Magnera Corp

Quarterly Report • Aug 2, 2016

10-Q 1 d209817d10q.htm FORM 10-Q Form 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2016

or

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

96 South George Street, Suite 520

York, Pennsylvania 17401

(Address of principal executive offices)

(717) 225-4711

(Registrant’s telephone number, including area code)

Commission file number	Exact name of registrant as specified in its charter	IRS Employer Identification No.	State or other jurisdiction of incorporation or organization
1-03560	P. H. Glatfelter Company	23-0628360	Pennsylvania

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 the past 90 days. Yes x No ¨ .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company).	Small 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 x .

Common Stock outstanding on July 29, 2016 totaled 43,547,739 shares.

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P. H. GLATFELTER COMPANY AND

SUBSIDIARIES

REPORT ON FORM 10-Q

For the QUARTERLY PERIOD ENDED

June 30, 2016

Table of Contents

PART I - FINANCIAL INFORMATION
Item 1	Financial Statements
	Condensed Consolidated Statements of Income for the three months and six months
ended June 30, 2016 and 2015 (unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income for the three months
and six months ended June 30, 2016 and 2015 (unaudited)	3
	Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015
(unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June
30, 2016 and 2015 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements
(unaudited)
	1. Organization	6
	2. Accounting Policies	6
	3. Earnings Per Share	7
	4.
Accumulated Other Comprehensive Income	8
	5. Income Taxes	9
	6. Stock-based
Compensation	10
	7.
Retirement Plans and Other Post-Retirement Benefits	11

	8. Inventories	12
	9. Long-term Debt	12
	10. Asset Retirement Obligations	13
	11. Fair Value of Financial
Instruments	13
	12. Financial Derivatives and Hedging
Activities	14
	13.
Commitments, Contingencies and Legal Proceedings	16
	14. Segment Information	21
	15. Condensed Consolidating Financial
Statements	22
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3	Quantitative and Qualitative Disclosures About Market Risks	39
Item 4	Controls and Procedures	39
PART II – OTHER INFORMATION
Item 6	Exhibits	40
	SIGNATURES	40

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PART I

Item 1 – Financial Statements

P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

In thousands, except per share	Three months ended June 30 — 2016	2015		2016		2015
Net sales	$ 406,413	$	410,803	$	808,631	$	828,272
Energy and related sales, net	2,001		715		2,667		2,783
Total revenues	408,414		411,518		811,298		831,055
Costs of products sold	365,691		378,685		710,732		746,114
Gross profit	42,723		32,833		100,566		84,941
Selling, general and administrative expenses	37,191		29,137		69,049		60,409
(Gains) losses on dispositions of plant, equipment and timberlands, net	2		(111	)	26		(2,765	)
Operating income	5,530		3,807		31,491		27,297
Non-operating income (expense)
Interest expense	(3,953	)	(4,352	)	(8,069	)	(8,860	)
Interest income	61		77		152		142
Other, net	317		215		(383	)	28
Total non-operating expense	(3,575	)	(4,060	)	(8,300	)	(8,690	)
Income (loss) before income taxes	1,955		(253	)	23,191		18,607
Income tax (benefit) provision	(10	)	(3,101	)	5,058		1,834
Net income	$ 1,965	$	2,848	$	18,133	$	16,773
Earnings per share
Basic	$ 0.05	$	0.07	$	0.42	$	0.39
Diluted	0.04		0.06		0.41		0.38
Cash dividends declared per common share	$ 0.125	$	0.12	$	0.25	$	0.24
Weighted average shares outstanding
Basic	43,558		43,377		43,539		43,315
Diluted	44,062		44,032		43,963		43,992

The accompanying notes are an integral part of these condensed consolidated financial statements.

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P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

In thousands	Three months ended June 30 — 2016		2015	2016		2015
Net income	$ 1,965		$ 2,848	$	18,133	$	16,773
Foreign currency translation adjustments	(14,864	)	16,704		(1,445	)	(24,633	)
Net change in:
Deferred gains on cash flow hedges, net of taxes of $(258), $956, $(201) and $(107),
respectively	944		(2,501	)	1,010		265
Unrecognized retirement obligations, net of taxes of $(1,442), $(1,769), $(2,809) and $(3,779),
respectively	2,381		2,884		4,638		6,170
Other comprehensive income (loss)	(11,539	)	17,087		4,203		(18,198	)
Comprehensive income (loss)	$ (9,574	)	$ 19,935	$	22,336	$	(1,425	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

In thousands	June 30 — 2016	2015
Assets
Cash and cash equivalents	$ 58,532	$	105,304
Accounts receivable, net	175,336		167,199
Inventories	257,623		247,214
Prepaid expenses and other current assets	33,094		32,650
Total current assets	524,585		552,367
Plant, equipment and timberlands, net	748,036		698,864
Goodwill	77,044		76,056
Intangible assets	61,625		63,057
Other assets	113,894		110,072
Total assets	$ 1,525,184	$	1,500,416
Liabilities and Shareholders’ Equity
Current portion of long-term debt	$ 9,098	$	7,366
Accounts payable	169,869		172,735
Dividends payable	5,455		5,231
Environmental liabilities	11,361		12,544
Other current liabilities	115,610		106,444
Total current liabilities	311,393		304,320
Long-term debt	358,366		353,296
Deferred income taxes	75,155		76,458
Other long-term liabilities	104,047		103,095
Total liabilities	848,961		837,169
Commitments and contingencies	—		—
Shareholders’ equity
Common stock	544		544
Capital in excess of par value	54,530		54,912
Retained earnings	970,374		963,143
Accumulated other comprehensive loss	(186,283	)	(190,486	)
	839,165		828,113
Less cost of common stock in treasury	(162,942	)	(164,866	)
Total shareholders’ equity	676,223		663,247
Total liabilities and shareholders’ equity	$ 1,525,184	$	1,500,416

The accompanying notes are an integral part of these condensed consolidated financial statements.

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P. H. GLATFELTER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

In thousands	Six months ended June 30 — 2016	2015
Operating activities
Net income	$ 18,133	$	16,773
Adjustments to reconcile to net cash provided by operations:
Depreciation, depletion and amortization	33,411		31,602
Amortization of debt issue costs	574		599
Pension expense, net of unfunded benefits paid	1,964		3,699
Deferred income tax (benefit) provision	(2,672	)	2,501
Losses (gains) on dispositions of plant, equipment and timberlands, net	26		(2,765	)
Share-based compensation	2,803		3,663
Change in operating assets and liabilities
Accounts receivable	(8,471	)	(20,783	)
Inventories	(12,295	)	(8,609	)
Prepaid and other current assets	(163	)	(1,678	)
Accounts payable	(3,027	)	(989	)
Accruals and other current liabilities	5,252		2,735
Other	1,105		(1,235	)
Net cash provided by operating activities	36,640		25,513
Investing activities
Expenditures for purchases of plant, equipment and timberlands	(80,391	)	(44,575	)
Proceeds from disposals of plant, equipment and timberlands, net	53		3,051
Other	(300	)	(1,600	)
Net cash used by investing activities	(80,638	)	(43,124	)
Financing activities
Net repayments of revolving credit facility	(11,403	)	—
Payments of borrowing costs	(136	)	(1,329	)
Proceeds from term loans	19,428		—
Repayment of term loans	(3,803	)	(1,492	)
Payments of dividends	(10,679	)	(9,992	)
Proceeds from government grants	4,443		—
Payments related to share-based compensation awards and other	(976	)	(2,000	)
Net cash used by financing activities	(3,126	)	(14,813	)
Effect of exchange rate changes on cash	352		(1,651	)
Net decrease in cash and cash equivalents	(46,772	)	(34,075	)
Cash and cash equivalents at the beginning of period	105,304		99,837
Cash and cash equivalents at the end of period	$ 58,532	$	65,762
Supplemental cash flow information
Cash paid for:
Interest, net of amounts capitalized	$ 7,509	$	8,281
Income taxes, net	8,486		10,234

The accompanying notes are an integral part of these condensed consolidated financial statements.

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P. H. GLATFELTER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. ORGANIZATION

P. H. Glatfelter Company and subsidiaries (“Glatfelter”) is a manufacturer of specialty papers and fiber-based engineered materials. Headquartered in York, PA, U.S. operations include facilities in Spring Grove, PA and Chillicothe and Fremont, OH. International operations include facilities in Canada, Germany, France, the United Kingdom and the Philippines, and sales and distribution offices in Russia and China. Our products are marketed worldwide, either through wholesale paper merchants, brokers and agents, or directly to customers.

1. ACCOUNTING POLICIES

Basis of Presentation The unaudited condensed consolidated financial statements (“financial statements”) include the accounts of Glatfelter and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

We prepared these financial statements in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements. In our opinion, the financial statements reflect all normal, recurring adjustments needed to present fairly our results for the interim periods. When preparing these financial statements, we have assumed that you have read the audited consolidated financial statements included in our 2015 Annual Report on Form 10-K.

Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Management believes the estimates and assumptions used in the preparation of these financial statements are reasonable, based upon currently available facts and known circumstances, but recognizes that actual results may differ from those estimates and assumptions.

Recently Issued Accounting Pronouncements In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment

Accounting designed to simplify certain aspects of accounting for share-based awards. The new ASU requires entities to recognize as a component of income tax expense all excess tax benefits or deficiencies arising from the difference between compensation costs recognized and the intrinsic value at the time an option is exercised or, in the case of restricted stock and similar awards, the fair value upon vesting of an award. Previously such differences were recognized in additional paid in capital as part of an “APIC pool.” In addition, the ASU also requires entities to exclude excess tax benefits and tax deficiencies from the calculation of common share equivalents for purposes of calculating earnings per share. The new standard is required to be adopted, either prospectively or retrospectively, in the first quarter of 2017 and early adoption is permitted. We do not believe the adoption of this standard will have a material impact on our reported results of operations or financial position.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . This ASU will require organizations such as us that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance will be effective for annual periods beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. We are in the process of assessing the impact this standard will have on us and expect to follow a modified retrospective method provided for under the standard.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards. The new standard is required to be adopted retrospectively for fiscal years beginning after December 15, 2017 and early adoption is permitted only for reporting periods beginning after December 31, 2016. We are in the process of evaluating the impact this standard may have, if any, on our reported results of operations or financial position.

In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments that changes the impairment model for most financial instruments, including trade receivables from an incurred loss method to a new forward-looking approach, based on expected losses. Under the new guidance, an allowance is recognized based on an estimate of expected credit losses. This standard is effective for us in the first quarter of 2020 and must be adopted using a modified retrospective

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transition approach. We are currently assessing the impact this standard may have on our results of operations and financial position.

1. EARNINGS PER SHARE

The following table sets forth the details of basic and diluted earnings per share (“EPS”):

In thousands, except per share	Three months ended June 30 — 2016	2015
Net income	$ 1,965	$ 2,848
Weighted average common shares outstanding used in basic EPS	43,558	43,377
Common shares issuable upon exercise of dilutive stock options and PSAs / RSUs	504	655
Weighted average common shares outstanding and common share equivalents used in diluted
EPS	44,062	44,032
Earnings per share
Basic	$ 0.05	$ 0.07
Diluted	0.04	0.06

In thousands, except per share	Six months ended June 30 — 2016	2015
Net income	$ 18,133	$ 16,773
Weighted average common shares outstanding used in basic EPS	43,539	43,315
Common shares issuable upon exercise of dilutive stock options and PSAs / RSUs	424	677
Weighted average common shares outstanding and common share equivalents used in diluted
EPS	43,963	43,992
Earnings per share
Basic	$ 0.42	$ 0.39
Diluted	0.41	0.38

The following table sets forth potential common shares outstanding for stock options and restricted stock units that were not included in the computation of diluted EPS for the period indicated, because their effect would be anti-dilutive:

In thousands	June 30 — 2016	2015
Three months ended	1,368	687
Six months ended	1,451	687

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1. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table sets forth details of the changes in accumulated other comprehensive income (losses) for the three months and six months ended June 30, 2016 and 2015.

in thousands — Balance at April 1, 2016	Currency translation adjustments — $ (59,622	)	Unrealized gain (loss) on cash flow hedges — $ (159	)	Change in pensions — $ (118,399	)	Change in other postretirement defined benefit plans — $ 3,436		Total — $ (174,744	)
Other comprehensive income before reclassifications (net of tax)	(14,864	)	837		—		—		(14,027	)
Amounts reclassified from accumulated other comprehensive income (net of tax)	—		107		2,613		(232	)	2,488
Net current period other comprehensive income (loss)	(14,864	)	944		2,613		(232	)	(11,539	)
Balance at June 30, 2016	$ (74,486	)	$ 785		$ (115,786	)	$ 3,204		$ (186,283	)
Balance at April 1, 2015	$ (75,561	)	$ 5,122		$ (116,994	)	$ (2,722	)	$ (190,155	)
Other comprehensive income before reclassifications (net of tax)	16,704		(1,220	)	—		—		15,484
Amounts reclassified from accumulated other comprehensive income (net of tax)	—		(1,281	)	2,918		(34	)	1,603
Net current period other comprehensive income (loss)	16,704		(2,501	)	2,918		(34	)	17,087
Balance at June 30, 2015	$ (58,857	)	$ 2,621		$ (114,076	)	$ (2,756	)	$ (173,068	)
in thousands	Currency translation adjustments		Unrealized gain (loss) on cash flow hedges		Change in pensions		Change in other postretirement defined benefit plans		Total
Balance at January 1, 2016	$ (73,041	)	$ (225	)	$ (120,714	)	$ 3,494		$ (190,486	)
Other comprehensive income before reclassifications (net of tax)	(1,445	)	1,089		—		—		(356	)
Amounts reclassified from accumulated other comprehensive income (net of tax)	—		(79	)	4,928		(290	)	4,559
Net current period other comprehensive income (loss)	(1,445	)	$ 1,010		4,928		(290	)	4,203
Balance at June 30, 2016	$ (74,486	)	$ 785		$ (115,786	)	$ 3,204		$ (186,283	)
Balance at January 1, 2015	$ (34,224	)	$ 2,356		$ (120,260	)	$ (2,742	)	$ (154,870	)
Other comprehensive income before reclassifications (net of tax)	(24,633	)	2,174		—		—		(22,459	)
Amounts reclassified from accumulated other comprehensive income (net of tax)	—		(1,909	)	6,184		(14	)	4,261
Net current period other comprehensive income (loss)	(24,633	)	265		6,184		(14	)	(18,198	)
Balance at June 30, 2015	$ (58,857	)	$ 2,621		$ (114,076	)	$ (2,756	)	$ (173,068	)

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Reclassifications out of accumulated other comprehensive income were as follows:

In thousands	Three months ended June 30 — 2016	2015			Six months ended June 30 — 2016		2015
Description									Line Item in Statements of Income
Cash flow hedges (Note 12)
(Gains) losses on cash flow hedges	$ 215	$	(1,750	)	$ (83	)	$ (2,623	)	Costs of products sold
Tax expense (benefit)	(108	)	469		4		714		Income tax provision
Net of tax	107		(1,281	)	(79	)	(1,909	)
Retirement plan obligations (Note 7)
Amortization of deferred benefit pension plan items
Prior service costs	509		574		1,013		1,142		Costs of products sold
	166		187		336		379		Selling, general and administrative
Actuarial losses	2,618		2,924		4,900		6,288		Costs of products sold
	915		1,023		1,687		2,165		Selling, general and administrative
	4,208		4,708		7,936		9,974
Tax benefit	(1,595	)	(1,790	)	(3,008	)	(3,790	)	Income tax provision
Net of tax	2,613		2,918		4,928		6,184
Amortization of deferred benefit other plan items
Prior service costs	(38	)	(57	)	(75	)	(115	)	Costs of products sold
	(8	)	(13	)	(16	)	(25	)	Selling, general and administrative
Actuarial losses	(269	)	12		(311	)	94		Costs of products sold
	(58	)	3		(67	)	21		Selling, general and administrative
	(373	)	(55	)	(469	)	(25	)
Tax expense	141		21		179		11		Income tax provision
Net of tax	(232	)	(34	)	(290	)	(14	)
Total reclassifications, net of tax	$ 2,488	$	1,603		$ 4,559		$ 4,261

1. 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, 2016 and December 31, 2015, we had $13.2 million and $12.2 million of gross unrecognized tax benefits. As of June 30, 2016, if such benefits were to be recognized, approximately $10.6 million would be recorded as a component of income tax expense, thereby affecting our effective tax rate.

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, by major jurisdiction, tax years that remain subject to examination:

Jurisdiction	Open Tax Years — Examinations not yet initiated	Examination in progress
United States
Federal	2013 - 2015	N/A
State	2011 - 2015	2011 - 2014
Canada (1)	2010 - 2015	N/A
Germany (1)	2012 - 2015	2007 - 2011
France	2013 - 2015	2011 - 2012
United Kingdom	2014 - 2015	N/A
Philippines	2015	2013, 2014

(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

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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 lapse of various statutes of limitation, it is reasonably possible our gross unrecognized tax benefits balance may decrease within the next twelve months by a range of zero to $1.7 million. Substantially all of this range relates to tax positions taken in Germany.

We recognize interest and penalties related to uncertain tax positions as income tax expense. The following table summarizes information related to interest and penalties on uncertain tax positions:

In millions	Six months ended June 30 — 2016	2015
Interest expense	$ 0.2	$ —
Penalties	—	—
	June 30	December 31
	2016	2015
Accrued interest payable	$ 0.8	$ 0.6

1. STOCK-BASED COMPENSATION

The P. H. Glatfelter Amended and Restated Long Term Incentive Plan (the “LTIP”) provides for the issuance of Glatfelter common stock to eligible participants in the form of restricted stock units, restricted stock awards, non-qualified stock options, performance shares, incentive stock options and performance units.

Pursuant to terms of the LTIP, we have issued to eligible participants restricted stock units, performance share awards and stock only stock appreciation rights.

Restricted Stock Units (“RSU”) and Performance Share Awards (“PSAs”) Awards of RSUs and PSAs are made under our LTIP. The RSUs vest on the passage of time, generally on a graded scale over a three, four, and five-year period, or in certain instances the RSUs were issued with five year cliff vesting. PSAs are issued annually to members of management and each respective grant cliff vests each December 31 of the third year following the grant, assuming the achievement of predetermined, cumulative financial performance targets covering two or three year periods. The performance measures include a minimum, target and maximum performance level providing the grantees an opportunity to receive more or less shares than targeted depending on actual financial performance. For both RSUs and PSAs, the grant date fair value of the awards, which is equal to the closing price per common share on the date of the award, is used to determine the amount of expense to be recognized over the applicable service period. Settlement of RSUs and PSAs will be made in shares of our common stock currently held in treasury.

The following table summarizes RSU and PSA activity during periods indicated:

Units — Balance at January 1,	674,523		888,942
Granted	295,654		152,531
Forfeited	(143,209	)	(77,652	)
Shares delivered	(149,475	)	(283,627	)
Balance at June 30,	677,493		680,194

The amount granted in 2016 and 2015 includes PSAs of 199,693 and 100,801, respectively, exclusive of reinvested dividends.

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The following table sets forth aggregate RSU and PSA compensation expense for the periods indicated:

In thousands	June 30 — 2016	2015
Three months ended	$ 935	$ 453
Six months ended	1,402	820

Stock Only Stock Appreciation Rights (“SOSARs”) Under terms of the SOSAR, a recipient receives the right to a payment in the form of shares of common stock equal to the difference, if any, in the fair market value of one share of common stock at the time of exercising the SOSAR and the exercise price. The SOSARs vest ratably over a three year period and have a term of ten years.

The following table sets forth information related to outstanding SOSARS.

SOSARS	2016 — Shares	Wtd Avg Exercise Price	Shares		Wtd Avg Exercise Price
Outstanding at January 1,	2,199,742	$	17.82	1,864,707	$	16.20
Granted	743,925		17.54	406,142		24.94
Exercised	(53,190	)	9.91	(58,343	)	13.52
Canceled / forfeited	(108,945	)	21.81	(3,349	)	26.53
Outstanding at June 30,	2,781,532	$	17.74	2,209,157	$	17.87
SOSAR Grants
Weighted average grant date fair value per share	$ 4.07		$	7.54
Aggregate grant date fair value (in thousands)	$ 3,013		$	3,063
Black-Scholes assumptions
Dividend yield	2.85	%		1.92	%
Risk free rate of return	1.34	%		1.64	%
Volatility	31.97	%		36.48	%
Expected life	6 yrs			6 yrs

The following table sets forth SOSAR compensation expense for the periods indicated:

In thousands	June 30 — 2016	2015
Three months ended	$ 669	$ 680
Six months ended	1,401	1,268

1. RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS

The following tables provide information with respect to the net periodic costs of our pension and post retirement medical benefit plans.

In thousands	Three months ended June 30 — 2016	2015
Pension Benefits
Service cost	$ 2,510	$	2,561
Interest cost	6,153		5,788
Expected return on plan assets	(11,275	)	(11,454	)
Amortization of prior service cost	675		761
Amortization of unrecognized loss	3,533		3,947
Net periodic benefit cost	$ 1,596	$	1,603
Other Benefits
Service cost	$ 250	$	303
Interest cost	456		436
Amortization of prior service cost	(46	)	(70	)
Amortization of unrecognized (gain)/loss	(327	)	15
Net periodic benefit cost	$ 333	$	684
	Six months ended June 30
In thousands	2016	2015
Pension Benefits
Service cost	$ 5,240	$	5,696
Interest cost	12,240		11,738
Expected return on plan assets	(22,661	)	(22,997	)
Amortization of prior service cost	1,349		1,521
Amortization of unrecognized loss	6,587		8,453
Net periodic benefit cost	$ 2,755	$	4,411
Other Benefits
Service cost	$ 573	$	716
Interest cost	996		999
Amortization of prior service cost	(91	)	(140	)
Amortization of unrecognized (gain)/loss	(378	)	115
Net periodic benefit cost	$ 1,100	$	1,690

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1. INVENTORIES

Inventories, net of reserves, were as follows:

	June 30	December 31
In thousands	2016	2015
Raw materials	$ 62,881	$ 60,098
In-process and finished	122,322	115,874
Supplies	72,420	71,242
Total	$ 257,623	$ 247,214

1. LONG-TERM DEBT

Long-term debt is summarized as follows:

In thousands	June 30 — 2016	2015
Revolving credit facility, due Mar. 2020	$ 48,851	$	58,792
5.375% Notes, due Oct. 2020	250,000		250,000
2.40% Term Loan, due Jun. 2022	9,516		10,109
2.05% Term Loan, due Mar. 2023	40,000		42,130
1.30% Term Loan, due Jun. 2023	11,102		—
1.55% Term Loan, due Sep. 2025	10,884		2,839
Total long-term debt	370,353		363,870
Less current portion	(9,098	)	(7,366	)
Unamortized deferred issuance costs	(2,889	)	(3,208	)
Long-term debt, net of current portion	$ 358,366	$	353,296

The amount set forth for Long-term debt, net of current portion as of December 31, 2015, has been restated to retroactively adopt ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs . This ASU requires debt issuance costs to be presented as a direct deduction from the carrying value of the related debt instrument rather than as a deferred asset except for costs associated with a revolving line of credit. We adopted this standard in the first quarter of 2016 retroactive to December 31, 2015.

On March 12, 2015, we amended our revolving credit agreement with a consortium of banks (the “Revolving Credit Facility”) which increased the amount available for borrowing to $400 million, extended the maturity of the facility to March 12, 2020, and instituted a revised interest rate pricing grid.

For all US dollar denominated borrowings under the Revolving Credit Facility, the borrowing rate is, at our option, either, (a) the bank’s base rate which is equal to the greater of i) the prime rate; ii) the federal funds rate

plus 50 basis points; or iii) the daily Euro-rate plus 100 basis points plus an applicable spread over either i), ii) or iii) ranging from 12.5 basis points to 100 basis points based on the Company’s leverage ratio and its corporate credit ratings determined by Standard & Poor’s Rating Services and Moody’s Investor Service, Inc. (the “Corporate Credit Rating”); or (b) the daily Euro-rate plus an applicable margin ranging from 112.5 basis points to 200 basis points based on the Company’s leverage ratio and the Corporate Credit Rating. For non-US dollar denominated borrowings, interest is based on (b) above.

The Revolving Credit Facility contains a number of customary covenants for financings of this type that, among other things, restrict our ability to dispose of or create liens on assets, incur additional indebtedness, repay other indebtedness, limits certain intercompany financing arrangements, make acquisitions and engage in mergers or consolidations. We are also required to comply with specified financial tests and ratios including: i) maximum net debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio (the “leverage ratio”); and ii) a consolidated EBITDA to interest expense ratio. The most restrictive of our covenants is a maximum leverage ratio of 3.5x. As of June 30, 2016, the leverage ratio, as calculated in accordance with the definition in our credit agreement, was 1.9x. A breach of these requirements would give rise to certain remedies under the Revolving Credit Facility, among which are the termination of the agreement and accelerated repayment of the outstanding borrowings plus accrued and unpaid interest under the credit facility.

On October 3, 2012, we completed a private placement offering of $250.0 million aggregate principal amount of 5.375% Senior Notes due 2020 (the “5.375% Notes”). The 5.375% Notes, which are now publically registered, are fully and unconditionally guaranteed, jointly and severally, by PHG Tea Leaves, Inc., Mollanvick, Inc., Glatfelter Composite Fibers N. A., Inc., Glatfelter Advanced Materials N.A., LLC., and Glatfelter Holdings, LLC (the “Guarantors”). Interest on the 5.375% Notes is payable semiannually in arrears on April 15 and October 15.

The 5.375% Notes are redeemable, in whole or in part, at anytime on or after October 15, 2016 at the redemption prices specified in the applicable Indenture. Prior to October 15, 2016, we may redeem some or all of the Notes at a “make-whole” premium as specified in the Indenture. These Notes and the guarantees of the notes are senior obligations of the Company and the Guarantors, respectively, rank equally in right of payment with future senior indebtedness of the Company and the Guarantors and will mature on October 15, 2020.

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The 5.375% Notes contain various covenants customary to indebtedness of this nature including limitations on i) the amount of indebtedness that may be incurred; ii) certain restricted payments including common stock dividends; iii) distributions from certain subsidiaries; iv) sales of assets; v) transactions amongst subsidiaries; and vi) incurrence of liens on assets. In addition, the 5.375% Notes contain cross default provisions that could result in all such notes becoming due and payable in the event of a failure to repay debt outstanding under the Revolving Credit Agreement at maturity or a default under the Revolving Credit Agreement that accelerates the debt outstanding thereunder. As of June 30, 2016, we met all of the requirements of our debt covenants.

Glatfelter Gernsbach GmbH & Co. KG (“Gernsbach”), a wholly-owned subsidiary of ours, entered into a series of borrowing agreements with IKB Deutsche Industriebank AG, Düsseldorf (“IKB”) as summarized below:

Amounts in thousands	Original Principal
Borrowing date
Apr. 11, 2013	€	42,700	2.05 %	Mar. 2023
Sep. 4, 2014		10,000	2.40 %	Jun. 2022
Oct. 10, 2015		2,608	1.55 %	Sep. 2025
May 4, 2016		7,195	1.55 %	Sep. 2025
Apr. 26, 2016		10,000	1.30 %	Jun. 2023

Each of the borrowings require quarterly repayments of principal and interest and provide for representations, warranties and covenants customary for financings of these types. The financial covenants contained in each of the IKB loans, which relate to the minimum ratio of consolidated EBITDA to consolidated interest expense and the maximum ratio of consolidated total net debt to consolidated adjusted EBITDA, are calculated by reference to our Revolving Credit Agreement.

P. H. Glatfelter Company guarantees all debt obligations of its subsidiaries. All such obligations are recorded in these condensed consolidated financial statements.

Letters of credit issued to us by certain financial institutions totaled $5.1 million and $5.3 million as of June 30, 2016 and December 31, 2015, respectively. The letters of credit, which reduce amounts available under our revolving credit facility, primarily provide financial assurances for the benefit of certain state workers compensation insurance agencies in conjunction with our self-insurance program. We bear the credit risk on this amount to the extent that we do not comply with the provisions of certain agreements. No amounts are outstanding under the letters of credit.

1. ASSET RETIREMENT OBLIGATION

During 2008, we recorded $11.5 million, net present value, of asset retirement obligations related to the legal requirement to close several lagoons at the Spring Grove, PA facility. Historically, lagoons were used to dispose of residual waste material. Closure of the lagoons has been substantially completed primarily by filling the lagoons, installing a non-permeable liner which will be covered with soil to construct the required cap over the lagoons. The retirement obligation was accrued with a corresponding increase in the carrying value of the property, equipment and timberlands caption on the condensed consolidated balance sheet. The amount capitalized is being amortized as a charge to operations on the straight-line basis in relation to the expected closure period.

Following is a summary of activity recorded during the first six months of 2016 and 2015:

In thousands — Balance at January 1,	2016 — $ 419	$	4,114
Accretion	—		59
Payments	(16	)	(1,905	)
Downward revision	—		(1,000	)
Gain	(2	)	(286	)
Balance at June 30,	$ 401	$	982

The amount set forth above as of June 30, 2016, is recorded in other current liabilities in the accompanying condensed consolidated balance sheet.

1. FAIR VALUE OF FINANCIAL INSTRUMENTS

The amounts reported on the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value. The following table sets forth carrying value and fair value of long-term debt:

In thousands	June 30, 2016 — Carrying Value	Fair Value	December 31, 2015 — Carrying Value	Fair Value
Variable rate debt	$ 48,851	$ 48,851	$ 58,792	$ 58,792
Fixed-rate bonds	250,000	255,625	250,000	250,938
2.40% Term loan	9,516	9,406	10,109	10,535
2.05% Term loan	40,000	38,724	42,130	42,886
1.30% Term Loan	11,102	10,403	—	—
1.55% Term loan	10,884	9,554	2,839	2,524
Total	$ 370,353	$ 372,563	$ 363,870	$ 365,675

As of June 30, 2016, and December 31, 2015, we had $250.0 million of 5.375% fixed rate bonds. These bonds

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are publicly registered, but thinly traded. Accordingly, the values set forth above for the bonds, as well as our other debt instruments, are based on observable inputs and other relevant market data (Level 2). The fair value of financial derivatives is set forth below in Note 12.

1. FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES

As part of our overall risk management practices, we enter into financial derivatives primarily designed to either i) hedge foreign currency risks associated with forecasted transactions – “cash flow hedges”; or ii) mitigate the impact that changes in currency exchange rates have on intercompany financing transactions and foreign currency denominated receivables and payables – “foreign currency hedges.”

Derivatives Designated as Hedging Instruments - Cash Flow Hedges We use currency forward contracts as cash flow hedges to manage our exposure to fluctuations in the currency exchange rates on certain forecasted production costs or capital expenditures expected to be incurred. Currency forward contracts involve fixing the exchange for delivery of a specified amount of foreign currency on a specified date. As of June 30, 2016, the maturity of currency forward contracts ranged from one month to 25 months.

We designate certain currency forward contracts as cash flow hedges of forecasted raw material purchases, certain production costs or capital expenditures with exposure to changes in foreign currency exchange rates. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges of foreign exchange risk is deferred as a component of accumulated other comprehensive income in the accompanying condensed consolidated balance sheets. With respect to hedges of forecasted raw material purchases or production costs, the amount deferred is subsequently reclassified into costs of products sold in the period that inventory produced using the hedged transaction affects earnings. For hedged capital expenditures, deferred gains or losses are reclassified and included in the historical cost of the capital asset and subsequently affect earnings as depreciation is recognized. The ineffective portion of the change in fair value of the derivative is recognized directly to earnings and reflected in the accompanying condensed consolidated statements of income as non-operating income (expense) under the caption “Other, net.”

We had the following outstanding derivatives that were used to hedge foreign exchange risks associated with forecasted transactions and designated as hedging instruments:

In thousands
Derivative
Sell/Buy - sell notional
Euro / British Pound	9,237	10,527
Sell/Buy - buy notional
Euro / Philippine Peso	670,402	758,634
British Pound / Philippine Peso	486,437	542,063
Euro / U.S. Dollar	48,574	51,433
U.S. Dollar / Canadian Dollar	33,839	34,649
U.S. Dollar / Euro	20,202	—

Derivatives Not Designated as Hedging Instruments - Foreign Currency Hedges We also enter into forward foreign exchange contracts to mitigate the impact changes in currency exchange rates have on balance sheet monetary assets and liabilities. None of these contracts are designated as hedges for financial accounting purposes and, accordingly, changes in value of the foreign exchange forward contracts and in the offsetting underlying on-balance-sheet transactions are reflected in the accompanying condensed consolidated statements of income under the caption “Other, net.”

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The following sets forth derivatives used to mitigate the impact changes in currency exchange rates have on balance sheet monetary assets and liabilities:

In thousands
Derivative
Sell/Buy - sell notional
U.S. Dollar / British Pound	10,500	10,000
British Pound / Euro	2,500	3,500
Sell/Buy - buy notional
Euro / U.S. Dollar	3,500	12,500
British Pound / Euro	19,000	13,500

These contracts have maturities of one month from the date originally entered into.

Fair Value Measurements The following table summarizes the fair values of derivative instruments for the period indicated and the line items in the accompanying condensed consolidated balance sheets where the instruments are recorded:

In thousands	June 30 2016	December 31 2015	June 30 2016	December 31 2015
Balance sheet caption	Prepaid Expenses and Other Current Assets		Other Current Liabilities
Designated as hedging:
Forward foreign currency exchange contracts	$ 915	$ 955	$ 15	$ 1,545
Not designated as hedging:
Forward foreign currency exchange contracts	$ 124	$ 68	$ —	$ 49

The amounts set forth in the table above represent the net asset or liability giving effect to rights of offset with each counterparty. The effect of netting the amounts presented above did not have a material effect on our consolidated financial position.

The following table summarizes the amount of income or (loss) from derivative instruments recognized in our results of operations for the periods indicated and the line items in the accompanying condensed consolidated statements of income where the results are recorded:

In thousands	Three months ended June 30 — 2016		2015		Six months ended June 30 — 2016	2015
Designated as hedging:
Forward foreign currency exchange contracts:
Effective portion – cost of products sold	$ (215	)	$ 1,750		$ 83	$	2,623
Ineffective portion – other – net	73		(62	)	(330	)	288
Not designated as hedging :
Forward foreign currency exchange contracts:
Other – net	$ 475		$ (313	)	$ 1,064	$	407

The impact of activity not designated as hedging was substantially all offset by the remeasurement of the underlying on-balance-sheet item.

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The fair values of the foreign exchange forward contracts are considered to be Level 2. Foreign currency forward contracts are valued using foreign currency forward and interest rate curves. The fair value of each contract is determined by comparing the contract rate to the forward rate and discounting to present value. Contracts in a gain position are recorded in the condensed consolidated balance sheets under the caption “Prepaid expenses and other current assets” and the value of contracts in a loss position is recorded under the caption “Other current liabilities.”

A rollforward of fair value amounts recorded as a component of accumulated other comprehensive income (loss) is as follows:

In thousands — Balance at January 1,	2016 — $ (178	)	2015 — $ 3,282
Deferred gains on cash flow hedges	1,294		2,995
Reclassified to earnings	(83	)	(2,623	)
Balance at June 30,	$ 1,033		$ 3,654

We expect substantially all of the amounts recorded as a component of accumulated other comprehensive income will be recorded as a component of the capital asset or realized in results of operations within the next twelve to twenty-five months and the amount ultimately recognized will vary depending on actual market rates.

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Credit risk related to derivative activity arises in the event the counterparty fails to meet its obligations to us. This exposure is generally limited to the amounts, if any, by which the counterparty’s obligations exceed our obligation to them. Our policy is to enter into contracts only with financial institutions which meet certain minimum credit ratings.

1. 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, on which our former Neenah facility was located, and in the Bay of Green Bay Wisconsin (collectively, the “Site”). Since the early 1990s, the United States, the State of Wisconsin and two Indian tribes (collectively, the “Governments”) have pursued a cleanup of a 39-mile stretch of river from Little Lake Butte des Morts into Green Bay and natural resource damages (“NRDs”).

The United States notified the following parties (“PRPs”) of their potential responsibility to implement response actions, to pay response costs, and to compensate for NRDs at this site: us, Appvion, Inc. (formerly known as Appleton Papers Inc.), CBC Coating, Inc. (formerly known as Riverside Paper Corporation), Georgia-Pacific Consumer Products, L.P. (“Georgia-Pacific”, formerly known as Fort James Operating Company), Menasha Corporation, NCR Corporation (“NCR”), U.S. Paper Mills Corp., and WTM I Company. As described below, many other parties have been joined in litigation. After giving effect to settlements reached with the Governments, the remaining PRPs exposed to continuing obligations to implement the remainder of the cleanup consist of us, Georgia-Pacific and NCR.

The Site has been subject to certain studies and the parties conducted certain demonstration projects and completed certain interim cleanups. The permanent cleanup, known as a “remedial action” under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”), consists of sediment dredging, installation of engineered caps, and placement of sand covers in various areas in the bed of the river.

The United States Environmental Protection Agency (“EPA”) has divided the Site into five “operable units”,

including the most upstream portion of the Site on which our facility was located (“OU1”) and four downstream reaches of the river and bay (“OU2-5”).

We and WTM I Company implemented the remedial action in OU1 under a consent decree with the Governments; Menasha Corporation made a financial contribution to that work. That project began in 2004 and the work is complete other than on-going monitoring and maintenance.

For OU2-5, work has proceeded primarily under a Unilateral Administrative Order (“UAO”) issued in November 2007 by the EPA to us and seven other respondents. The remedial actions from 2007 through 2014 were funded primarily by NCR and its indemnitors, including Appvion, Inc. In 2015, we placed certain covering and capping in OU4b as a response to the Government’s demands at a cost of $9.7 million. Georgia Pacific and NCR funded work in 2015 pursuant to a proposed consent decree that the United States did not move to enter until April 12, 2016; the court has not yet ruled on that motion. Work is scheduled to continue in OU2-5 through 2018, with monitoring and maintenance to follow.

As more fully discussed below, significant uncertainties exist pertaining to the ultimate allocation of OU2-5 remediation costs as well as the shorter term funding of the remedial actions for OU2-5.

Cost estimates. Estimates of the Site remediation change over time as we, or others, gain additional data and experience at the Site. In addition, disagreement exists over the likely costs for some of this work. On October 14, 2014, the Governments represented to the United States District Court in Green Bay that $1.1 billion provided an “upper end estimate of total past and future response costs” including a $100 million “uncertainty premium for future response costs.” Based upon estimates made by the Governments and independent estimates commissioned by various potentially responsible parties, we have no reason to disagree with the Governments’ assertion. Much of that amount has already been incurred, including approximately $100 million for OU1 and what we believe to be approximately $575 million for OU2-5 prior to the 2016 remediation season.

In 2016, the Governments again seek approximately $100 million of work to be completed in OU2-5. The exact work and a more precise estimate of its cost depend on certain unresolved technical issues. We have begun an effort to place the final layer on certain caps. We do not yet know to what extent we will undertake additional work in 2016; however, we expect to spend less than $10 million.

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As the result of a partial settlement, Georgia-Pacific has no obligation to pay for work upstream of a line near Georgia-Pacific’s Green Bay West Mill located in OU4. We believe substantially all in-water work upstream of this line had been completed as of the end of the 2014 dredging season.

Allocation Litigation. In January 2008, NCR and Appvion brought an action in the federal district court in Green Bay to allocate among all parties responsible for this Site all of the costs incurred by the Governments, all of the costs incurred by the parties, and all of the NRDs owed to the Natural Resource Trustees. We have previously referred to this case as the “Whiting Litigation.” After several summary judgment rulings and a trial, the trial court entered judgment in the Whiting Litigation allocating to NCR 100% of the costs of (a) the OU2-5 cleanup, (b) NRDs, (c) past and future costs incurred by the Governments in OU2-5, and (d) past and future costs incurred by any of the other parties net of an appropriate equitable adjustment for insurance recoveries. As to Glatfelter, NCR was judged liable to us for $4.28 million and any future costs or damages we may incur. NCR was held not responsible for costs incurred in OU1.

All parties appealed the Whiting Litigation judgment to the United States Court of Appeals for the Seventh Circuit. On September 25, 2014, that court affirmed, holding that if knowledge and fault were the only equitable factors governing allocation of costs and NRDs at the Site, NCR would owe 100% of all costs and damages in OU2-5, but would not have a share of costs in OU1 — which is upstream of the outfall of the facilities for which NCR is responsible — solely as an “arranger for disposal” of PCB-containing waste paper by recycling it at our mill. However, the court of appeals vacated the judgment and remanded the case for the district court’s further consideration of whether any other equitable factors might cause the district court to alter its allocation.

We contend the district court should, after further consideration, reinstate the 100%, or some similar very high, allocation to NCR of all the costs, and should hold that we should bear no share or a very small share. However, NCR has taken a contrary position and has sought contributions from others for future work until all allocation issues are resolved.

In addition, we take the position that the “single site” theory on which the courts held us responsible for cleaning up parts of the Site far downstream of our former mill should, if applied to NCR, make it liable for costs incurred in OU1. The district court agreed with us in an order dated March 3, 2015. On March 31, 2015, NCR sought review of that order by the court of appeals which review was denied on May 1, 2015.

Appvion and NCR have had a cost-sharing agreement since at least 1998. The court of appeals held if Appvion incurred any recoverable costs because the Governments had named Appvion as a potentially responsible party, then Appvion may have a right to recover those costs under CERCLA. We and Appvion disagree over the proper treatment of amounts that Appvion incurred while a PRP that were also subject to a cost-sharing agreement with NCR; we contend Appvion may not recover costs it was contractually obligated to incur, that it has no other costs, and if it did, we would have a right to contribution of any recovery against NCR and others. However, Appvion takes a contrary position and claims approximately $200 million.

The district court has established a schedule for the Whiting Litigation under which it would hold a trial beginning in March 2017 on remaining issues.

Enforcement Litigation. In October 2010, the United States and the State of Wisconsin brought an action (“Government Action”) in the federal district court in Green Bay against us and 13 other defendants seeking (a) to recover all of the United States’ and the State of Wisconsin’s unreimbursed past costs, (b) to obtain a declaration of joint and several liability for all of their future costs, (c) to recover NRDs, and (d) to obtain a declaration of liability of all of the respondents on the UAO to perform the remedy in OU2-5 as required by the UAO and a mandatory permanent injunction to the same effect. The last of these claims was tried in 2012, and in May 2013, the district court enjoined us, NCR, WTM I, and Menasha Corp. to perform the work under the UAO. As the result of partial settlements, U.S. Paper Mills Corp. and Georgia-Pacific Consumer Products L.P. agreed to joint and several liability for some of the work. Appvion was held not liable for this Site under CERCLA.

All other potentially responsible parties, including the United States and the State of Wisconsin, have settled with the Governments. As a result, the remaining defendants consist of us, NCR, and Georgia-Pacific.

We appealed the injunction to the United States Court of Appeals for the Seventh Circuit, as did NCR, WTM I, and Menasha. On September 25, 2014, the court of appeals decided our and NCR’s appeals; the others’ appeals were not decided because they entered into a settlement. The court of appeals vacated the injunction as to us and NCR. However, it affirmed the district court’s ruling that we are liable for response actions in OU2-5 and for complying with the UAO. The court of appeals vacated and remanded the district court’s decision that NCR had failed to prove that liability for OU2-5 could be apportioned, directing the lower court to consider issues it had not considered initially.

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On remand, the district court issued an opinion on October 19, 2015, holding that NCR had not shown a reasonable basis for apportionment of its liability for the site. On January 25, 2016, the court denied NCR’s request to certify that decision for immediate appeal.

As described below, the United States has withdrawn its natural resources damages claim against us. The Governments’ remaining claims principally consist of claims for (1) unreimbursed past costs of the United States totaling $35.1 million (as incurred through September 30, 2015) and unreimbursed past costs of the Wisconsin Department of Natural Resources totaling $3.9 million (as incurred through June 30, 2015), and (2) costs incurred and/or to be incurred after September 30, 2015 and June 30, 2015, respectively. The remaining issues in the Government Action are set for trial to commence after the conclusion of the 2017 trial in the Whiting Litigation.

Interim Funding of Ongoing Work. As described above, the court of appeals vacated the allocation judgment in the Whiting Litigation on September 25, 2014, but neither court has since replaced that allocation with any other. The 2007 UAO requires the PRPs to submit annual remediation work plans. For 2015, the EPA approved the 2015 Work Plan for $100 million of remediation activities. NCR, GP, and we were not able to reach agreement on a division of the costs of that work on an interim basis, subject to reallocation in the Whiting Litigation. NCR and GP entered into a proposed consent decree with the United States under which they agreed to fund certain work estimated to cost approximately $67 million in 2015, and they would not be responsible for completing the remainder of the work in 2015, estimated to cost approximately $33 million. However, NCR and GP did not complete all of the work assigned to them under the consent decree. The United States did not move to enter that consent decree until April 12, 2016, and the court has not yet ruled on that motion. Through the issuance of the 2015 Work Plan the EPA assigned to us those remaining tasks. Under the proposed consent decree, all parties would remain jointly and severally liable for work in the 2015 Work Plan not completed in 2015, except for a small amount of work upstream of the area for which GP is responsible. We contracted for remediation work in OU4 at a total cost of $9.7 million, an amount of work less than the amount assigned to us in the 2015 Work Plan. We anticipate that the amount of work performed by us in 2015 satisfied our share of the obligation if NCR and GP perform the work assigned to them in the 2015 Work Plan. The United States disagrees. We cannot predict the outcome of these disagreements or any possible resulting litigation.

The 2016 Work Plan similarly calls for completion of work that is estimated to cost in the range of $100 million. However, unlike the 2015 Work Plan, it does not allocate

the work among NCR, GP, and us. The parties have again not come to agreement on an interim allocation among them of responsibility for completing the work called for by the 2016 Work Plan. NCR and GP have begun certain work. We have begun placement of certain capping material.

Because we may not be able to obtain an agreement with the other parties or a ruling in litigation defining our obligation to contribute to work in 2016 prior to the time that work would have to be implemented, it is conceivable that we may have to choose an amount of work that we believe satisfies any obligation we may have to complete work in 2016, which selection we will have to defend after the fact. We expect to spend less than $10 million in connection with the 2016 Work Plan. In addition, it is conceivable we may be in the same position with respect to work in OU2-5 beyond the 2016 season. Although we are unable to determine with any degree of certainty the amount we may be required to complete or to fund, those amounts could be significant. Any amounts we pay or any other party pays in the interim may be subject to reallocation when the Whiting Litigation is resolved.

NRDs. The Governments’ NRD assessment documents originally claimed we are jointly and severally responsible for NRDs with a value between $176 million and $333 million. The Governments claimed this range should be inflated to current dollars and then certain unreimbursed past assessment costs should be added, so the range of their claim was $287 million to $423 million in 2009.

However, on October 14, 2014, the Governments represented to the district court that if certain settlements providing $45.9 million toward compensation of NRDs were approved, the total NRD recovery would amount to $105 million. The Governments stated they would consider those recoveries adequate and they would withdraw their claims against us and NCR for additional compensation of NRDs. On October 19, 2015, the district court granted the Governments leave to withdraw their NRD claims against us without prejudice to re-filing them at some later time. Some of the settling parties, including all of the settling parties contributing the $45.9 million, have waived their rights to seek contribution from us of the settlement amounts. We previously paid a portion of the earlier settlements that the Governments value at $59 million and that we contend may be somewhat more.

Reserves for the Site. Our reserve including ongoing monitoring obligations in OU1, our share of remediation of the downstream portions of the Site, NRDs and all pending, threatened or asserted and unasserted claims against us relating to PCB contamination is set forth below:

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	Six months ended
	June 30
In thousands	2016	2015
Balance at January 1,	$ 17,105	$	16,223
Payments	(1,189	)	(21	)
Accruals	—		—
Balance at June 30,	$ 15,916	$	16,202

The payments set forth above represent cash paid towards completion of remediation activities in connection with the 2015 and 2016 Work Plans. Our reserve as of June 30, 2016, includes our estimate of costs to be incurred for remediation work, pending clarity from the Whiting litigation. If we are unsuccessful in the allocation litigation or in the enforcement litigation described above, we may be required to record additional charges and such charges could be significant.

Of our total reserve for the Fox River, $11.4 million is recorded in the accompanying June 30, 2016 condensed consolidated balance sheet under the caption “Environmental liabilities” and the remainder is recorded under the caption “Other long term liabilities.”

As described above, the appellate court vacated and remanded for reconsideration the district court’s ruling in the Whiting Litigation that NCR would bear 100% of costs for the downstream portion of the Site. We continue to believe we will not be allocated a significant share of liability in any final equitable allocation of the response costs for OU2-5 or for NRDs. The accompanying condensed consolidated financial statements do not include reserves for any future defense costs, which could be significant, related to our involvement at the Site.

In setting our reserve for the Site, we have assessed our legal defenses, including our successful defenses to the allegations made in the Whiting Litigation and the original determination in the Whiting Litigation that NCR owes us “full contribution” for response costs and for NRDs that we may become obligated to pay except in OU1. We assume we will not bear the entire cost of remediation or damages to the exclusion of other known parties at the Site, who are also jointly and severally liable. The existence and ability of other parties to participate has also been taken into account in setting our reserve, and setting our reserve is generally based on our evaluation of recent publicly available financial information on certain of the responsible parties and any known insurance, indemnity or cost sharing agreements between responsible parties and third parties. In addition, we have considered 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 associated with the Site.

Other Information. The Governments have published studies estimating the amount of PCBs discharged by each identified potentially responsible party to the lower Fox River and Green Bay. These reports estimate our Neenah mill’s share of the mass of PCBs discharged to be as high as 27%. The district court has found the discharge mass estimates used in these studies not to be accurate. We believe the Neenah mill’s absolute and relative contribution of PCB mass is significantly lower than the estimates set forth in these studies. The district court in the Government Action has found that the Neenah mill discharged an unknown amount of PCBs.

Based upon the rulings in the Whiting Litigation and the Government Action, neither of which endorsed an equitable allocation in proportion to the mass of PCBs discharged, we continue to believe an allocation in proportion to mass of PCBs discharged would not constitute an equitable allocation of the potential liability for the contamination at the Fox River. We contend other factors, such as a party’s role in causing costs, the location of discharge, and the location of contamination must be considered in order for the allocation to be equitable.

Range of Reasonably Possible Outcomes. Based on our analysis of all available information, including but not limited to decisions of the courts, official documents such as records of decision, as well as discussions with legal counsel and cost estimates for work to be performed at the Site, and substantially dependent on the resolution of the allocation issues discussed above, we believe it is reasonably possible that our costs associated with the Fox River matter could exceed the aggregate amounts accrued for the Fox River matter by amounts ranging from insignificant to $190 million. We believe the likelihood of an outcome in the upper end of the monetary range is less than other possible outcomes within the range and the possibility of an outcome in excess of the upper end of the monetary range is remote.

We expect remediation costs to be incurred primarily over the next two to three years, although we are unable to determine with any degree of certainty the amount we may be required to fund for interim remediation work. To the extent we provide such interim funding, we contend that NCR or another party would be required to reimburse us once the final allocation is determined.

Summary. Our current assessment is we will be able to manage this environmental matter without a long-term, material adverse impact on the Company. This matter could, however, at any particular time or for any particular year or years, have a material adverse effect on

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Table of Contents

our consolidated financial position, liquidity and/or results of operations or could result in a default under our debt covenants. Moreover, there can be no assurance our reserves will be adequate to provide for future obligations related to this matter, or our share of costs and/or damages will not exceed our available resources, or those obligations will not have a long-term, material adverse effect on our consolidated financial position, liquidity or results of operations. Should a court grant the United States or the State of Wisconsin relief requiring us

individually either to perform directly or to contribute significant amounts towards remedial action downstream of Little Lake Butte des Morts those developments could have a material adverse effect on our consolidated financial position, liquidity and results of operations and might result in a default under our loan covenants.

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GLATFELTER

6.30.16 Form 10-Q

Table of Contents

1. SEGMENT INFORMATION

The following tables set forth financial and other information by business unit for the period indicated:

Three months ended June 30	Composite Fibers		Advanced Airlaid Materials		Specialty Papers				Other and Unallocated				Total
Dollars in millions
	2016	2015	2016	2015	2016		2015		2016		2015		2016	2015
Net sales	$ 136.4	$ 140.4	$ 60.8	$ 57.5	$ 209.3		$ 212.9		$ —		$ —		$ 406.4	$	410.8
Energy and related sales, net	—	—	—	—	2.0		0.7		—		—		2.0		0.7
Total revenue	136.4	140.4	60.8	57.5	211.3		213.6		—		—		408.4		411.5
Cost of products sold	109.0	112.4	51.8	52.3	202.9		211.9		2.0		2.1		365.7		378.7
Gross profit (loss)	27.4	28.0	9.0	5.2	8.4		1.7		(2.0	)	(2.1	)	42.7		32.8
SG&A	12.1	11.3	2.2	2.1	14.2		11.7		8.7		4.0		37.2		29.1
Gains on dispositions of plant, equipment and timberlands, net	—	—	—	—	—		—		—		(0.1	)	—		(0.1	)
Total operating income (loss)	15.3	16.7	6.8	3.1	(5.8	)	(10.0	)	(10.7	)	(6.0	)	5.5		3.8
Non-operating expense	—	—	—	—	—		—		(3.6	)	(4.1	)	(3.6	)	(4.1	)
Income (loss) before income taxes	$ 15.3	$ 16.7	$ 6.8	$ 3.1	$ (5.8	)	$ (10.0	)	$ (14.3	)	$ (10.1	)	$ 2.0	$	(0.3	)
Supplementary Data
Net tons sold (thousands)	40.7	39.4	24.4	22.6	194.7		191.3		—		—		259.7		253.3
Depreciation, depletion and amortization	$ 7.2	$ 6.7	$ 2.4	$ 2.1	$ 6.5		$ 6.3		$ 0.7		$ 0.5		$ 16.8	$	15.6
Capital expenditures	2.3	5.6	6.1	1.5	28.7		15.6		—		0.1		37.1		22.8
Six months ended June 30	Composite Fibers		Advanced Airlaid Materials		Specialty Papers				Other and Unallocated				Total
Dollars in millions
	2016	2015	2016	2015	2016		2015		2016		2015		2016	2015
Net sales	$ 259.9	$ 275.7	$ 121.5	$ 119.8	$ 427.2		$ 432.8		$ —		$ —		$ 808.6	$	828.3
Energy and related sales, net	—	—	—	—	2.7		2.8		—		—		2.7		2.8
Total revenue	259.9	275.7	121.5	119.8	429.9		435.6		—		—		811.3		831.1
Cost of products sold	210.3	221.5	104.1	107.3	394.0		412.3		2.3		5.0		710.7		746.1
Gross profit (loss)	49.6	54.2	17.4	12.5	35.9		23.3		(2.3	)	(5.0	)	100.6		84.9
SG&A	23.2	22.9	4.2	4.0	26.6		23.9		15.0		9.5		69.0		60.4
Gains on dispositions of plant, equipment and timberlands, net	—	—	—	—	—		—		—		(2.8	)	—		(2.8	)
Total operating income (loss)	26.4	31.3	13.2	8.5	9.3		(0.6	)	(17.3	)	(11.7	)	31.5		27.3
Non-operating expense	—	—	—	—	—		—		(8.3	)	(8.7	)	(8.3	)	(8.7	)
Income (loss) before income taxes	$ 26.4	$ 31.3	$ 13.2	$ 8.5	$ 9.3		$ (0.6	)	$ (25.6	)	$ (20.4	)	$ 23.2	$	18.6
Supplementary Data
Net tons sold (thousands)	77.6	77.3	48.9	46.7	400.5		390.0		—		—		527.0		514.0
Depreciation, depletion and amortization	$ 14.3	$ 13.4	$ 4.7	$ 4.3	$ 13.2		$ 12.9		$ 1.2		$ 1.0		$ 33.4	$	31.6
Capital expenditures	8.6	11.5	20.7	2.8	50.8		28.8		0.3		1.5		80.4		44.6

The sum of individual amounts set forth above may not agree to the consolidated financial statements included herein due to rounding.

Business Units Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the business unit are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the Business Unit Performance table.

Management evaluates results of operations of the business units before pension expense, certain corporate level costs, and the effects of certain gains or losses not considered to be related to the core business operations. Management believes that this is a more meaningful representation of the operating performance of its core businesses, the profitability of business units and the extent of cash flow generated from these core operations. Such amounts are presented under the caption “Other and Unallocated.” In the evaluation of business unit results, management does not use any measures of total assets. This presentation is aligned with the management and operating structure of our company. It is also on this basis that the Company’s performance is evaluated internally and by the Company’s Board of Directors.

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GLATFELTER

6.30.16 Form 10-Q

Table of Contents

1. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

Our 5.375% Notes issued by P. H. Glatfelter Company (the “Parent”) are fully and unconditionally guaranteed, on a joint and several basis, by certain of our 100%-owned domestic subsidiaries, PHG Tea Leaves, Inc., Mollanvick, Inc., Glatfelter Composite Fibers N. A., Inc. (“CFNA”), Glatfelter Advance Materials N.A., Inc. (“GAMNA”), and Glatfelter Holdings, LLC. The guarantees are subject to certain customary release provisions including i) the designation of such subsidiary as an unrestricted or excluded subsidiary; (ii) in connection with any sale or disposition of the capital stock of the subsidiary guarantor; and (iii) upon our exercise of our legal defeasance option or our covenant defeasance option, all of which are more fully described in the Indenture dated as of October 3, 2012 and the First Supplemental Indenture dated as of October 27, 2015, among us, the Guarantors and US Bank National Association, as Trustee, relating to the 5.375% Notes.

The following presents our condensed consolidating statements of income, including comprehensive income for the three months and six months ended June 30, 2016, our condensed consolidating cash flows for the six months ended June 30, 2016 and 2015 and our condensed consolidating balance sheets as of June 30, 2016 and December 31, 2015. The condensed consolidating financial statements set forth below include the addition of CFNA and GAMNA as guarantors during 2015.

Condensed Consolidating Statement of Income for the Three months ended June 30, 2016

In thousands — Net sales	Parent Company — $ 209,269		Guarantors — $ 17,561	$	196,675	$	(17,092	)	Consolidated — $ 406,413
Energy and related sales, net	2,001		—		—		—		2,001
Total revenues	211,270		17,561		196,675		(17,092	)	408,414
Costs of products sold	204,495		16,711		161,577		(17,092	)	365,691
Gross profit	6,775		850		35,098		—		42,723
Selling, general and administrative expenses	22,622		(36	)	14,605		—		37,191
Loss on dispositions of plant, equipment and timberlands, net	2		—		—		—		2
Operating income (loss)	(15,849	)	886		20,493		—		5,530
Other non-operating income (expense)
Interest expense	(4,289	)	—		(814	)	1,150		(3,953	)
Interest income	169		1,001		41		(1,150	)	61
Equity in earnings of subsidiaries	16,385		16,071		—		(32,456	)	—
Other, net	(575	)	(1,421	)	2,313		—		317
Total other non-operating income (expense)	11,690		15,651		1,540		(32,456	)	(3,575	)
Income (loss) before income taxes	(4,159	)	16,537		22,033		(32,456	)	1,955
Income tax provision (benefit)	(6,124	)	152		5,962		—		(10	)
Net income	1,965		16,385		16,071		(32,456	)	1,965
Other comprehensive income (loss)	(11,539	)	(13,937	)	(13,490	)	27,427		(11,539	)
Comprehensive income (loss)	$ (9,574	)	$ 2,448	$	2,581	$	(5,029	)	$ (9,574	)

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Condensed Consolidating Statement of Income for the Six months ended June 30, 2016

In thousands — Net sales	Parent Company — $ 427,157	$	36,207	$	381,141	$	(35,874	)	Consolidated — $ 808,631
Energy and related sales, net	2,667		—		—		—		2,667
Total revenues	429,824		36,207		381,141		(35,874	)	811,298
Costs of products sold	396,454		34,761		315,391		(35,874	)	710,732
Gross profit	33,370		1,446		65,750		—		100,566
Selling, general and administrative expenses	41,067		(221	)	28,203		—		69,049
Loss on dispositions of plant, equipment and timberlands, net	4		—		22		—		26
Operating income (loss)	(7,701	)	1,667		37,525		—		31,491
Other non-operating income (expense)
Interest expense	(8,704	)	—		(1,601	)	2,236		(8,069	)
Interest income	350		1,993		45		(2,236	)	152
Equity in earnings of subsidiaries	29,257		27,825		—		(57,082	)	—
Other, net	(1,117	)	(1,401	)	2,135		—		(383	)
Total other non-operating income (expense)	19,786		28,417		579		(57,082	)	(8,300	)
Income before income taxes	12,085		30,084		38,104		(57,082	)	23,191
Income tax provision (benefit)	(6,048	)	827		10,279		—		5,058
Net income	18,133		29,257		27,825		(57,082	)	18,133
Other comprehensive income (loss)	4,203		(384	)	(373	)	757		4,203
Comprehensive income	$ 22,336	$	28,873	$	27,452	$	(56,325	)	$ 22,336

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Condensed Consolidating Statement of Income for the Three months ended June 30, 2015

In thousands — Net sales	Parent Company — $ 212,920	$	22,667	$	194,779	$	(19,563	)	Consolidated — $ 410,803
Energy and related sales, net	715		—		—		—		715
Total revenues	213,635		22,667		194,779		(19,563	)	411,518
Costs of products sold	212,472		21,921		163,855		(19,563	)	378,685
Gross profit	1,163		746		30,924		—		32,833
Selling, general and administrative expenses	15,661		458		13,018		—		29,137
Loss on dispositions of plant, equipment and timberlands, net	(51	)	—		(60	)	—		(111	)
Operating income (loss)	(14,447	)	288		17,966		—		3,807
Other non-operating income (expense)
Interest expense	(4,608	)	—		(6,370	)	6,626		(4,352	)
Interest income	169		6,498		36		(6,625	)	77
Equity in earnings of subsidiaries	17,478		11,305		—		(28,783	)	—
Other, net	(746	)	(29	)	990		—		215
Total other non-operating income (expense)	12,293		17,774		(5,344	)	(28,782	)	(4,060	)
Income (loss) before income taxes	(2,154	)	18,062		12,622		(28,782	)	(253	)
Income tax provision (benefit)	(5,002	)	584		1,317		—		(3,101	)
Net income	2,848		17,478		11,305		(28,782	)	2,848
Other comprehensive income (loss)	17,087		13,680		(9,958	)	(3,722	)	17,087
Comprehensive income	$ 19,935	$	31,158	$	1,347	$	(32,504	)	$ 19,935

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6.30.16 Form 10-Q

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Condensed Consolidating Statement of Income for the Six months ended June 30, 2015

In thousands — Net sales	Parent Company — $ 432,796		Guarantors — $ 42,817	$	392,877	$	(40,218	)	Consolidated — $ 828,272
Energy and related sales, net	2,783		—		—		—		2,783
Total revenues	435,579		42,817		392,877		(40,218	)	831,055
Costs of products sold	416,154		41,255		328,923		(40,218	)	746,114
Gross profit	19,425		1,562		63,954		—		84,941
Selling, general and administrative expenses	32,843		955		26,611		—		60,409
Gains on dispositions of plant, equipment and timberlands, net	(1,522	)	(1,183	)	(60	)	—		(2,765	)
Operating income (loss)	(11,896	)	1,790		37,403		—		27,297
Other non-operating income (expense)
Interest expense	(9,425	)	—		(12,764	)	13,329		(8,860	)
Interest income	331		13,097		41		(13,327	)	142
Equity in earnings of subsidiaries	34,562		21,499		—		(56,061	)	—
Other, net	(1,460	)	(159	)	1,649		(2	)	28
Total other non-operating income (expense)	24,008		34,437		(11,074	)	(56,061	)	(8,690	)
Income before income taxes	12,112		36,227		26,329		(56,061	)	18,607
Income tax provision (benefit)	(4,661	)	1,665		4,830		—		1,834
Net income	16,773		34,562		21,499		(56,061	)	16,773
Other comprehensive income (loss)	(18,198	)	(24,870	)	28,890		(4,020	)	(18,198	)
Comprehensive income (loss)	$ (1,425	)	$ 9,692	$	50,389	$	(60,081	)	$ (1,425	)

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Condensed Consolidating Balance Sheet as of June 30, 2016

In thousands	Parent Company	Guarantors			Adjustments/ Eliminations		Consolidated
Assets
Cash and cash equivalents	$ 6,512	$ 2,545	$	49,475	$ —		$ 58,532
Other current assets	207,168	255,574		266,025	(262,714	)	466,053
Plant, equipment and timberlands, net	329,041	18,507		400,488	—		748,036
Investments in subsidiaries	783,479	535,117		—	(1,318,596	)	—
Other assets	112,876	—		139,687	—		252,563
Total assets	$ 1,439,076	$ 811,743	$	855,675	$ (1,581,310	)	$ 1,525,184
Liabilities and Shareholders’ Equity
Current liabilities	$ 401,540	$ 28,180	$	144,387	$ (262,714	)	$ 311,393
Long-term debt	247,381	—		110,985	—		358,366
Deferred income taxes	26,905	(229	)	48,479	—		75,155
Other long-term liabilities	87,027	313		16,707	—		104,047
Total liabilities	762,853	28,264		320,558	(262,714	)	848,961
Shareholders’ equity	676,223	783,479		535,117	(1,318,596	)	676,223
Total liabilities and shareholders’ equity	$ 1,439,076	$ 811,743	$	855,675	$ (1,581,310	)	$ 1,525,184

Condensed Consolidating Balance Sheet as of December 31, 2015

In thousands	Parent Company	Guarantors			Adjustments/ Eliminations		Consolidated
Assets
Cash and cash equivalents	$ 59,130	$ 465	$	45,709	$ —		$ 105,304
Other current assets	199,690	238,515		239,367	(230,509	)	447,063
Plant, equipment and timberlands, net	286,334	1,114		411,416	—		698,864
Investments in subsidiaries	737,450	507,116		—	(1,244,566	)	—
Other assets	106,586	—		142,599	—		249,185
Total assets	$ 1,389,190	$ 747,210	$	839,091	$ (1,475,075	)	$ 1,500,416
Liabilities and Shareholders’ Equity
Current liabilities	$ 363,037	$ 9,725	$	162,081	$ (230,523	)	$ 304,320
Long-term debt	247,075	—		106,221	—		353,296
Deferred income taxes	28,561	(79	)	47,976	—		76,458
Other long-term liabilities	87,270	—		15,825	—		103,095
Total liabilities	725,943	9,646		332,103	(230,523	)	837,169
Shareholders’ equity	663,247	737,564		506,988	(1,244,552	)	663,247
Total liabilities and shareholders’ equity	$ 1,389,190	$ 747,210	$	839,091	$ (1,475,075	)	$ 1,500,416

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Condensed Consolidating Statement of Cash Flows for the Six months ended June 30, 2016

In thousands	Parent Company
Net cash provided (used) by
Operating activities	$ 17,067	$	2,821	$	16,752	$	—	$	36,640
Investing activities
Expenditures for purchases of plant, equipment and timberlands	(51,043	)	(18,861	)	(10,487	)	—		(80,391	)
Proceeds from disposals of plant, equipment and timberlands, net	41		—		12		—		53
Repayments from intercompany loans	—		7,500		—		(7,500	)	—
Advances of intercompany loans	—		(7,880	)	—		7,880		—
Intercompany capital contributed	(17,000	)	(500	)	—		17,500		—
Other	(300	)	—		—		—		(300	)
Total investing activities	(68,302	)	(19,741	)	(10,475	)	17,880		(80,638	)
Financing activities
Net long-term borrowings	—		—		4,222		—		4,222
Payments of borrowing costs	(51	)	—		(85	)	—		(136	)
Payment of dividends to shareholders	(10,679	)	—		—		—		(10,679	)
Repayments of intercompany loans	—		—		(7,500	)	7,500		—
Borrowings of intercompany loans	7,880		—		—		(7,880	)	—
Intercompany capital (returned) received	—		17,000		500		(17,500	)	—
Proceeds from government grants	2,443		2,000		—		—		4,443
Payments related to share-based compensation awards and other	(976	)	—		—		—		(976	)
Total financing activities	(1,383	)	19,000		(2,863	)	(17,880	)	(3,126	)
Effect of exchange rate on cash	—		—		352		—		352
Net increase (decrease) in cash	(52,618	)	2,080		3,766		—		(46,772	)
Cash at the beginning of period	59,130		465		45,709		—		105,304
Cash at the end of period	$ 6,512	$	2,545	$	49,475	$	—	$	58,532

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Condensed Consolidating Statement of Cash Flows for the Six months ended June 30, 2015

In thousands	Parent Company		Guarantors		Non Guarantors
Net cash provided (used) by
Operating activities	$ (4,343	)	$ (695	)	$ 30,551	$	—	$	25,513
Investing activities
Expenditures for purchases of plant, equipment and timberlands	(30,241	)	—		(14,334	)	—		(44,575	)
Proceeds from disposals of plant, equipment and timberlands, net	1,581		1,213		257		—		3,051
Repayments from intercompany loans	—		48,855		—		(48,855	)	—
Advances of intercompany loans	—		(38,690	)	—		38,690		—
Intercompany capital (contributed) returned	10,500		(300	)	—		(10,200	)	—
Other	(1,600	)	—		—		—		(1,600	)
Total investing activities	(19,760	)	11,078		(14,077	)	(20,365	)	(43,124	)
Financing activities
Net repayments of indebtedness	—		—		(1,492	)	—		(1,492	)
Payments of borrowing costs	(1,329	)	—		—		—		(1,329	)
Payment of dividends to shareholders	(9,992	)	—		—		—		(9,992	)
Repayments of intercompany loans	(9,158	)	—		(39,697	)	48,855		—
Borrowings of intercompany loans	38,690		—		—		(38,690	)	—
Intercompany capital (returned) received	—		(10,500	)	300		10,200		—
Payments related to share-based compensation awards and other	(2,000	)	—		—		—		(2,000	)
Total financing activities	16,211		(10,500	)	(40,889	)	20,365		(14,813	)
Effect of exchange rate on cash	—		—		(1,651	)	—		(1,651	)
Net decrease in cash	(7,892	)	(117	)	(26,066	)	—		(34,075	)
Cash at the beginning of period	42,208		509		57,120		—		99,837
Cash at the end of period	$ 34,316		$ 392		$ 31,054	$	—	$	65,762

• 28 -

GLATFELTER

6.30.16 Form 10-Q

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Glatfelter’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2015 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, shipping volumes, selling prices, input costs, non-cash pension expense, environmental costs, capital expenditures and liquidity, all of which are inherently difficult to predict. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Accordingly, we identify the following important factors, among others, which could cause our results to differ from any results that might be projected, forecasted or estimated in any such forward-looking statements:

i. variations in demand for our products including the impact of unplanned market-related downtime, variations in product pricing, or product substitution;

ii. the impact of competition, both domestic and international, changes in industry production capacity, including the construction of new mills or new machines, the closing of mills and incremental changes due to capital expenditures or productivity increases;

iii. risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates;

iv. geopolitical events, including the impact of conflicts such as Russia and Ukraine;

v. our ability to develop new, high value-added products;

vi. changes in the cost or availability of raw materials we use, in particular pulpwood, pulp, pulp substitutes, caustic soda, and abaca fiber;

vii. changes in energy-related costs and commodity raw materials with an energy component;

viii. the impact of unplanned production interruption;

ix. disruptions in production and/or increased costs due to labor disputes;

x. the impact of exposure to volatile market-based pricing for sales of excess electricity;

xi. the gain or loss of significant customers and/or on-going viability of such customers;

xii. 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;

xiii. adverse results in litigation in the Fox River matter;

xiv. the impact of war and terrorism;

xv. the impact of unfavorable outcomes of audits by various state, federal or international tax authorities;

xvi. enactment of adverse state, federal or foreign tax or other legislation or changes in government policy or regulation; and

xvii. our ability to finance, consummate and integrate acquisitions.

We manufacture a wide array of specialty papers and fiber-based engineered materials. We manage our company along three business units:

• Composite Fibers with revenue from the sale of single-serve tea and coffee filtration papers, nonwoven wall covering materials, metallized papers, composite laminates papers, and many technically special papers including substrates for electrical applications;

• Advanced Airlaid Materials with revenue from the sale of airlaid nonwoven fabric-like materials used in feminine hygiene and adult incontinence products, wipes, and other airlaid applications; and

• Specialty Papers with revenue from the sale of papers for carbonless and other forms, envelopes, book publishing, and engineered products such as papers for high-speed ink jet printing, office specialty products, greeting cards, packaging, casting, release, transfer, playing card, postal, FDA-compliant food and beverage applications, and other niche specialty applications.

• 29 -

GLATFELTER

6.30.16 Form 10-Q

Table of Contents

RESULTS OF OPERATIONS

Six months ended June 30, 2016 versus the six months ended June 30, 2015

Overview For the first six months of 2016 net income was $18.1 million, or $0.41 per diluted share compared with $16.8 million, or $0.38 per diluted share in the first six months of 2015. Adjusted earnings, a non-GAAP measure, were $19.1 million, or $0.43 per diluted share for the first six months of 2016 compared with $15.2 million, or $0.35 per diluted share, for the same period a year ago. Our Advanced Airlaid Materials and Specialty Papers businesses reported significantly higher operating income in the comparison driven by higher demand, improved operations within Advanced Airlaid Materials, and, with respect to Specialty Papers, less costly annual maintenance outages and lower input costs. The improved performance of these two businesses was partially offset by lower operating income in the Composite Fibers business, which was impacted by lower average selling prices. The following table sets forth summarized results of operations:

In thousands, except per share	Six months ended June 30 — 2016	2015
Net sales	$ 808,631	$ 828,272
Gross profit	100,566	84,941
Operating income	31,491	27,297
Net income	18,133	16,773
Earnings per diluted share	0.41	0.38

In addition to the results reported in accordance with GAAP, we evaluate our performance using adjusted net income and adjusted earnings per diluted share. We disclose this information to allow investors to evaluate our performance exclusive of certain items that impact the comparability of results from period to period and we believe it is helpful in understanding underlying operating trends and cash flow generation. Adjusted net income consists of net income determined in accordance with GAAP adjusted to exclude the impact of the following:

Specialty Papers environmental compliance. These adjustments reflect non-capitalized costs incurred by the business unit directly related to the compliance with the U.S. EPA Best Available Retrofit Technology rule (BART; otherwise known as the Regional Haze Rule) and the Boiler Maximum Achievable Control Technology rule (Boiler MACT).

Airlaid capacity expansion costs. These adjustments reflect non-capitalized costs incurred directly related to the start-up of a new production facility for Advanced Airlaid Materials.

Timberland sales and related costs. These adjustments exclude gains from the sales of timberlands as these items are not considered to be part of our core business, ongoing results of operations or cash flows. These adjustments are irregular in timing and amount and may significantly impact our operating performance. As such, these items may not be indicative of past and future performance of the Company and therefore are excluded for comparability purposes.

Workforce efficiency charges . This includes costs that are directly related to actions undertaken to reduce costs and improve operating efficiencies. Such costs were specifically incurred as part of our initiative to reduce global headcount as part of a more broad based cost reduction effort initiated in the fourth quarter of 2014.

Acquisition and integration related costs . These adjustments include costs directly related to the consummation of the acquisition process and those related to integrating recently acquired businesses. These costs are irregular in timing and as such may not be indicative of our past and future performance.

Adjusted earnings and adjusted earnings per diluted share are considered measures not calculated in accordance with GAAP, and therefore are non-GAAP measures. The non-GAAP financial information should not be considered in isolation from, or as a substitute for, measures of financial performance prepared in accordance with GAAP. The following table sets for the reconciliation of net income to adjusted earnings for the six months ended June 30, 2016 and 2015:

In thousands, except per share	2016 — Amount	Diluted EPS	2015 — Amount	Diluted EPS
Net income	$ 18,133	$ 0.41	$ 16,773	$	0.38
Adjustments (pre-tax)
Specialty Papers’ environmental compliance	1,125		—
Airlaid capacity expansion costs	257		—
Timberland sales and related costs	—		(2,705	)
Workforce efficiency charges	88		1,953
Acquisition and integration related costs	—		160
Total adjustments (pre-tax)	1,470		(592	)
Income taxes (1) (2)	(543	)	(963	)
Total after-tax adjustments	927	0.02	(1,555	)	(0.04	)
Adjusted earnings	$ 19,060	$ 0.43	$ 15,218	$	0.35

(1) Tax effect for adjustments calculated based on the tax rate of the jurisdiction in which each adjustment originated.

(2) Includes release of $1.4 million of tax reserves on timberland sales in 2015.

The sum of individual per share amounts set forth above may not agree to adjusted earnings per share due to rounding.

• 30 -

GLATFELTER

6.30.16 Form 10-Q

Table of Contents

Business Unit Performance

Six months ended June 30	Composite Fibers		Advanced Airlaid Materials		Specialty Papers			Other and Unallocated				Total
Dollars in millions
	2016	2015	2016	2015	2016	2015		2016		2015		2016	2015
Net sales	$ 259.9	$ 275.7	$ 121.5	$ 119.8	$ 427.2	$ 432.8		$ —		$ —		$ 808.6	$	828.3
Energy and related sales, net	—	—	—	—	2.7	2.8		—		—		2.7		2.8
Total revenue	259.9	275.7	121.5	119.8	429.9	435.6		—		—		811.3		831.1
Cost of products sold	210.3	221.5	104.1	107.3	394.0	412.3		2.3		5.0		710.7		746.1
Gross profit (loss)	49.6	54.2	17.4	12.5	35.9	23.3		(2.3	)	(5.0	)	100.6		84.9
SG&A	23.2	22.9	4.2	4.0	26.6	23.9		15.0		9.5		69.0		60.4
Gains on dispositions of plant, equipment and timberlands, net	—	—	—	—	—	—		—		(2.8	)	—		(2.8	)
Total operating income (loss)	26.4	31.3	13.2	8.5	9.3	(0.6	)	(17.3	)	(11.7	)	31.5		27.3
Non-operating expense	—	—	—	—	—	—		(8.3	)	(8.7	)	(8.3	)	(8.7	)
Income (loss) before income taxes	$ 26.4	$ 31.3	$ 13.2	$ 8.5	$ 9.3	$ (0.6	)	$ (25.6	)	$ (20.4	)	$ 23.2	$	18.6
Supplementary Data
Net tons sold (thousands)	77.6	77.3	48.9	46.7	400.5	390.0		—		—		527.0		514.0
Depreciation, depletion and amortization	$ 14.3	$ 13.4	$ 4.7	$ 4.3	$ 13.2	$ 12.9		$ 1.2		$ 1.0		$ 33.4	$	31.6
Capital expenditures	8.6	11.5	20.7	2.8	50.8	28.8		0.3		1.5		80.4		44.6

The sum of individual amounts set forth above may not agree to the consolidated financial statements included herein due to rounding.

Business Units Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. The costs incurred by support areas not directly aligned with the business unit are allocated primarily based on an estimated utilization of support area services or are included in “Other and Unallocated” in the Business Unit Performance table.

Management evaluates results of operations of the business units before pension expense, certain corporate level costs, and the effects of certain gains or losses not considered to be related to the core business operations. Management believes that this is a more meaningful representation of the operating performance of its core businesses, the profitability of business units and the extent of cash flow generated from these core operations. Such amounts are presented under the caption “Other and Unallocated.” In the evaluation of business unit results, management does not use any measures of total assets. This presentation is aligned with the management and operating structure of our company. It is also on this basis that the Company’s performance is evaluated internally and by the Company’s Board of Directors.

• 31 -

GLATFELTER

6.30.16 Form 10-Q

Table of Contents

Sales and Costs of Products Sold

In thousands	Six months ended June 30 — 2016	2015	Change
Net sales	$ 808,631	$ 828,272	$ (19,641	)
Energy and related sales, net	2,667	2,783	(116	)
Total revenues	811,298	831,055	(19,757	)
Costs of products sold	710,732	746,114	(35,382	)
Gross profit	$ 100,566	$ 84,941	$ 15,625
Gross profit as a percent of Net sales	12.4 %	10.3 %

The following table sets forth the contribution to consolidated net sales by each business unit:

Percent of Total	Six months ended June 30 — 2016	2015
Business Unit
Composite Fibers	32.1 %	33.3 %
Advanced Airlaid Material	15.0	14.5
Specialty Papers	52.9	52.2
Total	100.0 %	100.0 %

Net sales totaled $808.6 million and $828.3 million in the first half of 2016 and 2015, respectively. The $19.7 million decline was primarily driven by $18.1 million of lower selling prices and $4.5 million of currency translation. Shipping volumes increased 2.5%.

Composite Fibers’ net sales declined $15.8 million, or 5.7%, primarily due to $4.7 million of lower selling prices and $4.5 million of unfavorable currency translation.

Composite Fibers’ operating income for the first half of 2016 decreased $4.9 million to $26.4 million compared to the year-ago period. The primary drivers are summarized in the following chart:

Advanced Airlaid Materials’ net sales increased $1.7 million in the year-over-year comparison as $5.6 million of lower selling prices from the contractual pass through of lower raw material costs more than offset higher shipping volumes. Shipping volumes increased 4.7% primarily due to higher shipments of hygiene products.

Advanced Airlaid Materials’ operating income totaled $13.2 million, an increase of $4.7 million, or 55.3% compared to the same period a year ago. The primary drivers are summarized in the following chart:

Specialty Papers’ net sales decreased $5.6 million, or 1.3% due to a $7.9 million impact from lower selling prices partially offset by a 2.7% increase in shipping volumes. The business unit again outperformed the broader uncoated free sheet market which increased 0.1%.

Operating income totaled $9.3 million, an increase of $9.9 million compared to the first six months of 2015. The primary drivers are summarized in the following chart:

The $5.7 million improvement in “Operations & Other” in the chart above includes the $7.1 million lower cost of the annual maintenance outages.

• 32 -

GLATFELTER

6.30.16 Form 10-Q

Table of Contents

We sell excess power generated by the Spring Grove, PA facility. The following table summarizes this activity for the first six months of 2016 and 2015:

In thousands	Six months ended June 30 — 2016	2015		Change
Energy sales	$ 1,818	$	3,328	$	(1,510	)
Costs to produce	(2,042	)	(2,256	)	214
Net	(224	)	1,072		(1,296	)
Renewable energy credits	2,891		1,711		1,180
Total	$ 2,667	$	2,783	$	(116	)

Renewable energy credits (“RECs”) represent sales of certified credits earned related to burning renewable sources of energy such as black liquor and wood waste. We sell RECs into an illiquid market. The extent and value of future revenues from REC sales is dependent on many factors outside of management’s control. Therefore, we may not be able to generate consistent additional sales of RECs in future periods.

Other and Unallocated The amount of net operating expenses not allocated to a business unit and reported as “Other and Unallocated” in our table of Business Unit Performance, totaled $17.3 million in the first six months of 2016 compared with $11.7 million in the first six months of 2015. Excluding $2.8 million of gains in 2015 from sales of timberlands in the comparison, unallocated net operating expenses increased $2.8 million primarily due to higher incentive compensation and professional services partially offset by lower pension expense.

Pension Expense The following table summarizes the amounts of pension expense recognized for the periods indicated:

In thousands	Six months ended June 30 — 2016	2015	Change
Recorded as:
Costs of products sold	$ 1,178	$ 3,495	$ (2,317	)
SG&A expense	1,577	916	661
Total	$ 2,755	$ 4,411	$ (1,656	)

The amount of pension expense recognized each year is dependent on various actuarial assumptions and certain other factors, including discount rates and the fair value of our pension assets. Pension expense for the full year of 2016 is expected to be approximately $5.5 million compared with $9.1 million in 2015. The decrease reflects the impact of higher discount rates partially offset by a lower assumed long term rate of return on plan assets.

Income taxes For the first six months of 2016, we recorded a provision for income taxes of $5.1 million on pretax income of $23.2 million. The comparable amounts in the period of 2015 were $1.8 million and $18.6 million, respectively. The effective tax rate in 2015 includes the impact of a $2.6 million release of income tax reserves in connection with the completion of certain federal and state tax examinations.

Foreign Currency We own and operate facilities in Canada, Germany, France, the United Kingdom and the Philippines. The functional currency of our Canadian operations is the U.S. dollar. However, in Germany and France it is the Euro, in the UK, it is the British Pound Sterling, and in the Philippines the functional currency is the Peso. On an annual basis, our euro denominated revenue exceeds euro expenses by approximately €120 million. For the six months ended June 30, 2016, the average currency exchange rate increased slightly to 1.12 U.S. dollars to 1.00 euro compared with 1.11 to 1.00 for the first six months of 2015. With respect to the British Pound Sterling, Canadian dollar, and Philippine Peso, we have differing amounts of inflows and outflows of these currencies, although to a lesser degree than the euro. As a result, we are exposed to changes in currency exchange rates and such changes could be significant. The translation of the results from international operations into U.S. dollars is subject to changes in foreign currency exchange rates.

The table below summarizes the translation impact on reported results that changes in currency exchange rates had on our non-U.S. based operations from the conversion of these operation’s results for the first six months of 2016.

In thousands	Six months ended June 30, 2016
	Favorable (unfavorable)
Net sales	$ (4,518	)
Costs of products sold	3,211
SG&A expenses	375
Income taxes and other	37
Net income	$ (895	)

The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2016 were the same as 2015. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.

• 33 -

GLATFELTER

6.30.16 Form 10-Q

Table of Contents

Three months ended June 30, 2016 versus the three months ended June 30, 2015

Overview For the second-quarter of 2016, net income totaled $2.0 million, or $0.04 per diluted share compared with $2.8 million, or $0.06 per diluted share in the second quarter of 2015. Adjusted earnings for the second quarter of 2016 were $2.8 million, or $0.06 per diluted share compared with $1.8 million, or $0.04 per diluted share, for the same period a year ago.

The following table sets forth summarized results of operations:

In thousands, except per share	Three months ended June 30 — 2016	2015
Net sales	$ 406,413	$ 410,803
Gross profit	42,723	32,833
Operating income	5,530	3,807
Net income	1,965	2,848
Earnings per diluted share	0.04	0.06

The following table sets for the reconciliation of net income to adjusted earnings for the three months ended June 30, 2016 and 2015:

In thousands, except per share	2016 — Amount	Diluted EPS	2015 — Amount	Diluted EPS
Net income	$ 1,965	$ 0.04	$ 2,848	$	0.06
Adjustments (pre-tax)
Specialty Papers’ environmental compliance	1,088		—
Airlaid capacity expansion costs	201		—
Timberland sales and related costs	—		(51	)
Workforce efficiency charges	—		614
Total adjustments (pre-tax)	1,289		563
Income taxes (1) (2)	(487	)	(1,567	)
Total after-tax adjustments	802	0.02	(1,004	)	(0.02	)
Adjusted earnings	$ 2,767	$ 0.06	$ 1,844	$	0.04

(1) Tax effect for adjustments calculated based on the tax rate of the jurisdiction in which each adjustment originated.

(2) Includes release of $1.4 million of tax reserves on timberland sales in 2015.

Business Unit Performance

Three months ended June 30	Composite Fibers		Advanced Airlaid Materials		Specialty Papers				Other and Unallocated				Total
Dollars in millions
	2016	2015	2016	2015	2016		2015		2016		2015		2016	2015
Net sales	$ 136.4	$ 140.4	$ 60.8	$ 57.5	$ 209.3		$ 212.9		$ —		$ —		$ 406.4	$	410.8
Energy and related sales, net	—	—	—	—	2.0		0.7		—		—		2.0		0.7
Total revenue	136.4	140.4	60.8	57.5	211.3		213.6		—		—		408.4		411.5
Cost of products sold	109.0	112.4	51.8	52.3	202.9		211.9		2.0		2.1		365.7		378.7
Gross profit (loss)	27.4	28.0	9.0	5.2	8.4		1.7		(2.0	)	(2.1	)	42.7		32.8
SG&A	12.1	11.3	2.2	2.1	14.2		11.7		8.7		4.0		37.2		29.1
Gains on dispositions of plant, equipment and timberlands, net	—	—	—	—	—		—		—		(0.1	)	—		(0.1	)
Total operating income (loss)	15.3	16.7	6.8	3.1	(5.8	)	(10.0	)	(10.7	)	(6.0	)	5.5		3.8
Non-operating expense	—	—	—	—	—		—		(3.6	)	(4.1	)	(3.6	)	(4.1	)
Income (loss) before income taxes	$ 15.3	$ 16.7	$ 6.8	$ 3.1	$ (5.8	)	$ (10.0	)	$ (14.3	)	$ (10.1	)	$ 2.0	$	(0.3	)
Supplementary Data
Net tons sold (thousands)	40.7	39.4	24.4	22.6	194.7		191.3		—		—		259.7		253.3
Depreciation, depletion and amortization	$ 7.2	$ 6.7	$ 2.4	$ 2.1	$ 6.5		$ 6.3		$ 0.7		$ 0.5		$ 16.8	$	15.6
Capital expenditures	2.3	5.6	6.1	1.5	28.7		15.6		—		0.1		37.1		22.8

The sum of individual amounts set forth above may not agree to the consolidated financial statements included herein due to rounding.

• 34 -

GLATFELTER

6.30.16 Form 10-Q

Table of Contents

Sales and Costs of Products Sold

In thousands	Three months ended June 30 — 2016	2015	Change
Net sales	$ 406,413	$ 410,803	$ (4,390	)
Energy and related sales, net	2,001	715	1,286
Total revenues	408,414	411,518	(3,104	)
Costs of products sold	365,691	378,685	(12,994	)
Gross profit	$ 42,723	$ 32,833	$ 9,890
Gross profit as a percent of Net sales	10.5 %	8.0 %

The following table sets forth the contribution to consolidated net sales by each business unit:

Percent of Total	Three months ended June 30 — 2016	2015
Business Unit
Composite Fibers	33.6 %	34.2 %
Advanced Airlaid Material	15.0	14.0
Specialty Papers	51.4	51.8
Total	100.0 %	100.0 %

Net sales totaled $406.4 million and $410.8 million in the second quarters of 2016 and 2015, respectively, with the decline primarily reflecting lower average selling prices. Currency translation adjustments favorably impacted the year-over-year comparison by $0.7 million

Composite Fibers’ net sales declined $4.0 million, or 2.9%, primarily due to $1.6 million from lower selling prices. Shipping volumes were higher in the comparison primarily due to improved demand for wallcover.

Composite Fibers’ second-quarter 2016 operating income decreased $1.4 million to $15.3 million compared to the year-ago period. The primary drivers are summarized in the following chart:

Advanced Airlaid Materials’ net sales increased $3.3 million in the year-over-year comparison as shipping volumes increased 7.8% primarily due to higher shipments

of hygiene products. Lower selling prices impacted the comparison by $1.8 million.

Advanced Airlaid Materials’ operating income totaled $6.8 million, more than double the same quarter a year ago. The primary drivers are summarized in the following chart:

Specialty Papers’ net sales decreased $3.7 million, or 1.7%, due to a $3.7 million impact from lower selling prices.

Specialty Papers’ operating loss narrowed by $4.2 million in the year-over-year comparison and totaled $5.8 million in the second quarter of 2016. The primary drivers are summarized in the following chart:

Operating results for both quarters reflect the cost of annual maintenance outages at the Company’s Chillicothe, OH and Spring Grove, PA facilities. The outages adversely impacted second-quarter 2016 results by $26.3 million, which was $7.1 million less than the cost of the outages in 2015. The $0.9 million improvement in “Operations & Other” in the chart above includes the lower cost of the annual maintenance outages which was offset by lower pulp production and an increase in incentive compensation and other costs.

• 35 -

GLATFELTER

6.30.16 Form 10-Q

Table of Contents

We sell excess power generated by the Spring Grove, PA facility. The following table summarizes this activity for the second quarters of 2016 and 2015:

In thousands	Three months ended June 30 — 2016	2015		Change
Energy sales	$ 836	$	1,163	$	(327	)
Costs to produce	(934	)	(1,211	)	277
Net	(98	)	(48	)	(50	)
Renewable energy credits	2,099		763		1,336
Total	$ 2,001	$	715	$	1,286

Other and Unallocated The amount of net operating expenses not allocated to a business unit and reported as “Other and Unallocated” in our table of Business Unit Performance, totaled $10.7 million in the second quarter of 2016 compared with $6.0 million in the second quarter of 2015. The increase was primarily due to higher incentive compensation and professional service fees.

Pension Expense The following table summarizes the amounts of pension expense recognized for the periods indicated:

In thousands	Three months ended June 30 — 2016	2015	Change
Recorded as :
Costs of products sold	$ 742	$ 1,468	$ (726	)
SG&A expense	854	135	719
Total	$ 1,596	$ 1,603	$ (7	)

Income taxes For the second quarter of 2016, we recorded zero tax on a pretax income of $2.0 million due to the jurisdiction in which taxable earnings and discrete items were generated. The comparable amounts in the second quarter of 2015 were an income tax benefit of $3.1 million on a pretax loss of $0.3 million. The tax benefit was primarily due to the release income tax reserves in connection with the completion of certain federal and state tax examinations.

Foreign Currency The table below summarizes the translation impact on reported results that changes in currency exchange rates had on our non-U.S. based operations from the conversion of these operation’s results for the second quarter of 2016.

In thousands	Three months ended June 30, 2016
	Favorable (unfavorable)
Net sales	$ 709
Costs of products sold	(1,354	)
SG&A expenses	(22	)
Income taxes and other	(9	)
Net income	$ (676	)

The above table only presents the financial reporting impact of foreign currency translations assuming currency exchange rates in 2016 were the same as 2015. It does not present the impact of certain competitive advantages or disadvantages of operating or competing in multi-currency markets.

LIQUIDITY AND CAPITAL RESOURCES

Our business is capital intensive and requires significant expenditures for new or enhanced equipment, to support our research and development efforts, for environmental compliance matters including, but not limited to, the Clean Air Act, and to support our business strategy. In addition, we have mandatory debt service requirements of both principal and interest. The following table summarizes cash flow information for each of the periods presented:

In thousands	Six months ended June 30 — 2016	2015
Cash and cash equivalents at beginning of period	$ 105,304	$	99,837
Cash provided (used) by
Operating activities	36,640		25,513
Investing activities	(80,638	)	(43,124	)
Financing activities	(3,126	)	(14,813	)
Effect of exchange rate changes on cash	352		(1,651	)
Net cash used	(46,772	)	(34,075	)
Cash and cash equivalents at end of period	$ 58,532	$	65,762

At June 30, 2016, we had $58.5 million in cash and cash equivalents held by both domestic and foreign subsidiaries. Unremitted earnings of our foreign subsidiaries are deemed to be indefinitely reinvested; however, as of June 30, 2016, the majority of our cash and cash equivalents

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is either held by domestic entities or is available for use domestically. In addition to our cash and cash equivalents, $258.4 million is available under our revolving credit agreement, which matures in March 2020.

Cash provided by operating activities totaled $36.6 million in the first six months of 2016 compared with $25.5 million in the same period a year ago. The increase in cash from operations primarily reflects a decrease in cash used for working capital.

Net cash used by investing activities increased by $37.5 million in the year-over-year comparison primarily due to capital expenditures for Specialty Papers’ environmental compliance and Advanced Airlaid Materials’ capacity expansion projects which totaled $55.6 million in 2016. Capital expenditures are expected to total between $150 million and $170 million for 2016, including approximately $45 million to $50 million for Specialty Papers’ environmental compliance projects and approximately $40 million to $45 million for the Airlaid capacity expansion.

Net cash used by financing activities totaled $3.1 million in the first six months of 2016 compared with $14.8 million in the same period of 2015. The net decline in use of cash for financing activities primarily reflects lower revolver borrowings, offset by additional term loan borrowings and receipt of $4.4 million of government grants primarily related to our Airlaid capacity expansion and Specialty Papers’ compliance projects.

The following table sets forth our outstanding long-term indebtedness:

In thousands	June 30 — 2016	2015
Revolving credit facility, due Mar. 2020	$ 48,851	$	58,792
5.375% Notes, due Oct. 2020	250,000		250,000
2.40% Term Loan, due Jun. 2022	9,516		10,109
2.05% Term Loan, due Mar. 2023	40,000		42,130
1.30% Term Loan, due Jun. 2023	11,102		—
1.55% Term Loan, due Sep. 2025	10,884		2,839
Total long-term debt	370,353		363,870
Less current portion	(9,098	)	(7,366	)
Unamortized deferred issuance costs	(2,889	)	(3,208	)
Long-term debt, net of current portion	$ 358,366	$	353,296

Our revolving credit facility contains a number of customary compliance covenants, the most restrictive of which is a maximum leverage ratio of 3.5x. As of June 30, 2016, the leverage ratio, as calculated in accordance with the definition in our credit agreement, was 1.9x, within the limits set forth in our

credit agreement. Based on our expectations of future results of operations and capital needs, we do not believe the debt covenants will impact our operations or limit our ability to undertake financings that may be necessary to meet our capital needs.

The 5.375% Notes contain cross default provisions that could result in all such notes becoming due and payable in the event of a failure to repay debt outstanding under the credit agreement at maturity, or a default under the credit agreement that accelerates the debt outstanding thereunder. As of June 30, 2016, we met all of the requirements of our debt covenants. The significant terms of the debt instruments are more fully discussed in Item 1 - Financial Statements – Note 9.

Financing activities includes cash used for common stock dividends which increased in the comparison reflecting a 4% increase in our quarterly cash dividend. In the first six months of 2016, we used $10.7 million of cash for dividends on our common stock compared with $10.0 million in the same period of 2015. 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.

We are subject to various federal, state and local laws and regulations intended to protect the environment as well as human health and safety. At various times, we have incurred significant costs to comply with these regulations and we could incur additional costs as new regulations are developed or regulatory priorities change. We will incur material capital costs to comply with new air quality regulations including the U.S. EPA Best Available Retrofit Technology rule (BART; otherwise known as the Regional Haze Rule) and the Boiler Maximum Achievable Control Technology rule (Boiler MACT). These rules will require process modifications and/or installation of air pollution controls on boilers at two of our facilities. We have begun converting or replacing five coal-fired boilers to natural gas and upgrading site infrastructure to accommodate the new boilers, including connecting to gas pipelines. Net of government grants, the total cost of these projects is estimated at $85 million to $90 million, of which approximately $67.9 million has been incurred through the end of the second quarter of 2016. The balance of the related spending will be substantially completed in 2016.

As more fully discussed in Item 1 - Financial Statements – Note 13 – Commitments, Contingencies and Legal Proceedings (“Note 13”), we are involved in the Lower Fox River in Wisconsin (the “Fox River”), an EPA Superfund site for which we remain potentially liable for contributions to the clean-up activity. During 2015, we used $9.7 million and expect to spend less than $10.0 million in 2016 for remediation activities. It is conceivable we may need to fund amounts in excess of this to fund a

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portion of the on-going costs in 2016 or beyond. Although we are unable to determine with any degree of certainty the amount we may be required to fund for interim remediation work, such amounts could be significant. The ultimate allocation of such costs is the subject of extensive ongoing litigation amongst three potentially responsible parties. See Note 13 for a summary of significant environmental matters.

During 2016, we expect our use of cash for capital expenditures, strategic investments and environmental compliance projects will exceed cash generated from operations. We expect to meet all of our near and long-term cash needs from a combination of operating cash flow, cash and cash equivalents, our existing credit facility and other long-term debt. However, as discussed in Note 13, an unfavorable outcome of the Fox River matters could have a material adverse impact on our consolidated financial position, liquidity and/or results of operations.

Off-Balance-Sheet Arrangements As of June 30, 2016 and December 31, 2015, 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, are reflected in the condensed consolidated balance sheets included herein in Item 1 – Financial Statements.

Outlook Composite Fibers’ shipping volumes in the third quarter are expected to be slightly higher than the second quarter. Selling prices and raw material and energy prices are expected to be in-line with the second quarter.

Advanced Airlaid Materials’ shipping volumes are expected to increase slightly in the third quarter. Customer selling prices and raw material and energy prices are expected to be in-line with the second quarter.

For Specialty Papers, we expect shipping volumes in the third quarter to increase by approximately 5% compared with the second quarter. Selling prices are expected to be slightly higher while increases in raw material and energy prices are expected to slightly outpace selling price increases. We also expect maintenance spending to decrease by approximately $23 million reflecting normal patterns of maintenance expense.

Corporate costs are expected to be approximately $1 million to $2 million less in the third quarter than in the second quarter.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Dollars in thousands	Year Ended December 31 — 2017	2018	2019	2020	2021	June 30, 2016 — Carrying Value	Fair Value
Long-term debt
Average principal outstanding
At fixed interest rates – Bond	$ 250,000	$ 250,000	$ 250,000	$ 250,000	$ 250,000	$ 250,000	$ 255,625
At fixed interest rates – Term Loans	62,403	52,625	42,166	31,708	21,249	71,502	68,087
At variable interest rates	48,851	48,851	48,851	48,851	48,851	48,851	48,851
						$ 370,353	$ 372,563
Weighted-average interest rate
On fixed rate debt – Bond	5.375 %	5.375 %	5.375 %	5.375 %	5.375 %
On fixed rate debt – Term Loans	2.17 %	2.17 %	2.17 %	2.17 %	2.17 %
On variable rate debt	1.25 %	1.25 %	1.25 %	1.25 %	1.25 %

The table above presents the average principal outstanding and related interest rates for the next five years for debt outstanding as of June 30, 2016. Fair values included herein have been determined based upon rates currently available to us for debt with similar terms and remaining maturities.

Our market risk exposure primarily results from changes in interest rates and currency exchange rates. At June 30, 2016, we had $370.4 million of long-term debt, of which 13.2% was at variable interest rates. Variable-rate debt outstanding represents borrowings under our revolving credit agreement that accrues interest based on LIBOR plus a margin. At June 30, 2016, the interest rate paid was approximately 1.25%. A hypothetical 100 basis point increase or decrease in the interest rate on variable rate debt would increase or decrease annual interest expense by $0.5 million.

As part of our overall risk management practices, we enter into financial derivatives primarily designed to either i) hedge foreign currency risks associated with forecasted transactions – “cash flow hedges”; or ii) mitigate the impact that changes in currency exchange rates have on intercompany financing transactions and foreign currency denominated receivables and payables – “foreign currency hedges.” For a more complete discussion of this activity, refer to Item 1 – Financial Statements – Note 12.

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. On an annual basis, our euro denominated revenue exceeds euro expenses by approximately €120 million. With respect to the British Pound Sterling, Canadian dollar, and Philippine Peso, we have differing amounts of inflows and outflows of these currencies, although to a lesser degree than the euro. As a result, particularly with respect to the euro, we are exposed to changes in currency exchange rates and such changes could be significant.

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, 2016, 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, 2016, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II

ITEM 6. EXHIBITS

The following exhibits are filed herewith or incorporated by reference as indicated.

31.1	Certification of Dante C. Parrini, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2	Certification of John P. Jacunski, Executive Vice President, Chief Financial Officer and President, Specialty Papers of Glatfelter, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Dante C. Parrini, 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, Executive Vice President, Chief Financial Officer and President, Specialty Papers of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
101.INS	XBRL Instance Document, filed herewith
101.SCH	XBRL Taxonomy Extension Schema, filed herewith
101.CAL	XBRL Extension Calculation Linkbase, filed herewith
101.DEF	XBRL Extension Definition Linkbase, filed herewith
101.LAB	XBRL Extension Label Linkbase, filed herewith
101.PRE	XBRL Extension Presentation Linkbase, filed herewith

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.

(Registrant)
August 2, 2016
By	/s/ David C. Elder
	David C. Elder
	Vice President, Finance

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EXHIBIT INDEX

Exhibit Number	Description
31.1	Certification of Dante C. Parrini, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 – Chief Executive Officer, filed herewith.
31.2	Certification of John P. Jacunski, Executive Vice President, Chief Financial Officer and President, Specialty Papers of Glatfelter, pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer, filed
herewith.
32.1	Certification of Dante C. Parrini, 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, Executive Vice President, Chief Financial Officer and President, Specialty Papers Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 – Chief
Financial Officer, filed herewith.
101.INS	XBRL Instance Document, filed herewith
101.SCH	XBRL Taxonomy Extension Schema, filed herewith
101.CAL	XBRL Extension Calculation Linkbase, filed herewith
101.DEF	XBRL Extension Definition Linkbase, filed herewith
101.LAB	XBRL Extension Label Linkbase, filed herewith
101.PRE	XBRL Extension Presentation Linkbase, filed herewith

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