He'll always have a line-count of 1, since he's slurping the files. The counter variable is used to count how many times the replacement is triggered with the /g option, not the number of "lines" read (he only reads one "line" in the original!).
Putting the declaration of $counter inside the loop should do the trick simply. A better solution might be to rewrite the regex to find the second occurrence of </div> rather than finding all of them and only substituting the second, and "inserting" the content directly rather than repeating the found stuff in the replacement.