e10vq
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
from ___to ___
For the quarterly period ended June 30, 2008
Commission file number 1-3560
P. H. Glatfelter Company
(Exact name of registrant as specified in its charter)
     
Pennsylvania   23-0628360
(State or other jurisdiction of   (IRS Employer Identification No.)
incorporation or organization)    
     
96 South George Street, Suite 500    
York, Pennsylvania 17401   (717) 225-4711
(Address of principal executive offices)   (Registrant’s telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes   ü     No      .
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     ü   Accelerated filer         Non-accelerated filer         Smaller reporting company
        (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         No   ü  .
As of July 31, 2008, P. H. Glatfelter Company had 45,271,073 shares of common stock outstanding.
 
 

 


 

P. H. GLATFELTER COMPANY
REPORT ON FORM 10-Q
for the QUARTERLY PERIOD ENDED
JUNE 30, 2008
Table of Contents
             
          Page  
PART I — FINANCIAL INFORMATION        
 
           
  Financial Statements        
 
           
 
  Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2008 and 2007 (unaudited)     2  
 
           
 
  Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007 (unaudited)     3  
 
           
 
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (unaudited)     4  
 
           
 
  Notes to Condensed Consolidated Financial Statements (unaudited)     5  
 
           
  Management's Discussion and Analysis of Financial Condition and Results of Operations     19  
 
           
  Quantitative and Qualitative Disclosures About Market Risks     27  
 
           
  Controls and Procedures     27  
 
           
PART II — OTHER INFORMATION        
 
           
  Submission of Matters to a Vote of Security Holders     28  
 
           
  Other Information     28  
 
           
  Exhibits     29  
 
           
    29  

 


 

PART I
Item 1 — Financial Statements
P. H. GLATFELTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
                                 
    Three Months Ended   Six Months Ended
    June 30   June 30
In thousands, except per share   2008   2007   2008   2007
 
 
                               
Net sales
  $ 320,224     $ 288,091     $ 625,723     $ 569,080  
Energy sales — net
    2,743       2,424       4,727       4,638  
     
Total revenues
    322,967       290,515       630,450       573,718  
Costs of products sold
    290,569       261,715       553,794       508,209  
     
Gross profit
    32,398       28,800       76,656       65,509  
 
                               
Selling, general and administrative expenses
    25,377       23,776       49,512       52,503  
Shutdown and restructuring charges
    (856 )     (63 )     (856 )     162  
(Gains) losses on dispositions of plant, equipment and timberlands, net
    16       (5,693 )     (14,502 )     (8,887 )
     
Operating income
    7,861       10,780       42,502       21,731  
Non-operating income (expense)
                               
Interest expense
    (5,827 )     (7,424 )     (11,972 )     (14,761 )
Interest income
    1,357       848       2,961       1,589  
Other — net
    103       (364 )     171       267  
     
Total other income (expense)
    (4,367 )     (6,940 )     (8,840 )     (12,905 )
     
Income before income taxes
    3,494       3,840       33,662       8,826  
Income tax provision
    338       1,842       10,831       3,575  
     
Net income
  $ 3,156     $ 1,998     $ 22,831     $ 5,251  
     
 
                               
Earnings per share
                               
Basic
  $ 0.07       0.04       0.51     $ 0.12  
Diluted
    0.07       0.04       0.50       0.12  
 
                               
Cash dividends declared per common share
  $ 0.09     $ 0.09     $ 0.18     $ 0.18  
 
                               
Weighted average shares outstanding
                               
Basic
    45,227       45,040       45,192       44,964  
Diluted
    45,666       45,373       45,594       45,308  
The accompanying notes are an integral part of these condensed consolidated financial statements.
GLATFELTER

- 2 -


 

P. H. GLATFELTER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
                 
    June 30   December 31
In thousands   2008   2007
 
 
               
Assets
               
 
Current assets
               
Cash and cash equivalents
  $ 18,611     $ 29,833  
Accounts receivable — net
    147,549       122,980  
Inventories
    196,455       193,042  
Prepaid expenses and other current assets
    39,706       27,557  
     
Total current assets
    402,321       373,412  
 
               
Plant, equipment and timberlands — net
    530,533       519,866  
 
               
Other assets
    400,745       393,789  
     
Total assets
  $ 1,333,599     $ 1,287,067  
     
 
               
Liabilities and Shareholders’ Equity
               
Current liabilities
               
Current portion of long-term debt
  $ 12,383     $ 11,008  
Short-term debt
    3,389       1,136  
Accounts payable
    70,826       73,195  
Dividends payable
    4,073       4,063  
Environmental liabilities
    6,835       7,038  
Other current liabilities
    93,790       101,116  
     
Total current liabilities
    191,296       197,556  
 
               
Long-term debt
    306,268       301,041  
 
               
Deferred income taxes
    195,138       189,156  
 
               
Other long-term liabilities
    131,369       123,246  
     
Total liabilities
    824,071       810,999  
 
               
Commitments and contingencies
           
 
               
Shareholders’ equity
               
Common stock
    544       544  
Capital in excess of par value
    46,200       44,697  
Retained earnings
    578,272       563,608  
Accumulated other comprehensive loss
    19,806       4,061  
     
 
    644,822       612,910  
 
               
Less cost of common stock in treasury
    (135,294 )     (136,842 )
     
Total shareholders’ equity
    509,528       476,068  
     
Total liabilities and shareholders’ equity
  $ 1,333,599     $ 1,287,067  
     
The accompanying notes are an integral part of these condensed consolidated financial statements.
GLATFELTER

- 3 -


 

P. H. GLATFELTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
                 
    Six Months Ended June 30
In thousands   2008   2007
 
Operating activities
               
Net income
  $ 22,831     $ 5,251  
Adjustments to reconcile to net cash provided (used) by operations:
               
Depreciation, depletion and amortization
    30,666       27,865  
Pension income
    (7,965 )     (6,421 )
(Reversal of) shutdown and restructuring charges
    (856 )     162  
Deferred income tax provision
    5,994       (66 )
Gains on dispositions of plant, equipment and timberlands, net
    (14,502 )     (8,887 )
Stock-based compensation
    2,367       2,108  
(Cash used) reserve for environmental matters
    (9,481 )     5,348  
Change in operating assets and liabilities
               
Accounts receivable
    (20,682 )     (6,292 )
Inventories
    (1,208 )     5,053  
Other assets and prepaid expenses
    1,956       (1,825 )
Accounts payable
    (2,898 )     (9,962 )
Accruals and other current liabilities
    (8,983 )     1,382  
Other
    (286 )     3,920  
     
Net cash (used) provided by operating activities
    (3,047 )     17,636  
 
               
Investing activities
               
Expenditures for purchases of plant, equipment and timberlands
    (25,407 )     (14,221 )
Proceeds from disposals of plant, equipment and timberlands, net
    14,997       9,448  
     
Net cash used by investing activities
    (10,410 )     (4,773 )
 
               
Financing activities
               
Net (repayments of) proceeds from revolving credit facility and other
    (25,000 )     1,303  
Net proceeds from (repayment of) other short term debt
    3,295       (519 )
Proceeds from borrowing from Sun Trust Financial
    36,695        
Principal repayments — 2011 Term Loan
    (6,000 )     (16,400 )
Payment of dividends
    (8,220 )     (8,159 )
Proceeds from stock options exercised and other
    642       1,171  
     
Net cash provided (used) by financing activities
    1,412       (22,604 )
 
               
Effect of exchange rate changes on cash
    823       752  
     
Net decrease in cash and cash equivalents
    (11,222 )     (8,989 )
Cash and cash equivalents at the beginning of period
    29,833       21,985  
     
Cash and cash equivalents at the end of period
  $ 18,611     $ 12,996  
     
 
               
Supplemental cash flow information
               
Cash paid (received) for
               
Interest
  $ 11,309     $ 14,549  
Income taxes
    16,110       (1,637 )
The accompanying notes are an integral part of these condensed consolidated financial statements.
GLATFELTER

- 4 -


 

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

1. ORGANIZATION
     P. H. Glatfelter Company and subsidiaries (“Glatfelter”) is a manufacturer of specialty papers and 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.
3. RECENT PRONOUNCEMENTS
     Effective January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). This standard defines the term “fair value”, establishes a framework for measurement and requires expanded disclosures about the fair value measurements. The adoption of SFAS No. 157, did not have an impact on our consolidated financial position or results of operations.
     In December 2007, SFAS No. 141(R), “Business Combinations” was issued. This statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. In addition, under SFAS No. 141(R), changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. With respect to us, SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. However, after adoption of SFAS No. 141(R), changes in estimates of deferred tax assets and liabilities, and final settlements of all income tax uncertainties that related to a business combination which are made after the measurement period will impact income tax expense. We expect SFAS No. 141(R) will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time.
     In June 2008, the FASB issued Staff Position (“FSP”) No. EITF No. 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” This FSP affects entities that accrue cash dividends on share-based payment awards during the awards’ service period when the dividends do not need to be returned if the employees forfeit the award. The FSP requires that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders and are considered participating securities. The provisions of FSP No. EITF No. 03-6-1 are effective for fiscal years beginning after December 15, 2008. We are currently evaluating the requirements of FSP No. EITF 03-6-1, to determine the impact, if any, on our consolidated financial statements.
4. ACQUISITIONS
     Metallised Products Limited On November 30, 2007, through Glatfelter-UK Limited, 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 purchased the stock of MPL for $6.8 million cash and assumed $5.8 million of debt in addition to $1.5 million of transaction costs. The amounts set forth above reflect a $0.4 million reduction in the original purchase based on final adjusted working capital as of the closing date. The acquisition, which was financed from our existing cash balance, employed about 165 people and had 2007 revenues of approximately $53.4 million.


GLATFELTER

- 5 -


 

     The following table summarizes the preliminary allocation of the purchase price to assets acquired and liabilities assumed:
         
In thousands        
 
Assets acquired:
       
Cash
  $ 730  
Accounts receivable
    7,718  
Inventory
    4,747  
Property and equipment
    10,178  
Other assets
    922  
Goodwill
    1,885  
 
     
 
    26,180  
Less acquisition related liabilities including accounts payable and accrued expenses
    11,978  
Long term debt
    5,830  
 
     
 
    17,808  
 
     
Total
  $ 8,372  
 
5. GAIN ON DISPOSITIONS OF PLANT, EQUIPMENT AND TIMBERLANDS
     During the first six months of 2008 and 2007, we completed sales of timberlands which are summarized by the following table:
                         
Dollars in thousands   Acres   Proceeds   Gain
 
2008
                       
Timberlands
    3,595     $ 14,997     $ 14,603  
Other
    n/a             (101 )
     
 
          $ 14,997     $ 14,502  
     
2007
                       
Timberlands
    3,588     $ 9,435     $ 9,066  
 
     In accordance with terms of our credit facility, we are required to use the proceeds from timberland sales to reduce amounts outstanding under our term loan.
6. EARNINGS PER SHARE
     The following table sets forth the details of basic and diluted earnings per share (EPS):
                 
    Three Months Ended
    June 30
In thousands, except per share   2008   2007
 
Net income
  $ 3,156     $ 1,998  
     
Weighted average common shares outstanding used in basic EPS
    45,227       45,040  
Common shares issuable upon exercise of dilutive stock options, restricted stock awards and performance awards
    439       333  
     
Weighted average common shares outstanding and common share equivalents used in diluted EPS
    45,666       45,373  
     
 
               
Earnings per share
               
Basic and diluted
  $ 0.07     $ 0.04  
 
                 
    Six Months Ended
    June 30
In thousands, except per share   2008   2007
 
Net income
  $ 22,831     $ 5,251  
     
Weighted average common shares outstanding used in basic EPS
    45,192       44,964  
Common shares issuable upon exercise of dilutive stock options, restricted stock awards and performance awards
    402       344  
     
Weighted average common shares outstanding and common share equivalents used in diluted EPS
    45,594       45,308  
     
 
               
Earnings per share
               
Basic
  $ 0.51     $ 0.12  
Diluted
  $ 0.50       0.12  
 
     Approximately 688,500 and 691,500 of potential common shares have been excluded from the computation of diluted earnings per share for the three month and six month periods ended June 30, 2008, respectively, due to their anti-dilutive nature. Approximately 525,150 and 522,150 of potential common shares were excluded from the computation of diluted earnings per share for the three month and six month periods ended June 30, 2007, respectively.
7. INCOME TAXES
     Income taxes are recognized for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. The effects of income taxes are measured based on enacted tax laws and rates.
     As of June 30, 2008 and December 31, 2007, we had $27.7 million and $26.1 million of gross unrecognized tax benefits respectively. As of June 30, 2008, if such benefits were to be recognized, approximately $22.0 million would be recorded as a component of income tax expense, thereby affecting our effective tax rate.


GLATFELTER

- 6 -


 

     We, or one of our subsidiaries, file income tax returns with the United States Internal Revenue Service, as well as various state and foreign authorities. The following table summarizes tax years that remain subject to examination by major jurisdiction:
                 
    Open Tax Year
    Examination in   Not under
Jurisdiction   progress   examination
 
 
               
United States
               
Federal
    2004 — 2006       2007  
State
    2004       2003 — 2007  
Germany (1)
    2003 — 2006       2007  
France
    N/A       2006 — 2007  
United Kingdom
    N/A       2006 — 2007  
Philippines
    2005 — 2006       2007  
 
 
(1)   — includes provincial or similar local jurisdictions, as applicable
     The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Management performs a comprehensive review of its global tax positions on a quarterly basis and accrues amounts for uncertain tax positions. Based on these reviews and the result of discussions and resolutions of matters with certain tax authorities and the closure of tax years subject to tax audit, reserves are adjusted as necessary. However, future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are determined or resolved or as such statutes are closed. Due to potential for resolution of federal, state, and foreign examinations, and the expiration of various statutes of limitations, it is reasonably possible our gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $0.8 million.
     We recognize interest and penalties related to uncertain tax positions as income tax expense. Interest expense recognized in the second quarter of 2008 totaled $0.04 million and $0.1 million in the second quarter of 2007. Such amounts were $0.3 million in both the first half of 2008 and 2007. Accrued interest was $2.0 million and $1.8 million as of June 30, 2008 and December 31, 2007, respectively. We did not record any penalties associated with uncertain tax positions during 2008 or 2007.
8. STOCK-BASED COMPENSATION
     During the first six months of 2008, we issued 274,240 Stock Only Stock Appreciation Rights (“SOSAR”) to members of executive management a grant date strike price of $13.44 per share. Under terms of the SOSAR, the recipients received the right to receive a payment in the form of shares of common stock equal to the difference if any, in the fair market value of one share of common stock at the time of exercising the SOSAR and the strike price. The SOSARs, which vest ratably over a three year period, had a grant date fair value, estimated using the Black-Scholes valuation model, of $3.72 per right, and an aggregate value of $1.0 million. In addition, 136,100 Restricted Stock Units (“RSU”) were issued in the first six months of 2008 with a weighted-average grant date fair value of $14.48 per unit and an aggregate value of $2.0 million. The RSUs vest over a period ranging from three years to five years.
     During the first six months of 2008 and 2007, we recognized stock-based compensation expense totaling $2.4 million and $2.1 million, respectively.


GLATFELTER

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9. RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS
     The following table provides information with respect to the net periodic costs of our pension and post retirement medical benefit plans.
                 
    Three Months Ended
    June 30
In thousands   2008   2007
 
Pension Benefits
               
Service cost
  $ 1,991     $ 2,331  
Interest cost
    6,158       5,627  
Expected return on plan assets
    (13,037 )     (11,699 )
Amortization of prior service cost
    597       589  
Amortization of unrecognized loss
    95       244  
     
Net periodic benefit income
  $ (4,196 )   $ (2,908 )
     
 
               
Other Benefits
               
Service cost
  $ 503     $ 538  
Interest cost
    825       743  
Expected return on plan assets
    (216 )     (223 )
Amortization of prior service cost
    (337 )     (275 )
Amortization of unrecognized loss
    359       262  
     
Net periodic benefit cost
  $ 1,134     $ 1,045  
 
 
    Six Months Ended
    June 30
In thousands   2008   2007
  | |
Pension Benefits
               
Service cost
  $ 4,528     $ 4,787  
Interest cost
    11,749       10,918  
Expected return on plan assets
    (25,632 )     (23,731 )
Amortization of prior service cost
    1,197       1,199  
Amortization of unrecognized loss
    193       406  
     
Net periodic benefit income
  $ (7,965 )   $ (6,421 )
     
 
               
Other Benefits
               
Service cost
  $ 1,061     $ 1,013  
Interest cost
    1,576       1,517  
Expected return on plan assets
    (417 )     (446 )
Amortization of prior service cost
    (596 )     (517 )
Amortization of unrecognized loss
    622       523  
     
Net periodic benefit cost
  $ 2,246     $ 2,090  
 
10. COMPREHENSIVE INCOME
     The following table sets forth comprehensive income and its components:
                 
    Three Months Ended
    June 30
In thousands   2008   2007
 
Net income
  $ 3,156     $ 1,998  
Foreign currency translation adjustment
    (1,203 )     4,569  
Additional pension liability amortization, net of tax
    450       533  
     
Comprehensive income
  $ 2,403     $ 7,100  
 
 
    Six Months Ended
    June 30
In thousands   2008   2007
 
Net income
  $ 22,831     $ 5,251  
Foreign currency translation adjustment
    14,841       6,359  
Additional pension liability amortization, net of tax
    904       1,047  
     
Comprehensive income
  $ 38,576     $ 12,657  
 
11. INVENTORIES
     Inventories, net of reserves, were as follows:
                 
    June 30,   December 31,
In thousands   2008   2007
 
Raw materials
     $ 45,839     $ 41,119  
In-process and finished
    99,779       102,219  
Supplies
    50,837       49,704  
     
Total
     $ 196,455     $ 193,042  
 
12. LONG-TERM DEBT
     Long-term debt is summarized as follows:
                 
    June 30,   December 31,
In thousands   2008   2007
 
Revolving credit facility, due April 2011
     $ 10,956     $ 35,049  
Term Loan, due April 2011
    37,000       43,000  
71/8% Notes, due May 2016
    200,000       200,000  
Term Loan, due January 2013
    36,695        
Note payable, due March 2013
    34,000       34,000  
     
Total long-term debt
    318,651       312,049  
Less current portion
    (12,383 )     (11,008 )
     
Long-term debt, excluding current portion
     $ 306,268     $ 301,041  
 
     Our revolving credit facility provides for up to $200 million of aggregate borrowings on an unsecured basis. The term loan due in April 2011 requires quarterly repayments of principal outstanding that began on March 31, 2007 with the final principal payment due on April 2, 2011. In addition, if certain prepayment events occur, such as a sale of assets, the incurrence of additional indebtedness in excess of $40.0 million in the aggregate, or issuance of additional equity; we must repay a


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specified portion of the term loan within five days of the prepayment event.
     Borrowings under the credit agreement bear interest, at our option, at either (a) the bank’s base rate described in the credit agreement as the greater of the prime rate or the federal funds rate plus 50 basis points, or (b) the EURO rate based generally on the London Interbank Offer Rate, plus an applicable margin that varies from 67.5 basis points to 137.5 basis points according to our corporate credit rating determined by S&P and Moody’s.
     The credit agreement, as amended, contains a number of customary covenants for financings of this type that, among other things, restrict our ability to: i) dispose of or create liens on assets; ii) transfer assets between borrowing or guaranteeing subsidiaries and non guaranteeing subsidiaries; iii) incur additional indebtedness; iv) repay other indebtedness; or v) make acquisitions and engage in mergers or consolidations. We are also required to comply with specified financial tests and ratios, including a consolidated minimum net worth test, a maximum debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio and a minimum interest coverage ratio. A breach of these requirements, of which we were not aware of any at June 30, 2008, would give rise to certain remedies under the credit agreement as amended, among which are the termination of the agreement and accelerated repayment of the outstanding borrowings plus accrued and unpaid interest under the credit facility.
     The 71/8% Senior Note agreement contains a “cross-default” clause that provides if there were to be an event of default under the credit agreement discussed earlier, we would also be in default under the 71/8% Senior Notes.
     In November 2007, we sold timberlands and as consideration received a $43.2 million, 20-year interest bearing note receivable from the timberland buyer. In January 2008, we pledged this note as collateral under a $36.7 million term loan (the “2008 Term Loan”) with SunTrust Financial. The 2008 Term Loan matures in five years, and bears interest at a six-month reserve adjusted LIBOR plus a margin rate of 1.20% per annum.
     On March 21, 2003, we sold timberlands and received as consideration a $37.9 million 10-year interest bearing note receivable from the timberland buyer. We pledged this note as collateral under a $34.0 million promissory note payable to SunTrust Financial (the “Note Payable”). The Note Payable was scheduled to mature in March 2008. In February 2008, we amended the Note Payable to extend its maturity until March 26, 2013. Beginning on March 26, 2008, the Note Payable bears a fixed rate of interest of 3.10%.
     The notes receivable, discussed in the preceding paragraphs, aggregating $81.1 million, are recorded in the accompanying consolidated balance sheets under the caption “Other assets.”
     P. H. Glatfelter Company guarantees debt obligations of all its subsidiaries. All such obligations are recorded in these consolidated financial statements.
     As of June 30, 2008 and December 31, 2007, we had $7.1 million and $14.1 million of letters of credit issued to us by certain financial institutions. Such letters of credit, which reduce amounts available under our revolving credit facility, provide i) financial assurances for the benefit of certain state workers compensation insurance agencies in conjunction with our self-insurance program, and ii) assurance related to the purchase of certain utilities for our manufacturing facilities. We bear the credit risk on this amount to the extent that we do not comply with the provisions of certain agreements. No amounts are outstanding under the letters of credit.
13. ASSET RETIREMENT OBLIGATION
     During the second quarter of 2008, we recorded $7.2 million of asset retirement obligations related to the legal requirement to close 19 lagoons at the Spring Grove, PA facility. The lagoons are currently being used to dispose of residual waste material. Closure of the lagoons, which is expected to occur over the next several years, not to exceed ten years, will be accomplished by disposing in the lagoons certain non-hazardous sludge, ash and other residual material currently produced by the mill. This will be followed by the placement of a cover comprised primarily of purchased clay and top soil to construct the required cap over the lagoons. The ultimate time period over which the lagoons are closed is dependent upon the plan to be agreed and approved by the Pennsylvania Department of Environmental Protection. The amounts referred to above were accrued with a corresponding increase in the carrying value of the property, equipment and timberlands caption on the consolidated balance sheet. The amount capitalized will be amortized as a charge to operations on a systematic basis in relation to the expected closure period.
14. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
     Fox River — Neenah, Wisconsin
     Background We have significant uncertainties associated with environmental claims arising out of the presence of polychlorinated biphenyls (“PCBs”) in sediments in the lower Fox River and in the Bay of Green Bay Wisconsin (“Site”). As part of the 1979 acquisition of the Bergstrom Paper Company we acquired a facility


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located at the Site (the “Neenah Facility”). In part, the Neenah Facility used wastepaper as a source of fiber. At no time did the Neenah Facility utilize PCBs in the pulp and paper making process, but discharges to the lower Fox River from the Neenah Facility which may have contained PCBs from wastepaper may have occurred from 1954 to the late 1970s. Any PCBs that our Neenah Facility discharged into the lower Fox River resulted from the presence of PCBs in NCR®-brand carbonless copy paper in the wastepaper that was recycled at the Neenah Facility. We closed the Neenah Facility in June 2006.
     The United States, the State of Wisconsin and various state and federal governmental agencies (collectively, the “Governments”), as well as private parties, have found PCBs in sediments on the bed of the Fox River, apparently from a number of sources at municipal and industrial facilities along the upstream and downstream portions of the Site. The Governments have identified manufacturing and recycling of NCR®-brand carbonless copy paper as the principal source of that contamination.
     The United States Environmental Protection Agency (“EPA”) has divided the lower Fox River and the Bay of Green Bay site into five “operable units” numbered from the most upstream (“OU1”) to the most downstream (“OU5”). OU1 is the reach from primarily Lake Winnebago to the dam at Appleton, and is comprised of Little Lake Butte des Morts. Our Neenah Facility discharged its wastewater into OU1. OU2 extends from the dam at Appleton to the dam at Little Rapids, OU3 from the dam at Little Rapids to the dam at De Pere, OU4 from the dam at De Pere to the mouth of the river, and OU5 from the mouth into the lower portion of Green Bay. The river extends 39 miles from the upstream end of OU1 to the downstream end of OU4.
     Our liabilities, if any, for this contamination primarily arise under the federal Comprehensive Environmental, Response, Compensation and Liability Act (“CERCLA” or “Superfund”). The Governments have sought to recover “response actions” or “response costs,” which are the costs of studying and cleaning up contamination, from various “responsible parties.” In addition, various natural resource trustee agencies of the United States, the States of Wisconsin and Michigan, and several Indian Tribes have sought to recover natural resource damages (“NRDs”), including natural resource damage assessment costs. Parties that have incurred response costs or NRDs either voluntarily or in response to the governments’ and trustees’ demands may have an opportunity to seek contribution or other recovery of some or all of those costs from other parties who are jointly and severally responsible under Superfund for those costs. Therefore, as we incur costs, we also acquire a claim against other parties who may not have paid their equitable share of those costs. As others incur costs, they
acquire a claim against us to the extent that they claim that we have not paid our equitable share of the total. Any party that resolves its liability to the United States or a state in a judicially or administratively approved settlement agreement obtains protection from contribution claims for matters addressed in the settlement.
     For these reasons, all of the parties who are potentially responsible (“PRPs”) under CERCLA for response costs or NRDs have exposure to liability for: (a) the cost of past response actions taken by anyone else, (b) the cost of past NRD payments or restoration projects incurred by anyone else, (c) the cost of response actions to be taken in the future, and (d) NRDs. All of this exposure is subject to substantial defenses, including, for example, that the PRP is not liable or not jointly and severally liable for any particular cost or damage, that the cost or damage is not recoverable under CERCLA or any other law, or that the recovery is barred by the passage of time. In addition, a party that has incurred or committed to incur costs or has paid NRDs may be able to claim credit for that cost or payment in any equitable allocation of response costs or NRDs in any action for reallocation of costs.
     Cleanup Decisions. Our liability exposure depends importantly on the decisions made by EPA and the Wisconsin Department of Natural Resources (“WDNR”) as to how the Site will be cleaned up, and consequently the costs and timing of those response actions. The nature of the response actions has been highly controversial. EPA issued a record of decision (“ROD”) selecting response actions for OU1 and OU2 in December 2002. EPA issued a separate ROD selecting response actions for OU3, OU4, and OU5 in March 2004.
     As the result of continuing discussions with parties other than us, as well as our experience in OU1 (discussed below), EPA amended the ROD for OU2-5 in June 2007 to rely less on dredging and more on capping and covering of sediments containing PCBs. The governments project that these methods will allow certain costs to be lower for this portion of the cleanup. In June 2008, EPA amended the ROD for OU1.
     NRD Assessment. The natural resources trustees have engaged in work to assess NRDs at and arising from the Site. However, they have not completed a required NRD Assessment under the pertinent regulations. The trustees’ estimate of NRDs ranges from $176 million to $333 million, some of which has already been satisfied. With specific respect to NRD claims, we contended that the trustees’ claims are barred by the applicable 3 year statute of limitations.
     Work Under Agreements, Orders, and Decrees. As we mention above, our exposure to liability depends


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on the amount of work done, costs incurred, and damages paid both by us and by others. The procedural context of the work done, costs incurred, and damages paid also matters.
     Since 1991, the Governments and various groups of potentially responsible parties, including us, have entered into a series of agreements, orders, and decrees under which we and others have performed work, incurred costs, or paid damages in connection with the Site. As a result, some parties have contributed or performed substantial work at the Site and at least one party, Fort Howard Corporation (whose successor is either the Fort James Operating Company or Georgia Pacific Corporation) has resolved its NRD liability at the Site.
     Notably, in April 2004, the United States District Court for the Eastern District of Wisconsin entered a consent decree (“OU1 Consent Decree”) in United States v. P.H. Glatfelter Co., No. 2:03-cv-949, under which we and WTM I Corp. have been implementing the remedy in OU1, dividing costs evenly in addition to a $7 million contribution from Menasha Corp. and a $10 million contribution that the United States contributed from a separate settlement in United States v. Appleton Papers Inc., No. 2:01-cv-816, obligating NCR and Appleton Papers to contribute to certain NRD projects. In June 2008, the parties entered into an amendment to the OU1 Consent Decree. The amendment allows for implementation of the amended remedy for OU1. It also commits us and WTM I to implement that remedy without a cost limitation on that commitment. The amended OU1 Consent Decree has been lodged with the court, but has not yet been entered by the court. The amended OU1 Consent Decree, by its terms, binds the parties unless the United States withdraws its consent or the court denies a motion to enter the consent decree.
     Further, in November 2007, EPA issued an administrative order for remedial action (“UAO”) to Appleton Papers Inc., CBC Coating, Inc. (formerly known as Riverside Paper Corporation), Georgia-Pacific Consumer Products, L.P. (formerly known as Fort James Operating Company), Menasha Corporation, NCR Corporation, us, U.S. Paper Mills Corp., and WTM I Company directing those respondents to implement the amended remedy in OU2-5. We have no obligation to assist in that effort until August 2008. We understand that others have commenced designing that remedy and procuring certain equipment and real estate necessary to its implementation.
     Cost estimates. Estimates of the Site remediation change over time as we, or others, gain additional experience. In addition, disagreement exists over the likely costs for some of this work. The Governments estimate that the total cost of implementing the amended
remedy in OU1 will be approximately $102 million. Because we have completed a significant amount of work in this portion of the river, we believe the costs of completing the remedial actions specified in the amended ROD can be completed for this amount. However, it is reasonably possible costs could exceed this amount by up to $10 million. The cost of implementing the remedy set forth in the amended ROD for OU2-5 (the downstream portions of the Site) is estimated by the Governments to total between $270 million and $499 million, reflecting a contingency factor of plus or minus 30%. However, based on independent estimates commissioned by various potentially responsible parties, we believe the actual costs to be incurred to implement the remedy of OU2 — 5 will exceed the Government’s estimate by a significant amount.
     NRDs. The trustees claim that we are jointly and severally responsible for NRDs with a value between $176 million and $333 million. We deny (a) liability for most of these NRDs, (b) that if anyone is liable, that we are jointly and severally liable for the full amount, and (c) that the trustees can pursue this claim at this late date as the limitations period for NRD claims is three years from discovery.
     Allocation. Since 1991, various potentially responsible parties have, without success, attempted to agree on a binding, final, allocation of costs and damages among themselves. All costs that they have incurred to date have been incurred individually, or under interim, nonbinding allocations. However, the consent decree in United States v. P.H. Glatfelter Co. affords us and WTM I contribution protection for claims seeking to reallocate costs of implementing the OU1 remedy, and Fort James Operating Co. (now Georgia-Pacific) has certain rights under its consent decree. Otherwise, the parties have not litigated their internal allocation with us.
     NCR and Appleton Papers Inc. have commenced litigation in the United States District Court for the Eastern District of Wisconsin captioned Appleton Papers Inc. v. George A. Whiting Paper Co., No. 2:08-cv-16, seeking to reallocate costs and damages allegedly incurred or paid or to be incurred or paid by NCR or Appleton Papers. They have to date joined 22 defendants: us, George A. Whiting Paper Co., Menasha Corporation, Green Bay Packaging Inc., International Paper Company, Leicht Transfer & Storage Company, Neenah Foundry Company, Newpage Wisconsin System Inc., The Procter & Gamble Paper Products Company, Wisconsin Public Service Corp. the Cities of Appleton, De Pere, Green Bay, and Kaukauna, Brown County, Green Bay Metropolitan Sewerage District, Heart of the Valley Metropolitan Sewerage District, Neenah-Menasha Sewerage Commission, the Villages of Kimberly and Wrightstown, WTM I Company, and U.S. Paper Mills Corporation. That litigation may be expected to result in an allocation of responsibility, at least as between these parties.
     We contend that we are not jointly and severally liable for costs or damages arising from the presence of PCBs downstream of OU1. In addition, we contend that


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NCR or other sources of NCR® - brand carbonless copy paper that our Neenah Mill recycled bear most of the responsibility for costs and damages arising from the presence of PCBs in OU1. Other parties disagree.
     To date we have spent or have committed to spend approximately $50 million implementing the remedy in OU1, and under the various agreements, orders, and decrees under which we and others have performed work, incurred costs, or paid damages in connection with the Site.
     Reserves for the Fox River Site In 2007 we recorded additional charges of $6 million in the first quarter and $20 million in the third quarter, to satisfy both our obligations at OU1 and all pending, threatened or asserted and unasserted claims against us for the Fox River including our claimed liability for the remediation of OU3-5 as a result of the developments concerning the Fox River including our revised cost estimates for OU1. These additional charges represent our current assessment of the ultimate costs to be incurred by us associated with the revised final plan for OU1 and any settlement of liability for NRDs and for remediation of OU 2-5. As of June 30, 2008, our reserve for the Fox River environmental liability totaled $26.3 million. Of the total reserve, $6.8 million is recorded in the accompanying consolidated balance sheets under the caption “Environmental liabilities” and the remaining $19.5 million is recorded under the caption “Other long term liabilities.” Our reserve includes amounts originally established prior to 2002 and adjustments in the first and third quarter of 2007 increasing the liability by $26.0 million offset by expenditures related to remediation activities.
     We and WTM I have been funding the OU1 remedy by depositing funds in an OU1 Escrow Account and then paying for work out of that account. At June 30, 2008, the remaining OU1 Escrow Account balance totaled $13.7 million. During the first six months of 2008, Menasha contributed $7 million to the OU1 Escrow Account. In addition, WTM I and we committed to contribute an additional $9.5 million each, and contributions, or security for later contributions, have been posted according to the agreed schedule. Of the total commitment, we funded $3.5 million on July 15, 2008 and obtained a letter of credit guaranteeing payment of the balance.
     We believe that we have strong defenses to liability for remediation of OU2-5 including the existence of ample data that indicates that PCBs did not leave OU1 in concentrations that could have caused or contributed to the need for cleanup in OU2-5. Others, including the EPA and other PRPs, disagree with us and, as a result, the EPA has issued a UAO to us and to others to perform the OU2-5 work. NCR and Appleton Papers have recently commenced the Whiting Litigation and have joined us and others. Additional litigation associated with the remediation of the Site is likely. As illustrated by the Whiting Litigation, we also
note that there exist additional potentially responsible parties other than the PRPs who were named in the UAO or who have been joined in the Whiting Litigation, including the owners of public wastewater treatment facilities who discharged PCB-contaminated wastewater to the Fox River and entities providing PCB-containing wastepaper to each of the recycling mills.
     Even if we are not successful in establishing that we are not liable for the remediation of OU2-5, we do not believe that we would be allocated a significant percentage share of liability in any equitable allocation of the remediation costs and other potential damages associated with OU2-5. The accompanying consolidated financial statements do not include reserves for any future litigation or defense costs for the Fox River, and because litigation has commenced, the costs to do so could be significant.
     In setting our reserve for the Fox River, we have assessed our defenses to liability, including matters raised in the Whiting Litigation, and assumed that we will not bear the entire cost of remediation and damages to the exclusion of other known PRPs at the Site who are also potentially jointly and severally liable. The existence and ability of other PRPs to participate has also been taken into account in setting our reserve, and is generally based on our evaluation of recent publicly available financial information on each PRP, and any known insurance, indemnity or cost sharing agreements between PRPs and third parties. In addition, our assessment is based upon the magnitude, nature, location and circumstances associated with the various discharges of PCBs to the river and the relationship of those discharges to identified contamination. We will continue to evaluate our exposure and the level of our reserves, including, but not limited to, our potential share of the costs and NRDs, if any, associated with the Fox River site.
     Other than with respect to the OU1 Consent Decree, the amount and timing of future expenditures for environmental compliance, cleanup, remediation and personal injury, NRDs and property damage liabilities cannot be ascertained with any certainty due to, among other things, the unknown extent and nature of any contamination, the response actions that may ultimately be required, the availability of remediation equipment, and landfill space, and the number and financial resources of any other PRPs.
     Other Information The Wisconsin DNR and FWS have each published studies, the latter in draft form, estimating the amount of PCBs discharged by each identified PRP to the lower Fox River and the Bay of Green Bay. These reports estimate the Neenah Facility’s share of the volumetric discharge to be as high as 27%. We do not believe the volumetric estimates used in these


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studies are accurate because (a) the studies themselves disclose that they are not accurate and (b) the volumetric estimates contained in the studies are based on assumptions that are unsupported by existing data on the Site. We believe that our volumetric contribution is significantly lower than the estimates set forth in these studies. Further, we do not believe that a volumetric allocation would constitute an equitable allocation of the potential liability for the contamination. Other factors, such as the location of contamination, the location of discharge, and a party’s role in causing discharge, must be considered in order for the allocation to be equitable.
     We previously entered into interim cost-sharing agreements with four of the other PRPs, which provided for those PRPs to share certain costs relating to scientific studies of PCBs discharged at the Site (“Interim Cost Sharing Agreements”). These interim cost-sharing agreements do not establish the final allocation of remediation costs incurred at the Site. Based upon our evaluation of the volume, nature and location of the various discharges of PCBs at the Site and the relationship of those discharges to identified contamination, we believe our allocable share of liability at the Site is less than our share of costs under the Interim Cost Sharing Agreements.
     While the OU1 Consent Decree, as amended, provides a negotiated framework for resolving both our and WTM I’s liability for the remediation of OU1, it does not resolve our exposure at the Site. The OU1 Consent Decree does not address response costs necessary to remediate the remainder of the Site and only addresses NRDs and claims for reimbursement of government expenses to a limited extent. Because CERCLA imposes strict joint and several liability, uncertainty persists regarding our exposure with respect to the remainder of the Fox River site. In addition, as mentioned previously, EPA has issued a UAO to us and others calling for further work in OU2-5, and Appleton Papers and NCR have commenced the Whiting Litigation that may become more complicated and involve additional parties. We cannot predict the outcome of the Whiting Litigation or any other litigation or regulatory actions related to this matter.
     Range of Reasonably Possible Outcomes Our analysis of the range of reasonably possible outcomes is derived from all available information, including but not limited to official documents such as RODs, discussions with the United States and other PRPs, as well as legal counsel and engineering consultants. Based on our analysis of the current RODs and cost estimates for work to be performed at the Site, we believe that it is
reasonably possible that our costs associated with the Fox River matter may exceed our reserve for the Fox River matter by amounts that are insignificant or that could range up to $195 million, over a period that is currently undeterminable but that could range beyond 15 years. We believe that the likelihood of an outcome in the upper end of the monetary range is significantly less than other possible outcomes within the range and that the possibility of an outcome in excess of the upper end of the monetary range is remote.
     Based on currently available information, we believe that the remaining work to complete the remediation of OU1 can be completed with the amounts in the OU1 Escrow Account, and the amounts committed to be contributed by us and WTM I. Our assessment assumes that: 1) the court ultimately enters the amended OU1 Consent Decree; 2) we and WTM I successfully negotiate acceptable contracts covering the work provided for in the amended OU1 ROD; and 3) the remedial measures provided in the amended OU1 ROD are successfully implemented. However, if we are unsuccessful in managing our costs to implement the amended OU1 ROD, additional charges may be necessary and such amounts could be material.
     Summary Our current assessment is that we will be able to manage these environmental matters without a long-term, material adverse impact on the Company. These matters could, however, at any particular time or for any particular year or years, have a material adverse effect on our consolidated financial position, liquidity and/or results of operations or could result in a default under our loan covenants. Moreover, there can be no assurance that our reserves will be adequate to provide for future obligations related to 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. With regard to the Fox River site, if we are not successful in managing the completion of the remaining remedial work at OU1 and/or should the United States seek to enforce the UAO for OU2-5 against us which requires us to either perform directly or contribute significant amounts towards the performance of that work, such developments could have a material adverse effect on our consolidated financial position, liquidity and results of operations and may result in a default under our loan covenants.


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15. SEGMENT AND GEOGRAPHIC INFORMATION
     The following table sets forth financial and other information by business unit for the periods indicated:
                                                                         
Business Unit Performance   For The Three Months Ended June 30,
In thousands   Specialty Papers   Composite Fibers   Other and Unallocated   Total
    2008     2007   2008     2007   2008     2007   2008     2007
 
                                                                       
Net sales
  $ 207,296       $ 202,606     $ 112,928       $ 85,486     $       $ (1 )   $ 320,224       $ 288,091  
Energy sales, net
    2,743         2,424                                   2,743         2,424  
 
                                                                       
Total revenue
    210,039         205,030       112,928       $ 85,486               (1 )     322,967         290,515  
Cost of products sold
    196,948         192,817       96,462         70,522       (2,841 )       (1,624 )     290,569         261,715  
 
                                                                       
Gross profit (loss)
    13,091         12,213       16,466         14,964       2,841         1,623       32,398         28,800  
SG&A
    13,772         14,521       9,689         8,182       1,916         1,073       25,377         23,776  
Shutdown and restructuring charges
                                (856 )       (63 )     (856 )       (63 )
Gains on dispositions of plant, equipment and timberlands
                                16         (5,693 )     16         (5,693 )
 
                                                                       
Total operating income (loss)
    (681 )       (2,308 )     6,777         6,782       1,765         6,306       7,861         10,780  
Nonoperating income (expense)
                                (4,367 )       (6,940 )     (4,367 )       (6,940 )
 
                                                                       
Income (loss) before income taxes
  $ (681 )     $ (2,308 )   $ 6,777       $ 6,782     $ (2,602 )     $ (634 )   $ 3,494       $ 3,840  
 
                                                                       
 
                                                                       
Supplementary Data
                                                                       
Net tons sold
    182,700         183,344       22,356         18,118                     205,056         201,462  
Depreciation, depletion and amortization expense
  $ 8,980       $ 8,881     $ 6,968       $ 5,250                   $ 15,948       $ 14,131  
                         
                                                                         
Business Unit Performance   For The Six Months Ended June 30,
In thousands   Specialty Papers   Composite Fibers   Other and Unallocated   Total
    2008     2007   2008     2007   2008     2007   2008     2007
 
                                                                       
Net sales
  $ 408,242       $ 399,510     $ 217,480       $ 169,570     $ 1       $     $ 625,723       $ 569,080  
Energy sales, net
    4,727         4,638                                   4,727         4,638  
 
                                                                       
Total revenue
    412,969         404,148       217,480         169,570       1               630,450         573,718  
Cost of products sold
    374,224         370,737       184,858         141,312       (5,288 )       (3,840 )     553,794         508,209  
 
                                                                       
Gross profit (loss)
    38,745         33,411       32,622         28,258       5,289         3,840       76,656         65,509  
SG&A
    27,979         29,048       19,709         16,494       1,824         6,961       49,512         52,503  
Shutdown and restructuring charges
                                (856 )       162       (856 )       162  
Gains on dispositions of plant, equipment and timberlands
                                (14,502 )       (8,887 )     (14,502 )       (8,887 )
 
                                                                       
Total operating income (loss)
    10,766         4,363       12,913         11,764       18,823         5,604       42,502         21,731  
Nonoperating income (expense)
                                  (8,840 )       (12,905 )     (8,840 )       (12,905 )
 
                                                                       
Income (loss) before income taxes
  $ 10,766       $ 4,363     $ 12,913       $ 11,764     $ 9,983       $ (7,301 )   $ 33,662       $ 8,826  
 
                                                                       
 
                                                                       
Supplementary Data
                                                                       
Net tons sold
    364,911         358,464       43,695         36,475                     408,606         394,939  
Depreciation depletion and amortization expense
  $ 17,612       $ 17,532     $ 13,054       $ 10,333                   $ 30,666       $ 27,865  
                         
     Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the business unit are primarily allocated based on an estimated utilization of support area services or are included in “Other and Unallocated” in the table above.
     Management evaluates results of operations of the business units before non-cash pension income, any charges related to the Fox River environmental reserves, restructuring related charges, unusual items, effects of asset dispositions and insurance recoveries because it believes 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 core operations. This presentation is closely aligned with the management and operating structure of our company. It is also on this basis that the Company’s performance is evaluated internally and by the Company’s Board of Directors. Such amounts are presented above under the caption “Other and Unallocated.”
GLATFELTER

-14-


 

16. GUARANTOR FINANCIAL STATEMENTS
     Our 71/8% Senior Notes have been fully and unconditionally guaranteed, on a joint and several basis, by certain of our 100%-owned domestic subsidiaries, PHG Tea Leaves, Inc., Mollanvick, Inc., The Glatfelter Pulp Wood Company, GLT International Finance, LLC, Glatfelter Holdings, LLC and Glatfelter Holdings II, LLC.
     The following presents our condensed consolidating statements of income and cash flow for the three months ended June 30, 2008 and 2007 and our condensed consolidating balance sheets as of June 30, 2008 and December 31, 2007. These financial statements reflect P. H. Glatfelter Company (the parent), the guarantor subsidiaries (on a combined basis), the non-guarantor subsidiaries (on a combined basis) and elimination entries necessary to combine such entities on a consolidated basis.
     During 2007, we completed a reorganization pursuant to which, Glenn Wolfe was merged into the parent company. Accordingly the 2007 financial information set forth below reflects such reorganization. All prior period financial information has been restated.
Condensed Consolidating Statement of Income for the
three months ended June 30, 2008
                                         
    Parent           Non   Adjustments/    
In thousand   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
 
                                       
Net sales
  $ 207,296     $ 10,566     $ 112,928     $ (10,566 )   $ 320,224  
Energy sales — net
    2,743                         2,743  
             
Total revenues
    210,039       10,566       112,928       (10,566 )     322,967  
Costs of products sold
    194,143       10,637       96,577       (10,788 )     290,569  
             
Gross profit
    15,896       (71 )     16,351       222       32,398  
Selling, general and administrative expenses
    14,853       554       9,970             25,377  
Shutdown and restructuring charges
    (856 )                       (856 )
Gains on dispositions of plant, equipment and timberlands, net
    2       14                   16  
             
Operating income
    1,897       (639 )     6,381       222       7,861  
Non-operating income (expense)
                                       
Interest expense
    (4,983 )           (844 )           (5,827 )
Interest income (expense)
    (1,239 )     3,143       (547 )           1,357  
Other income (expense) — net
    5,989       181       (208 )     (5,859 )     103  
         
Total other income (expense)
    (233 )     3,324       (1,599 )     (5,859 )     (4,367 )
             
Income (loss) before income taxes
    1,664       2,685       4,782       (5,637 )     3,494  
Income tax provision (benefit)
    (1,492 )     998       740       92       338  
             
Net income (loss)
  $ 3,156     $ 1,687     $ 4,042     $ (5,729 )   $ 3,156  
             
Condensed Consolidating Statement of Income for the
three months ended June 30, 2007
                                         
    Parent           Non   Adjustments/    
In thousand   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
 
                                       
Net sales
  $ 202,606     $ 10,576     $ 85,485     $ (10,576 )   $ 288,091  
Energy sales — net
    2,424                         2,424  
             
Total revenues
    205,030       10,576       85,485       (10,576 )     290,515  
Costs of products sold
    192,055       9,574       70,693       (10,607 )     261,715  
             
Gross profit
    12,975       1,002       14,792       31       28,800  
Selling, general and administrative expenses
    14,387       643       8,746             23,776  
Shutdown and restructuring charges
    63             (126 )           (63 )
Gains on dispositions of plant, equipment and timberlands, net
    179       (5,872 )                 (5,693 )
             
Operating income
    (1,654 )     6,231       6,172       31       10,780  
Non-operating income (expense)
                                       
Interest expense
    (6,842 )           (582 )           (7,424 )
Interest income (expense)
    162       3,590       (1,204 )     (1,700 )     848  
Other income (expense) — net
    7,715       330       (274 )     (8,135 )     (364 )
             
Total other income (expense)
    1,035       3,920       (2,060 )     (9,835 )     (6,940 )
             
Income (loss) before income taxes
    (619 )     10,151       4,112       (9,804 )     3,840  
Income tax provision (benefit)
    (2,617 )     4,039       1,021       (601 )     1,842  
             
Net income (loss)
  $ 1,998     $ 6,112     $ 3,091     $ (9,203 )   $ 1,998  
     
GLATFELTER

-15-


 

Condensed Consolidating Statement of Income for the
six months ended June 30, 2008
                                         
    Parent           Non   Adjustments/    
In thousand   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
 
                                       
Net sales
  $ 408,243     $ 21,993     $ 217,480     $ (21,993 )   $ 625,723  
Energy sales — net
    4,727                         4,727  
             
Total revenues
    412,970       21,993       217,480       (21,993 )     630,450  
Costs of products sold
    369,727       21,214       185,683       (22,830 )     553,794  
             
Gross profit
    43,243       779       31,797       837       76,656  
Selling, general and administrative expenses
    27,893       1,017       20,602             49,512  
Shutdown and restructuring charges
    (856 )                       (856 )
Gains on dispositions of plant, equipment and timberlands, net
    127       (14,604 )     (25 )           (14,502 )
             
Operating income
    16,079       14,366       11,220       837       42,502  
Non-operating income (expense)
                                       
Interest expense
    (10,289 )     (11 )     (1,672 )           (11,972 )
Interest income
    19,346       6,293       (1,078 )     (21,600 )     2,961  
Other income (expense) — net
    6,359       559       (395 )     (6,352 )     171  
             
Total other income (expense)
    15,416       6,841       (3,145 )     (27,952 )     (8,840 )
             
Income (loss) before income taxes
    31,495       21,207       8,075       (27,115 )     33,662  
Income tax provision (benefit)
    8,664       8,353       1,844       (8,030 )     10,831  
             
Net income (loss)
  $ 22,831     $ 12,854     $ 6,231     $ (19,085 )   $ 22,831  
     
Condensed Consolidating Statement of Income for the
six months ended June 30, 2007
                                         
    Parent           Non   Adjustments/    
In thousand   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
 
                                       
Net sales
  $ 399,510     $ 21,603     $ 169,570     $ (21,603 )   $ 569,080  
Energy sales — net
    4,638                         4,638  
             
Total revenues
    404,148       21,603       169,570       (21,603 )     573,718  
Costs of products sold
    368,673       19,452       141,535       (21,451 )     508,209  
             
Gross profit
    35,475       2,151       28,035       (152 )     65,509  
Selling, general and administrative expenses
    33,776       1,107       17,620             52,503  
Shutdown and restructuring charges
    262             (100 )           162  
Gains on dispositions of plant, equipment and timberlands, net
    179       (9,066 )                 (8,887 )
             
Operating income
    1,258       10,110       10,515       (152 )     21,731  
Non-operating income (expense)
                                       
Interest expense
    (13,601 )           (1,160 )           (14,761 )
Interest income
    441       6,995       (2,397 )     (3,450 )     1,589  
Other income (expense) — net
    13,140       575       (192 )     (13,256 )     267  
             
Total other income (expense)
    (20 )     7,570       (3,749 )     (16,706 )     (12,905 )
             
Income (loss) before income taxes
    1,238       17,680       6,766       (16,858 )     8,826  
Income tax provision (benefit)
    (4,013 )     7,008       1,874       (1,294 )     3,575  
             
Net income (loss)
  $ 5,251     $ 10,672     $ 4,892     $ (15,564 )   $ 5,251  
     
GLATFELTER

-16-


 

Condensed Consolidating Balance Sheet as of June 30, 2008
                                         
    Parent                   Adjustments/    
In thousands   Company   Guarantors   Non Guarantors   Eliminations   Consolidated
 
 
                                       
Assets
                                       
Current assets
                                       
Cash and cash equivalents
  $ 6,682     $ 438     $ 11,491     $     $ 18,611  
Other current assets
    300,110       334,727       75,057       (326,184 )     383,710  
Plant, equipment and timberlands — net
    279,267       7,882       243,384             530,533  
Other assets
    773,537       193,572       (43,390 )     (522,974 )     400,745  
             
Total assets
  $ 1,359,596     $ 536,619     $ 286,542     $ (849,158 )   $ 1,333,599  
     
 
                                       
Liabilities and Shareholders’ Equity
                                       
Current liabilities
  $ 378,082     $ 70,036     $ 68,435     $ (325,257 )   $ 191,296  
Long-term debt
    235,573             70,695             306,268  
Deferred income taxes
    138,733       35,456       32,155       (11,206 )     195,138  
Other long-term liabilities
    97,680       13,677       11,127       8,885       131,369  
             
Total liabilities
    850,068       119,169       182,412       (327,578 )     824,071  
Shareholders’ equity
    509,528       417,450       104,130       (521,580 )     509,528  
             
Total liabilities and shareholders’ equity
  $ 1,359,596     $ 536,619     $ 286,542     $ (849,158 )   $ 1,333,599  
     
Condensed Consolidating Balance Sheet as of December 31, 2007
                                         
    Parent           Non   Adjustments/    
In thousands   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
 
                                       
Assets
                                       
Current assets
                                       
Cash and cash equivalents
  $ 6,693     $ 162     $ 22,978     $     $ 29,833  
Other current assets
    257,804       277,958       37,008       (229,191 )     343,579  
Plant, equipment and timberlands — net
    279,511       7,591       232,764             519,866  
Other assets
    749,913       212,513       (78,513 )     (490,124 )     393,789  
             
Total assets
  $ 1,293,921     $ 498,224     $ 214,237     $ (719,315 )   $ 1,287,067  
     
 
                                       
Liabilities and Shareholders’ Equity
                                       
Current liabilities
  $ 319,516     $ 39,285     $ 64,423     $ (225,668 )   $ 197,556  
Long-term debt
    267,041             34,000             301,041  
Deferred income taxes
    138,615       33,557       32,236       (15,252 )     189,156  
Other long-term liabilities
    92,681       14,310       8,489       7,766       123,246  
             
Total liabilities
    817,853       87,152       139,148       (233,154 )     810,999  
Shareholders’ equity
    476,068       411,072       75,089       (486,161 )     476,068  
             
Total liabilities and shareholders’ equity
  $ 1,293,921     $ 498,224     $ 214,237     $ (719,315 )   $ 1,287,067  
     
GLATFELTER

-17-


 

Condensed Consolidating Statement of Cash Flows for the
six months ended June 30, 2008
                                         
    Parent           Non   Adjustments/    
In thousands   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
 
                                       
Net cash provided (used) by
                                       
Operating activities
  $ 14,431     $ 2,200     $ 1,922     $ (21,600 )   $ (3,047 )
Investing activities
                                       
Purchase of plant, equipment and timberlands
    (9,308 )     (1,139 )     (14,960 )           (25,407 )
Proceeds from disposal plant, equipment and timberlands
    1       14,996                   14,997  
Repayments from (advances of) intercompany loans, net
    4,000       (16,778 )     (9,158 )     21,936        
Return (contributions) of intercompany capital, net
            26,597               (26,597 )      
     
Total investing activities
    (5,307 )     23,676       (24,118 )     (4,661 )     (10,410 )
Financing activities
                                       
Net (repayments of) proceeds from indebtedness
    (30,001 )           38,991             8,990  
Payment of dividends to shareholders
    (8,220 )                       (8,220 )
(Repayments) borrowings of intercompany loans, net
    28,536       (4,000 )     (2,600 )     (21,936 )      
Return of intercompany capital, net
                  (26,597 )     26,597        
Payment of intercompany dividends
          (21,600 )             21,600        
Proceeds from stock options exercised
    642                         642  
     
Total financing activities
    (9,043 )     (25,600 )     9,794       26,261       1,412  
Effect of exchange rate on cash
    (92 )           915             823  
     
Net increase (decrease) in cash
    (11 )     276       (11,487 )           (11,222 )
Cash at the beginning of period
    6,693       162       22,978             29,833  
     
Cash at the end of period
  $ 6,682     $ 438     $ 11,491     $     $ 18,611  
     
Condensed Consolidating Statement of Cash Flows for the
six months ended June 30, 2008
                                         
    Parent           Non   Adjustments/    
In thousands   Company   Guarantors   Guarantors   Eliminations   Consolidated
 
 
                                       
Net cash provided (used) by
                                       
Operating activities
  $ 25,073     $ (9,305 )   $ 1,868     $     $ 17,636  
Investing activities
                                       
Purchase of plant, equipment and timberlands
    (10,428 )     (381 )     (3,412 )           (14,221 )
Proceeds from disposal plant, equipment and timberlands
    13       9,435                   9,448  
             
Total investing activities
    (10,415 )     9,054       (3,412 )           (4,773 )
Financing activities
                                       
 
                                       
Net (repayments of) proceeds from indebtedness
    (15,075 )           (541 )           (15,616 )
Payment of dividends
    (8,159 )                       (8,159 )
Proceeds from stock options exercised
    1,171                         1,171  
             
Total financing activities
    (22,063 )           (541 )           (22,604 )
Effect of exchange rate on cash
                752             752  
             
Net increase (decrease) in cash
    (7,405 )     (251 )     (1,333 )           (8,989 )
Cash at the beginning of period
    10,227       546       11,212             21,985  
             
Cash at the end of period
  $ 2,822     $ 295     $ 9,879     $     $ 12,996  
     


GLATFELTER

-18-


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Glatfelter’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its our Annual Report on Form 10-K..
     Forward-Looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future consolidated financial position or results of operations, made in this Report on Form 10-Q are forward looking. We use words such as “anticipates”, “believes”, “expects”, “future”, “intends” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from such expectations. The following discussion includes forward-looking statements regarding expectations of, among others, net sales, costs of products sold, environmental costs, capital expenditures and liquidity, all of which are inherently difficult to predict. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Accordingly, we identify the following important factors, among others, which could cause our results to differ from any results that might be projected, forecasted or estimated in any such forward-looking statements:
i.   changes in the cost or availability of raw materials we use, in particular pulpwood, market pulp, pulp substitutes, and abaca fiber;
 
ii.   changes in energy-related costs and commodity raw materials with an energy component;
 
iii.   variations in demand for, or pricing of, our products;
 
iv.   our ability to develop new, high value-added Specialty Papers and Composite Fibers products;
 
v.   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;
 
vi.   the gain or loss of significant customers and/or on-going viability of such customers;
vii.   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;
 
viii.   risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates;
ix.   geopolitical events, including war and terrorism;
 
x.   enactment of adverse state, federal or foreign tax or other legislation or changes in government policy or regulation;
 
xi.   adverse results in litigation;
 
xii.   our ability to successfully execute our timberland strategy to realize the value of our timberlands; and
 
xiii.   our ability to finance, consummate and integrate 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 and beverage, decorative laminates for furniture and flooring, metalized papers and other highly technical niche markets.
     Overview Our results of operations for the first half of 2008 when compared with the same period of 2007 reflect stable demand trends and improved pricing conditions in each of our business units. However, each of our business units’ results in the first half of 2008 were adversely impacted by significantly higher input costs.
     Specialty Papers’ results in 2008 compared to 2007 benefited from initiatives implemented in the second half of 2007 to improve the operational effectiveness and overall profitability of the Chillicothe facility.
     Composite Fibers’ results in the first half of 2008 were adversely impacted by operational matters related to lost production associated with the upgrades of paper machines at two of its facilities, and lower production output due to the tight supply of abaca fiber. In addition, the inclusion of the November 2007 acquisition of the Caerphilly facility was slightly dilutive to this business unit’s results.


GLATFELTER

-19-


 

     Results of operations for the first half of 2008 include $8.7 million of after-tax gains from the sale of timberlands as well a $2.0 million recovery in a litigation matter related to our former Ecusta mill, offset by legal fees for matters at that site.
RESULTS OF OPERATIONS
Six Months Ended June 30, 2008 versus the
Six Months Ended June 30, 2007
     The following table sets forth summarized results of operations:
                   
    Six Months Ended June 30
In thousands, except per share   2008     2007
       
Net sales
  $ 625,723       $ 569,080  
Gross profit
    76,656         65,509  
Operating income
    42,502         21,731  
Net income
    22,831         5,251  
Earnings per share
    0.50         0.12  
       
     The consolidated results of operations for the six months ended June 30, 2008 includes the following significant items:
                 
    After-tax   Diluted EPS
In thousands, except per share   Gain (loss)        
 
2008
               
Timberland sales
  $ 8,656     $ 0.19  
Reversal of shutdown and restructuring charges
    532       0.01  
Acquisition integration related costs
    (588 )     (0.01 )
 
               
2007
               
Timberland sales
    5,400       0.12  
Environmental remediation
    (3,693 )     (0.08 )
Acquisition integration related costs
    (1,150 )     (0.03 )
 
     The above items increased earnings by $8.6 million, or $0.19 per diluted share in the first six months of 2008. In the comparable period a year ago, the above items increased earnings by $0.6 million, or $0.01 per diluted share.


Business Units
                                                                         
Business Unit Performance   For the Six Months Ended June 30,
In thousands   Specialty Papers   Composite Fibers   Other and Unallocated   Total
    2008     2007   2008     2007   2008     2007   2008     2007
 
                                                                       
Net sales
  $ 408,242       $ 399,510     $ 217,480       $ 169,570     $ 1       $     $ 625,723       $ 569,080  
Energy sales, net
    4,727         4,638                                   4,727         4,638  
 
                                                                       
Total revenue
    412,969         404,148       217,480         169,570       1               630,450         573,718  
Cost of products sold
    374,224         370,737       184,858         141,312       (5,288 )       (3,840 )     553,794         508,209  
 
                                                                       
Gross profit
    38,745         33,411       32,622         28,258       5,289         3,840       76,656         65,509  
SG&A
    27,979         29,048       19,709         16,494       1,824         6,961       49,512         52,503  
Shutdown and restructuring charges
                                (856 )       162       (856 )       162  
Gains on dispositions of plant, equipment and timberlands
                                (14,502 )       (8,887 )     (14,502 )       (8,887 )
 
                                                                       
Total operating income (loss)
    10,766         4,363       12,913         11,764       18,823         5,604       42,502         21,731  
Nonoperating income (expense)
                                (8,840 )       (12,905 )     (8,840 )       (12,905 )
 
                                                                       
Income (loss) before income taxes
  $ 10,766       $ 4,363     $ 12,913       $ 11,764     $ 9,983       $ (7,301 )   $ 33,662       $ 8,826  
 
                                                                       
 
                                                                       
Supplementary Data
                                                                       
Net tons sold
    364,911         358,464       43,695         36,475                     408,606         394,939  
Depreciation, depletion and amortization expense
  $ 17,612       $ 17,532     $ 13,054       $ 10,333                   $ 30,666       $ 27,865  
                         
GLATFELTER

-20-


 

     Business Units Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the business unit are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the table above.
     Management evaluates results of operations of the business units before non-cash pension income, charges related to the Fox River environmental reserves, restructuring related charges, unusual items, certain corporate level costs, effects of asset dispositions and insurance recoveries because it believes 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 core operations. Such amounts are presented under the caption “Other and Unallocated.” This presentation is closely aligned with the management and operating structure of our company. It is also on this basis that the Company’s performance is evaluated internally and by the Company’s Board of Directors.
Sales and Costs of Products Sold
                           
    Six Months Ended    
    June 30    
In thousands   2008     2007   Change
           
Net sales
  $ 625,723       $ 569,080     $ 56,643  
Energy sales – net
    4,727         4,638       89  
           
Total revenues
    630,450         573,718       56,732  
Costs of products sold
    553,794         508,209       45,585  
           
Gross profit
  $ 76,656       $ 65,509     $ 11,147  
           
Gross profit as a percent of Net sales
    12.3 %       11.5 %        
           
     The following table sets forth the contribution to consolidated net sales by each business unit:
                   
    Percent of Total
    2008     2007
       
Business Unit
                 
Specialty Papers
    65.2 %       70.2 %
Composite Fibers
    34.8         29.8  
           
Total
    100.0 %       100.0 %
     
     Net sales totaled $625.7 million for the first six months of 2008, an increase of $56.6 million, or10.0%, compared to the same period a year ago.
     In the Specialty Papers business unit, net sales for the first six months of 2008 increased $8.7 million to $408.2 million and operating income totaled $10.8 million, an increase of $6.4 million over the previous year. Higher average selling prices contributed $15.0 million of the increase in net sales and volumes shipped increased 1.8%. 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 $20.7 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 $1.7 million early in the first half of the current year. In addition to the net effect of the factors discussed above, the higher operating income for the first half of 2008 reflects progress achieved in the last half of 2007 in executing Chillicothe’s profit improvement initiatives.
     In Composite Fibers, net sales were $217.5 million for the first six months of 2008, an increase of $47.9 million from the same period a year ago and operating income totaled $12.9 million, an increase of $1.1 million in the comparison. The completion of the November 30, 2007 Caerphilly acquisition accounted for approximately $23.5 million of the increase in net sales and the translation of foreign currencies benefited net sales by $18.1 million. Volumes increased approximately 19.8% with increases realized across all product lines. On a constant currency basis, average selling prices benefited net sales by $3.8 million which partially offset the impact of higher input costs. Energy and raw material costs in this business unit were $5.8 million higher than the same period a year ago. During the fourth quarter of 2007, we completed a machine upgrade at Composite Fibers’ Lydney facility, with startup extending into the first quarter of 2008, lowering production volumes and operating income by approximately $1.7 million.


      
GLATFELTER

-21-


 

     Non-Cash Pension Income Non-cash pension income results from the over-funded status of our pension plans. 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. The following summarizes non-cash pension income for the first half of 2008 compared to the same period of 2007:
                           
    Six Months Ended    
    June 30    
In thousands   2008     2007   Change
           
Recorded as:
                         
Costs of products sold
  $ 5,465       $ 4,694     $ 771  
SG&A expense
    2,500         1,727       773  
           
Total
  $ 7,965       $ 6,421     $ 1,544  
       
     Selling, general and administrative (“SG&A”) expenses decreased $3.0 million in the period-to-period comparison and totaled $49.5 million in the first half of 2008. SG&A decreased in the comparison due to the inclusion in the 2007 period of a $6 million charge for environmental matters in addition to the benefit in the comparison of a $2.0 million recovery in 2008 from the settlement of a litigation matter related to our former Ecusta division, offset by legal fees for matters at that site. The amounts for 2008 also were adversely impacted by foreign currency translation and the inclusion of the Caerphilly acquisition.
     Gain on Sales of Plant, Equipment and Timberlands During the first six months of 2008, we completed sales of timberlands which are summarized by the following table:
                           
Dollars in thousands   Acres     Proceeds   Gain
       
2008
                         
Timberlands
    3,595       $ 14,997     $ 14,603  
Other
    n/a               (101 )
                 
 
            $ 14,997     $ 14,502  
                 
 
                         
2007
                         
Timberlands
    3,588       $ 9,435     $ 9,066  
       
     Income taxes Our results of operations for the first six months of 2008 reflect an effective tax rate of 32.2% compared to 40.5% in the same period a year ago. The decrease in the effective tax rate is primarily due to tax benefits recorded upon the filing of an international subsidiary’s tax return and the reversal of a tax reserve in a foreign jurisdiction where the statute expired.
     Foreign Currency We own and operate paper and pulp mills in Germany, France, the United Kingdom and the Philippines. The local currency in Germany and France is the Euro, in the UK it is the British Pound Sterling, and in the Philippines the currency is the Peso. During the first six months of 2008, Euro functional currency operations generated approximately 21.5% of our sales and 20.1% 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 these international operations into U.S. dollars is subject to changes in foreign currency exchange rates.
     The table below summarizes the effect from foreign currency translation on first half 2008 reported results compared to first half 2007:
         
    Six Months  
In thousands   Ended June 30  
    Favorable  
    (unfavorable)  
Net sales
  $ 18,073  
Costs of products sold
    (14,925 )
SG&A expenses
    (1,515 )
Income taxes and other
    (309 )
 
     
Net income
  $ 1,324  
   
     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.


      
GLATFELTER

-22-


 

Three Months Ended June 30, 2008 versus the
Three Months Ended June 30, 2007
     The following table sets forth summarized results of operations:
                   
    Three Months Ended
    June 30
In thousands, except per share   2008     2007
     
Net sales
  $ 320,224       $ 288,091  
Gross profit
    32,398         28,800  
Operating income
    7,861         10,780  
Net income (loss)
    3,156         1,998  
Earnings (loss) per share
    0.07         0.04  
     
     The consolidated results of operations for the three months ended June 30 includes the following significant items:
                 
    After-tax   Diluted EPS
In thousands, except per share   Gain (loss)        
2008
               
Reversal of shutdown and restructuring charges
  $ 532     $ 0.01  
Acquisition integration related costs
    (177 )     0.00  
 
               
2007
               
Timberland sales
    3,486       0.08  
Acquisition integration related costs
    (744 )     (0.02 )


Business Units The following table sets forth profitability information by business unit and the composition of consolidated income before income taxes:
                                                                         
Business Unit Performance                     For the Three Months Ended June 30,    
In thousands, except net tons sold   Specialty Papers   Composite Fibers   Other and Unallocated   Total
    2008     2007   2008     2007   2008     2007   2008     2007
 
                                                                       
Net sales
  $ 207,296       $ 202,606     $ 112,928       $ 85,486     $       $ (1 )   $ 320,224       $ 288,091  
Energy sales, net
    2,743         2,424                                   2,743         2,424  
 
                                                                       
Total revenue
    210,039         205,030       112,928       $ 85,486               (1 )     322,967         290,515  
Cost of products sold
    196,948         192,817       96,462         70,522       (2,841 )       (1,624 )     290,569         261,715  
 
                                                                       
Gross profit (loss)
    13,091         12,213       16,466         14,964       2,841         1,623       32,398         28,800  
SG&A
    13,772         14,521       9,689         8,182       1,916         1,073       25,377         23,776  
Shutdown and restructuring charges
                                (856 )       (63 )     (856 )       (63 )
Gains on dispositions of plant, equipment and timberlands
                                16         (5,693 )     16         (5,693 )
 
                                                                       
Total operating income (loss)
    (681 )       (2,308 )     6,777         6,782       1,765         6,306       7,861         10,780  
Non-operating income (expense)
                                        (4,367 )       (6,940 )     (4,367 )       (6,940 )
 
                                                                       
Income (loss) before income taxes
  $ (681 )     $ (2,308 )   $ 6,777       $ 6,782     $ (2,602 )     $ (634 )   $ 3,494       $ 3,840  
 
                                                                       
 
                                                                       
Supplementary Data
                                                                       
Net tons sold
    182,700         183,344       22,356         18,118                     205,056         201,462  
Depreciation, depletion and amortization expense
  $ 8,980       $ 8,881     $ 6,968       $ 5,250                   $ 15,948       $ 14,131  
                 
GLATFELTER

-23-


 

     The following table summarizes sales and costs of products sold for the three months ended June 30, 2008 and 2007.
Sales and Costs of Products Sold
                           
    Three Months Ended    
    June 30    
In thousands   2008     2007   Change
           
Net sales
  $ 320,224       $ 288,091     $ 32,133  
Energy sales – net
    2,743         2,424       319  
           
Total revenues
    322,967         290,515       32,452  
Costs of products sold
    290,569         261,715       28,854  
           
Gross profit
  $ 32,398       $ 28,800     $ 3,598  
           
Gross profit as a percent of Net sales
    10.1 %       10.0 %        
     
     The following table sets forth the contribution to consolidated net sales by each business unit:
                   
    Percent of Total
    2008     2007
       
Business Unit
                 
Specialty Papers
    64.7 %       70.3 %
Composite Fibers
    35.3         29.7  
           
Total
    100.0 %       100.0 %
       
     Net sales totaled $320.2 million for the second quarter of 2008, an increase of $32.1 million, or approximately 11.1%, compared to the same period a year ago.
     In the Specialty Papers business unit, net sales for the second quarter of 2008 increased $4.7 million to $207.3 million and the unit had an operating loss of $0.7 million, an improvement of $1.6 million over the previous year. Higher average selling prices contributed $9.0 million of the increase in net sales and volumes shipped were essentially unchanged, although the mix of products was slightly unfavorable primarily due to the expected and continued decline in carbonless and forms markets. Operating income was adversely impacted by higher production costs primarily due to higher raw material prices that increased by $11.6 million largely driven by pulp and energy. During the second quarters of 2008 and 2007, we completed the annually scheduled maintenance outages at its Spring Grove, PA and Chillicothe, OH facilities. These required outages result in increased maintenance spending and reduced production leading to unfavorable manufacturing costs and lower product sales negatively affecting our second quarter results when compared to other quarters. The maintenance outages adversely impacted gross profit by approximately $15.6 million in the second quarter of 2008, compared to $15.3 million in the same quarter a year ago. During the second quarter, we also incurred $0.4 million in severance costs as we continued to reduce the cost structure at our Chillicothe facility.
     Net sales in the Composite Fibers business unit increased $27.4 million, or 32.1% to $112.9 million for the 2008 second quarter, largely due to the November 2007 Caerphilly acquisition and the impact of foreign currency translation. Despite the loss of production and sales volume associated with the rebuild of a paper machine in Gernsbach Germany, operating income was in line with the second quarter of 2007 at $6.8 million. On a constant currency basis, higher average selling prices contributed $3.0 million to operating income and volumes increased approximately 23.4%. The higher volumes were primarily due to shipments of metalized paper from Caerphilly (acquired in November 2007), and, to a lesser extent, greater shipments of composite laminates and food and beverage products. The cost of raw materials, primarily pulps and energy, was $4.9 million higher than a year ago. As expected, Caerphilly was slightly dilutive to second quarter 2008 earnings and as previously announced, the Company continues to expect Caerphilly to be neutral to earnings for 2008 and slightly accretive in 2009. During the second quarter of 2008, the Company completed the previously announced upgrade of a paper machine at the Gernsbach facility. Lost production time during the upgrade period adversely impacted operating income by approximately $0.3 million. In addition, cost of goods sold in the second quarter of 2008 includes $0.7 million of accelerated depreciation to write-off the book value of the paper machine components that were replaced during the upgraded.
     Non-Cash Pension Income Non-cash pension income results from the over-funded status of our pension plans. 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. The following summarizes non-cash pension income for each of the second quarters of 2008 and 2007:
                           
    Three Months Ended    
    June 30    
In thousands   2008     2007   Change
           
Recorded as:
                         
Costs of products sold
  $ 2,925       $ 2,190     $ 735  
SG&A expense
    1,271         718       553  
           
Total
  $ 4,196       $ 2,908     $ 1,288  
       
     Selling, general and administrative (“SG&A”) expenses increased by $1.6 million in the quarter-to-quarter comparison and totaled $25.4 million in the second quarter of 2008. The increase was due to higher performance-based incentive compensation expenses, the effect of foreign currency translation adjustments and the inclusion of Caerphilly’s results in 2008.


      
GLATFELTER

-24-


 

     Income taxes During the second quarter of 2008, our effective tax rate was 9.7% compared to 48.0% in the same period of 2007. The decrease was primarily due to the significant amount of land sales in the second quarter of 2007 which are subject to higher tax rates, tax benefits recorded upon the filing of an international subsidiary’s tax return, and the reversal of a tax reserve in a foreign jurisdiction where the statute expired.
     Foreign Currency During the second quarter of 2008, Euro functional currency operations generated approximately 21.8 % of our sales and 20.1 % of operating expenses and British Pound Sterling operations represented 10.9 % of net sales and 10.9 % of operating expenses. The translation of the results from these international operations into U.S. dollars is subject to changes in foreign currency exchange rates.
     The table below summarizes the effect from foreign currency translation on second quarter 2008 reported results compared to second quarter 2007:
         
In thousands   Three Months Ended  
    Favorable  
    (unfavorable)  
Net sales
  $ 9,789  
Costs of products sold
    (7,713 )
SG&A expenses
    (714 )
Income taxes and other
    (166 )
 
     
Net income
  $ 1,196  
   
     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 expenditures for new or enhanced equipment, for environmental compliance matters and to support our business strategy and research and development efforts. The following table summarizes cash flow information for each of the periods presented.
                   
    Six Months Ended
    June 30
In thousands   2008     2007
           
Cash and cash equivalents at beginning of period
  $ 29,833       $ 21,985  
Cash provided by (used for)
                 
Operating activities
    (3,047 )       17,636  
Investing activities
    (10,410 )       (4,773 )
Financing activities
    1,412         (22,604 )
Effect of exchange rate changes on cash
    823         752  
           
Net cash used
    (11,222 )       (8,989 )
           
Cash and cash equivalents at end of period
  $ 18,611       $ 12,996  
     
     Cash used in operating activities increased $20.7 million in the comparison as the benefits of improved results of operations were more than offset by increased accounts receivables, the use of $9.4 million of cash to fund environmental matters and the payment of to $16.1 million of taxes in 2008 compared with a $1.6 million of tax refund in the same period of 2007.
     The net change in investing cash flows primarily reflects $11.2 million increase in capital expenditures during the period partially offset by a $5.5 million increase in proceeds from timberland sales. For all of 2008, capital expenditures are expected to total $52 million to $57 million including a $10 million investment to upgrade the capabilities of one of our inclined-wire paper machines in Germany during the second quarter of 2008.
     We recently announced our intentions to invest $38 million in state-of-the-art inclined wire and through air drying technology to upgrade another paper machine at our Gernsbach, Germany facility. This investment is expected to be made in the second half of 2009 and will likely be funded from existing cash balances and available borrowing capacity under our current credit facility.
     During the first six months of 2008 and 2007, cash dividends paid on common stock totaled approximately $8.2 million in each period. 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.
     Changes in cash flows from financing activity in the comparison resulted primarily from net debt repayments in first six months of 2007 totaling $15.6 million, compared to net borrowings in the current year totaling $9.0 million. During the first half of 2008, we completed a $36.7 million borrowing collateralized with a promissory note received in connection with the fourth quarter of 2007 installment timberland sale.


      
GLATFELTER

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     The following table sets forth our outstanding long-term indebtedness:
                   
    June 30,     December
In thousands   2008     31, 2007
       
Revolving credit facility, due April 2011
  $ 10,956       $ 35,049  
Term Loan, due April 2011
    37,000         43,000  
71/8% Notes, due May 2016
    200,000         200,000  
Term Loan, due January 2013
    36,695          
Note payable, due March 2013
    34,000         34,000  
           
Total long-term debt
    318,651         312,049  
Less current portion
    (12,383 )       (11,008 )
           
Long-term debt, excluding current portion
  $ 306,268       $ 301,041  
     
     The significant terms of the debt obligations are set forth in Item 1–Financial Statements and Supplementary Data, Note 12.
     We are subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of mills we operate, or have operated. To comply with environmental laws and regulations, we have incurred substantial capital and operating expenditures in past years. We anticipate that environmental regulation of our operations will continue to become more burdensome and that capital and operating expenditures necessary to comply with environmental regulations will continue, and perhaps increase, in the future. In addition, we may incur obligations to remove or mitigate any adverse effects on the environment resulting from our operations, including the restoration of natural resources and liability for personal injury and for damages to property and natural resources. See Item 1 – Financial Statements – Note 14 for a summary of significant environmental matters.
     We expect to meet all of our near- and longer-term cash needs from a combination of operating cash flow, cash and cash equivalents, sales of timberland, our existing credit facility or other bank lines of credit and other long-term debt. However, as discussed in Item 1 – Financial Statements– Note 14, an unfavorable outcome of various environmental matters could have a material adverse impact on our consolidated financial position, liquidity and/or results of operations.
     Our credit agreement, as amended, contains a number of customary compliance covenants. In addition, the 71/8% Notes contain a cross default provision that in the event of a default under the credit agreement, the 71/8% Notes would become currently due. As of June 30, 2008, we met all of the requirements of our debt covenants.
     Off-Balance-Sheet Arrangements As of June 30, 2008 and December 31, 2007, 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 1 – Financial Statements.
     Outlook For the second half of 2008, we expect average selling prices to increase across all product lines in the Specialty Papers business unit. However, the rate of increase in this unit’s input costs is expected to outpace the benefits from higher selling prices. Further, we expect cost reduction initiatives to mitigate the adverse effects of the rate of increases in input costs compared to increases in selling prices. Volumes shipped in the Specialty Papers business unit during the second half of 2008 are expected to be in line with the same period of 2007.
     In the Composite Fibers business unit, higher average selling prices coupled with continuous improvement initiatives are expected to more than offset rising input costs. Volumes shipped in this unit during the second half of 2008 are expected to be higher than the same period of 2007 reflecting additional volumes attributable to the Caerphilly acquisition.
     In connection with the previously announced $38 million investment to install state-of-the-art inclined wire technology and through air drying on a paper machine, we expect to record accelerated depreciation expense, of $0.7 million per quarter through the third quarter of 2009, associated with the upgraded machine components.
     We also expect to record, in the second half of 2008, charges estimated to total $0.5 million to $1.0 million associated with new or additional profit improvement initiatives at the Chillicothe facility.


      
GLATFELTER

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
                                                         
    Year Ended December 31   At June 30, 2008
Dollars in thousands   2008   2009   2010   2011   2012   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     $ 185,175  
At fixed interest rate – SunTrust Note
    34,000       34,000       34,000       34,000       34,000       34,000       33,621  
At variable interest rates
    81,900       72,268       58,509       42,055       36,695       84,651       84,651  
                                               
 
                                          $ 318,651     $ 303,447  
                                             
Weighted-average interest rate
                                                       
On fixed rate debt – Bond
    7.13 %     7.13 %     7.13 %     7.13 %     7.13 %                
On fixed rate debt – Note payable
    3.10       3.10       3.10       3.10       3.10                  
On variable rate debt
    4.47       4.62       4.92       5.20       5.31                  
 

     Our market risk exposure primarily results from changes in interest rates and currency exchange rates. At June 30, 2008, we had long-term debt outstanding of $318.7 million, of which $84.7 million or 26.6 % was at variable interest rates.
     The table above presents average principal outstanding and related interest rates for the next five years. Fair values included herein have been determined based upon rates currently available to us for debt with similar terms and remaining maturities.
     Variable-rate debt outstanding represents borrowings under (i) credit facility that incur interest based on the domestic prime rate or a Eurocurrency rate, at our option, plus a margin; (ii) the term loan that matures in April 2011, under which we are required to make quarterly repayments and (iii) the 2008 Term Loan that bears interest at a six-month reserve adjusted LIBOR plus a margin rate of 1.2%per annum. At June 30, 2008, the weighted average interest rate paid on variable rate debt was 4.47%. A hypothetical 100 basis point increase or decrease in the interest rate on variable rate debt would increase or decrease annual interest expense by $0.9 million.
     We are subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. Dollar. During the first six months of 2008, Euro functional currency operations generated approximately 21.5 % of our sales and 20.1 % of operating expenses and British Pound Sterling operations represented 10.6 % of net sales and 11.2 % of operating expenses.
ITEM 4. CONTROLS AND PROCEDURES
     Evaluation of Disclosure Controls and Procedures Our chief executive officer and our principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2008, have concluded that, as of the evaluation date, our disclosure controls and procedures are effective.
     Changes in Internal Controls There were no changes in our internal control over financial reporting during the three months ended June 30, 2008, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.


      
GLATFELTER

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PART II
     ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    The Annual Meeting of holders of Glatfelter common stock was held on May 1, 2008. At this meeting, shareholders voted on the following matters (with the indicated tabulated results).
  i.   The election of two members of the Board of Directors to serve for full three-year terms expiring in 2011.
                 
Director   For   Withheld
     
Nicholas DeBenedictis
    24,426,131       16,736,576  
J. Robert Hall
    37,745,500       3,417,207  
  ii.   the amendment of the Company’s By-laws to phase out the company’s classified Board structure.
         
For   Against   Abstained
     
40,807,843   300,680   54,182
  iii.   the ratification of the appointment of Deloitte & Touche LLP as the independent registered public accounting firm for the Company for the fiscal year ending December 31, 2008.
         
For   Against   Abstained
38,594,819   2,533,458   34,430
     ITEM 5. OTHER INFORMATION
     On May 8, 2008, in conjunction with the Company’s ongoing strategic initiative to monetize the value of its timberlands, the Company, through a wholly-owned subsidiary, entered into an agreement to sell 246 acres of timberland for $3.25 million in cash to George H. Glatfelter, its Chairman and Chief Executive Officer, and his wife Beverly G. Glatfelter (the “Glatfelters”), subject to closing conditions customary with transactions of this nature. The 246 acres of timberland which was subject to the agreement with the Glatfelters, had been independently appraised and marketed for public sale by the Company. Based on those appraisals and the marketing process that was pursued, the Company and its Board of Directors believe that the sale price agreed to with the Glatfelters constitutes fair market value for the timberland. The sale of this timberland closed on August 8, 2008.
     In accordance with the Company’s Corporate Governance standards, the proposed sale transaction with the Glatfelters was reviewed and pre-approved by the Nominating and Corporate Governance Committee of the Company’s Board of Directors as a related party transaction.
     A copy of the land sale agreement is filed with this Quarterly Report on Form 10-Q as Exhibit 10.2.
GLATFELTER

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     ITEM 6. EXHIBITS
     The following exhibits are filed herewith or incorporated by reference as indicated.
     
10.1
  Amended Consent Decree for Remedial Design and Remedial Action at Operable Unit 1 of the Lower Fox River and Green Bay Site by and among the United States of America and the State of Wisconsin v. P. H. Glatfelter and WTM I Company (f/k/a Wisconsin Tissue Mills Inc.), certain Appendices have been intentionally omitted, copies of which can be obtained free of charge from the Registrant), incorporated by reference to the Company’s Current Report on Form 8-K, dated June 30, 2008.
10.2
  Contract for Sale for Sale of Real Estate between Glatfelter Pulp Wood Company, a wholly owned subsidiary of the Company, and George H. Glatfelter II and Beverly G. Glatfelter, dated May 8, 2008, filed herewith.
31.1
  Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
  Certification of John P. Jacunski, Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
  Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
32.2
  Certification of John P. Jacunski, Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
             
    P. H. GLATFELTER COMPANY    
    (Registrant)    
 
           
August 11, 2008
           
 
           
 
  By   /s/ David C. Elder    
 
           
 
      David C. Elder    
 
      Corporate Controller    
GLATFELTER

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    EXHIBIT INDEX
     
Exhibit Number   Description
10.1
  Amended Consent Decree for Remedial Design and Remedial Action at Operable Unit 1 of the Lower Fox River and Green Bay Site by and among the United States of America and the State of Wisconsin v. P. H. Glatfelter and WTM I Company (f/k/a Wisconsin Tissue Mills Inc.) -(certain Appendices have been intentionally omitted, copies of which can be obtained free of charge from the Registrant), incorporated by reference to the Company’s Current Report on Form 8-K, dated June 30, 2008.
10.2
  Contract for Sale for Sale of Real Estate between Glatfelter Pulp Wood Company, a wholly owned subsidiary of the Company, and George H. Glatfelter II and Beverly G. Glatfelter, dated May 8, 2008, filed herewith.
31.1
  Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 – Chief Executive Officer, filed herewith.
31.2
  Certification of John P. Jacunski, Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer, filed herewith.
32.1
  Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer, filed herewith.
32.2
  Certification of John P. Jacunski, Senior Vice President and Chief Financial Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 – Chief Financial Officer, filed herewith.
GLATFELTER

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