual results may differ from those estimates and assumptions.
 
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 average-cost method. Inventories at our foreign operations are valued using a method that approximates average cost.
 
Plant, Equipment and Timberlands  For financial 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 calculate financial reporting depreciation for principal items of plant and equipment are as follows:
 
         
Buildings
    10 – 45 Years  
Machinery and equipment
    7 – 35 Years  
Other
    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 undiscounted cash flows is less than the carrying value of the asset, the asset’s fair value is estimated and an impairment loss is recognized for any deficiencies. Goodwill is reviewed for impairment on a discounted cash flow basis at least annually. Impairment losses, if any, are recognized for the amount by which the carrying value of the asset exceeds its fair value.
 
Asset Retirement Obligations  In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 410, Asset Retirement and Environmental Obligations, we accrue asset retirement obligations, if any, in the period in which obligations relating to future asset retirements are incurred and when a reasonable estimate of fair value can be determined. Under these standards, costs are to be accrued at estimated fair value, and a related long-lived asset is capitalized. Over time, the liability is accreted to its settlement value and the capitalized cost is depreciated over the useful life of the related asset for which the obligation exists. Upon settlement of the liability, we recognize a gain or loss for any difference between the settlement amount and the liability recorded.
 
Income Taxes  Income taxes are determined using the asset and liability method of accounting for income taxes in accordance with FASB ASC 740 Income Taxes (“ASC 740”). Under ASC 740, tax expense includes U.S. and international income taxes plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested. Tax credits and other incentives reduce tax expense in the year the credits are claimed. Certain items of income and

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expense are not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported in deferred income taxes. Deferred tax assets are recognized if it is more likely than not that the assets will be realized in future years. We establish a valuation allowance for deferred tax assets for which realization is not more likely than not.
 
Effective January 1, 2007, income tax contingencies are accounted for in accordance with FASB ASC 740-10-20 Income Taxes (formerly FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an 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 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 record any necessary adjustments in the period in which the facts that give rise to a revision become known.
 
Treasury Stock  Common stock purchased for treasury is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on the weighted-average cost basis.
 
Foreign Currency Translation  Our subsidiaries outside the United States use their local currency as the functional currency. Accordingly, translation gains and losses and the effect of exchange rate changes on transactions designated as hedges of net foreign 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. We record revenue net of an allowance for customer returns and rebates.
 
Revenue from energy sales is recognized when electricity is delivered to the customer. Certain costs associated with the production of electricity, such as fuel, labor, depreciation and maintenance are netted against energy sales for presentation on the Consolidated Statements of Income. Our current contract to sell electricity generated in excess of our own use expires in the year 2010 and requires that the customer purchase all of our excess electricity up to a certain level. The price for the electricity is determined pursuant to a formula and varies depending upon the amount sold in any given year.
 
Revenue from renewable energy credits is recognized 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 technologies. Costs related to environmental remediation are charged to expense. These accruals are adjusted periodically as assessment and remediation actions continue and/or further legal or technical information develops. Such undiscounted liabilities are exclusive of any insurance 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 environmental 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 Comprehensive Income at December 31, 2009 consisted of a loss of $136.3 million from additional defined benefit liabilities, net of tax, and $16.4 million of gains from foreign currency translation adjustments.
 
Earnings Per Share  Basic earnings per share are computed by dividing net income by the weighted-average 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 equivalents 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 financial 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.

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We use the following valuation techniques to measure fair value for our assets and liabilities:
 
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 estimates of assumptions that market participants would use in pricing the asset or liability.
 
The amounts reported on the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, other assets, and short-term debt approximate fair value.
 
3.   RECENT PRONOUNCEMENTS
 
In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of GAAP, a replacement of SFAS No. 162” (“SFAS 168”) as codified under ASC 105 “Generally Accepted Accounting Principles.” SFAS No. 168 became the source of authoritative GAAP recognized by the FASB. SFAS No. 168 was effective for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date of SFAS No. 168, the ASC superseded all then-existing non-SEC accounting and reporting standards. The issuance of SFAS No. 168 requires references to authoritative US GAAP to coincide with the appropriate section of the ASC. Accordingly, this standard did not have an impact on our financial condition or results of operations.
 
4.   ACQUISITIONS
 
Metallised Products Limited  On November 30, 2007, through Glatfelter-UK Limited (“GLT-UK”), a wholly-owned subsidiary, we completed our acquisition of Metallised Products Limited (“MPL”), a privately owned company that manufactures a variety of metallized paper products for consumer and industrial applications. MPL is based in Caerphilly, Wales.
 
Under terms of the agreement, we agreed to purchase the stock of MPL for $7.2 million cash and assumed $5.8 million of debt in addition to $1.4 million of transaction costs. The acquisition was financed from our existing cash balance. This facility employed about 165 people at the time of the acquisition and had 2007 revenues of approximately $53.4 million.
 
The following table summarizes the allocation of the purchase price to assets acquired and liabilities assumed:
 
                 
  In thousands            
 
 
                 
Assets
               
                 
Cash
    $ 730        
                 
Accounts receivable
      7,718        
                 
Inventory
      4,731        
                 
Property and equipment
      9,663        
                 
Other assets
      903        
                 
Goodwill
      2,239        
       
       
                 
Total
      25,984        
                 
Liabilities
               
                 
Acquisition related liabilities including accounts payable and accrued expenses
      11,783        
                 
Long term debt
      5,830        
       
       
                 
Total
      17,613        
       
       
                 
Total purchase price
    $ 8,371        
 
 
 
 
5.   ALTERNATIVE FUEL MIXTURE CREDITS
 
The U.S. Internal Revenue Code provided a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses. The credit, equal to $0.50 per gallon of alternative fuel contained in the mixture, is refundable to the taxpayer. On May 11, 2009, we were notified by the Internal Revenue Service that our application to be registered as an alternative fuel mixer was approved. We received a payment from the Internal Revenue Service on June 30, 2009 in the amount of $29.7 million for the alternative fuel mixture consumed at our Spring Grove, PA and Chillicothe, OH facilities during the period February 20, 2009 through May 17, 2009. Since we began mixing and burning eligible alternative fuels, we have earned $107.8 million of alternative fuel mixture credits of which $29.7 million has been received in cash, $20.1 million was used to reduce estimated interim tax payments and $58.0 million will be claimed as refundable income tax credits and is expected to be realized in cash primarily in the first half of 2010. We record all alternative fuel mixture credits as a reduction to cost of goods sold and the net credit to be claimed is recorded under the caption “Prepaid and other Current Assets” in the accompanying Consolidated Balance Sheets.
 
The alternative fuel mixture credit expired on December 31, 2009.