CLW-2014.6.30-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2014
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number: 001-34146
CLEARWATER PAPER CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
20-3594554
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
601 West Riverside, Suite 1100
Spokane, Washington
 
99201
(Address of principal executive offices)
 
(Zip Code)
(509) 344-5900
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý    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 (section 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  ý     No  ¨    
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý    
The number of shares of common stock of the registrant outstanding as of July 22, 2014 was 19,805,239.




CLEARWATER PAPER CORPORATION
Index to Form 10-Q
 
 
 
 
 
 
Page Number
 
 
 
PART I.
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
6 - 21
 
 
 
ITEM 2.
22 - 35
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II.
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 6.
 
 
 
 




Part I
ITEM 1.
 
Consolidated Financial Statements
Clearwater Paper Corporation
Consolidated Statements of Operations
Unaudited (Dollars in thousands - except per-share amounts)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
498,759

 
$
471,002

 
$
983,679

 
$
931,826

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
(434,111
)
 
(414,521
)
 
(860,740
)
 
(828,730
)
Selling, general and administrative expenses
(31,565
)
 
(26,767
)
 
(65,079
)
 
(60,899
)
Impairment of assets

 

 
(4,259
)
 

Total operating costs and expenses
(465,676
)
 
(441,288
)
 
(930,078
)
 
(889,629
)
Income from operations
33,083

 
29,714

 
53,601

 
42,197

Interest expense, net
(10,688
)
 
(11,094
)
 
(21,422
)
 
(22,076
)
Debt retirement costs

 

 

 
(17,058
)
Earnings before income taxes
22,395

 
18,620

 
32,179

 
3,063

Income tax (provision) benefit
(9,942
)
 
(6,962
)
 
(13,500
)
 
7,713

Net earnings
$
12,453

 
$
11,658

 
$
18,679

 
$
10,776

Net earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.61

 
$
0.52

 
$
0.91

 
$
0.48

Diluted
0.61

 
0.52

 
0.90

 
0.47

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

2




Clearwater Paper Corporation
Consolidated Statements of Comprehensive Income
Unaudited (Dollars in thousands)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net earnings
$
12,453

 
$
11,658

 
$
18,679

 
$
10,776

Other comprehensive income:
 
 
 
 
 
 
 
Defined benefit pension and other postretirement employee benefits:
 
 
 
 
 
 
 
Amortization of actuarial loss included in net periodic
  cost, net of tax of $934, $1,217, $1,899, and $2,923
1,479

 
1,872

 
3,008

 
4,496

Amortization of prior service (credit) cost included in net periodic
  cost, net of tax of $(353), $75, $(382), and $(32)
(559
)
 
113

 
(604
)
 
(50
)
Curtailments, net of tax of $ -, $303, $ - and $303

 
466

 

 
466

Other comprehensive income, net of tax
920

 
2,451

 
2,404

 
4,912

Comprehensive income
$
13,373

 
$
14,109

 
$
21,083

 
$
15,688

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


3




Clearwater Paper Corporation
Consolidated Balance Sheets
Unaudited (Dollars in thousands – except per-share amounts)
 
 
June 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
22,481

 
$
23,675

Restricted cash
1,501

 
1,500

Short-term investments
59,000

 
70,000

Receivables, net
168,555

 
158,874

Taxes receivable
6,840

 
10,503

Inventories
264,874

 
267,788

Deferred tax assets
29,536

 
37,538

Prepaid expenses
8,085

 
5,523

Total current assets
560,872

 
575,401

Property, plant and equipment, net
873,284

 
884,698

Goodwill
229,533

 
229,533

Intangible assets, net
36,208

 
40,778

Pension assets
11,284

 
4,488

Other assets, net
9,374

 
9,927

TOTAL ASSETS
$
1,720,555

 
$
1,744,825

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
220,393

 
$
190,648

Current liability for pensions and other postretirement employee benefits
8,778

 
8,778

Total current liabilities
229,171

 
199,426

Long-term debt
650,000

 
650,000

Liability for pensions and other postretirement employee benefits
105,015

 
109,807

Other long-term obligations
50,212

 
52,942

Accrued taxes
2,694

 
2,658

Deferred tax liabilities
128,270

 
124,898

Stockholders’ equity:
 
 
 
Preferred stock, par value $0.0001 per share, 5,000,000 authorized shares, no shares
  issued

 

Common stock, par value $0.0001 per share, 100,000,000 authorized
  shares-24,030,815 and 24,007,581 shares issued
2

 
2

Additional paid-in capital
329,884

 
326,546

Retained earnings
485,318

 
466,639

Treasury stock, at cost, common shares-4,115,900 and 2,923,640 shares repurchased
(204,322
)
 
(130,000
)
Accumulated other comprehensive loss, net of tax
(55,689
)
 
(58,093
)
Total stockholders’ equity
555,193

 
605,094

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,720,555

 
$
1,744,825

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

4




Clearwater Paper Corporation
Consolidated Statements of Cash Flows
Unaudited (Dollars in thousands)
 
 
Six Months Ended
 
June 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net earnings
$
18,679

 
$
10,776

Adjustments to reconcile net earnings to net cash flows from operating activities:
 
 
 
Depreciation and amortization
44,246

 
45,404

Equity-based compensation expense
6,910

 
5,581

Impairment of assets
4,259

 

Deferred tax provision (benefit)
9,857

 
(9,384
)
Employee benefit plans
979

 
5,098

Deferred issuance costs and discounts on long-term debt
949

 
4,017

Disposal of plant and equipment, net
422

 

Changes in working capital, net
14,818

 
(43,805
)
Changes in taxes receivable, net
3,663

 
11,918

Changes in non-current accrued taxes, net
36

 
(2,763
)
Funding of qualified pension plans
(8,889
)
 
(4,633
)
Other, net
(1,016
)
 
(237
)
Net cash flows from operating activities
94,913

 
21,972

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Changes in short-term investments, net
11,000

 
(60,000
)
Additions to plant and equipment
(32,612
)
 
(31,413
)
Proceeds from sale of assets
619

 

Net cash flows from investing activities
(20,993
)
 
(91,413
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from long-term debt

 
275,000

Repayment of long-term debt

 
(150,000
)
Purchase of treasury stock
(74,322
)
 
(59,984
)
Payments for long-term debt issuance costs

 
(4,779
)
Payment of tax withholdings on equity-based payment arrangements
(792
)
 
(2,195
)
Net cash flows from financing activities
(75,114
)
 
58,042

Decrease in cash
(1,194
)
 
(11,399
)
Cash at beginning of period
23,675

 
12,579

Cash at end of period
$
22,481

 
$
1,180

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid for interest
$
19,547

 
$
16,326

Cash paid for income taxes
4,211

 
2,080

Cash received from income tax refunds
4,170

 
796

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES
 
 
 
Changes in accrued plant and equipment
$
(912
)
 
$
7,269

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

5




Clearwater Paper Corporation
Condensed Notes to Consolidated Financial Statements
Unaudited
NOTE 1 Nature of Operations and Basis of Presentation
GENERAL
Clearwater Paper Corporation is a leading North American producer of private label tissue and paperboard products. We manufacture quality consumer tissue, away-from-home tissue, parent rolls (non-converted tissue product), machine-glazed tissue, bleached paperboard and pulp at 13 manufacturing locations in the U.S. and Canada. Our private label consumer tissue products - facial and bath tissue, paper towels and napkins - are used primarily at-home and are principally sold to major retailers and wholesale distributors, which include grocery, drug, mass-merchant and discount stores. Our paperboard is sold primarily in the high-end segment of the packaging industry, which demands high-quality construction and print surfaces for graphics.
On February 17, 2014, we announced the permanent and immediate closure of our Long Island, New York, tissue converting and distribution facility. As of June 30, 2014, we have incurred $10.3 million of costs associated with the closure, of which $1.8 million was incurred during the second quarter of 2014.
On March 6, 2013, we announced the planned permanent closure of our Thomaston, Georgia converting and distribution facility. The shutdown occurred gradually as converting lines were relocated and installed at our other facilities, with all operations at Thomaston ceasing at the end of 2013. As of June 30, 2014, we have incurred $7.1 million of costs associated with the closure, of which $0.4 million was incurred during the second quarter of 2014.
FINANCIAL STATEMENT PREPARATION AND PRESENTATION
The accompanying Consolidated Balance Sheets at June 30, 2014 and December 31, 2013, the related Consolidated Statements of Operations and Comprehensive Income for the three months and six months ended June 30, 2014 and 2013, and the Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013, have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. We believe that all adjustments necessary for a fair statement of the results of the interim periods presented have been included. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission, or SEC, on February 20, 2014.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SIGNIFICANT 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, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods. Significant areas requiring the use of estimates and measurement of uncertainty include determination of net realizable value for deferred tax assets, uncertain tax positions, assessment of impairment of long-lived assets, goodwill and intangibles, assessment of environmental matters, equity-based compensation and pension and postretirement obligation assumptions. Actual results could differ from those estimates and assumptions.
SHORT-TERM INVESTMENTS AND RESTRICTED CASH
Our short-term investments are invested primarily in demand deposits, which have very short maturity periods, and therefore earn an interest rate commensurate with low-risk instruments. We do not attempt to hedge our exposure to interest rate risk for our short-term investments. Our restricted cash in which the underlying instrument has a term of greater than twelve months from the balance sheet date is classified as non-current and is included in “Other assets, net” on our Consolidated Balance Sheet. As of June 30, 2014 and December 31, 2013, substantially all restricted cash balances were classified as current and included in "Restricted cash" on our Consolidated Balance Sheets.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are stated at the amount we expect to collect. Trade accounts receivable do not bear interest. The allowance for doubtful accounts is our best estimate of the losses we expect will result from the inability of our customers to make required payments. We generally determine the allowance based on a combination of actual historical write-off experience and an analysis of specific customer accounts. As of June 30, 2014 and December 31, 2013, we had allowances for doubtful accounts of $2.0 million and $1.9 million, respectively.

6




PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, including any interest costs capitalized, less accumulated depreciation. Depreciation of buildings, equipment and other depreciable assets is determined using the straight-line method. Assets we acquire through business combinations have estimated lives that are typically shorter than the assets we construct or buy new. Accumulated depreciation totaled $1,508.4 million and $1,476.4 million at June 30, 2014 and December 31, 2013, respectively.
Consistent with authoritative guidance, we assess the carrying amount of long-lived assets with definite lives that are held-for-use and evaluate them for recoverability whenever events or changes in circumstances indicate that we may be unable to recover the carrying amount of the assets. During the first quarter of 2014, we permanently closed our Long Island converting and distribution facility. As a result of this closure, we considered an outside third party's appraisal in assessing the recoverability of the facility's long-lived plant and equipment based on available market data for comparable assets sold through private party transactions. Based on this assessment, we determined the carrying amounts of certain long-lived plant and equipment related to the Long Island facility exceeded their fair value. As a result, we recorded a $3.0 million non-cash impairment charge to our accompanying Consolidated Statement of Operations. There were no other such events or changes in circumstances that impacted our remaining long-lived assets.
STOCKHOLDERS’ EQUITY
On February 5, 2014, we announced that our Board of Directors had approved a new stock repurchase program authorizing the repurchase of up to $100.0 million of our common stock. The repurchase program authorizes purchases of our common stock from time to time through open market purchases, negotiated transactions or other means, including accelerated stock repurchases and 10b5-1 trading plans in accordance with applicable securities laws and other restrictions. We have no obligation to repurchase stock under this program and may suspend or terminate the program at any time. In total, we have repurchased 1,192,260 shares of our outstanding common stock as of June 30, 2014, of which 733,676 shares were repurchased during the second quarter of 2014 at an average price of $61.32 per share, pursuant to this repurchase program. As of June 30, 2014, we had $25.7 million of authorization remaining for this stock repurchase program.
On January 17, 2013, we announced that our Board of Directors had approved a stock repurchase program authorizing the repurchase of up to $100.0 million of our common stock, which was completed in 2013. On March 1, 2013, we entered into an accelerated stock buyback, or ASB, agreement with a major financial institution to repurchase an aggregate of $50.0 million of our outstanding common stock. In total, 1,039,513 shares of our outstanding common stock were delivered under the ASB agreement at an average repurchase price of $48.10 per share. In addition to the ASB agreement, we also made repurchases of 1,030,657 shares of our outstanding common stock on the open market at a total cost of $50.0 million, representing an an average price of $48.51 per share.
DERIVATIVES
We had no activity during the six months ended June 30, 2014 and 2013 that required hedge or derivative accounting treatment. To help mitigate our exposure to market risk for changes in utility commodity pricing, from time to time we have used firm price contracts to supply a portion of the natural gas requirements for our manufacturing facilities. As of June 30, 2014, these contracts covered approximately 50% of our expected average monthly natural gas requirements for the remainder of 2014. Historically, these contracts have qualified for treatment as “normal purchases or normal sales” under authoritative guidance and thus required no mark-to-market adjustment.
NOTE 2 Recently Adopted and New Accounting Standards
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update, or ASU, 2014-09, Revenue from Contracts with Customers. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration, or payment, to which the company expects to be entitled in exchange for those goods or services. The standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively, such as service revenue and contract modifications, and clarify guidance for multiple-element arrangements. This standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption prohibited. The standard may be applied under either a retrospective or cumulative effect adoption method. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

7




In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends and raises the threshold of a disposal transaction that qualifies as a discontinued operation, as well as requires additional disclosures about discontinued operations and disposals of individually significant components that do not qualify as discontinued operations. This standard is effective prospectively for all disposals of components that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years, with early adoption permitted. We are currently evaluating the impact, if any, this guidance will have on our consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU only changes existing presentation requirements but does not require new recurring disclosures and is prospective for annual and interim reporting periods beginning after December 15, 2013. This guidance did not impact our consolidated financial statements.
We reviewed all other new accounting pronouncements issued in the period and concluded that they are not applicable to our business.
NOTE 3 Inventories
Inventories at the balance sheet dates consist of:

(In thousands)
June 30,
2014
 
December 31,
2013
Pulp, paperboard and tissue products
$
180,146

 
$
182,715

Materials and supplies
73,702

 
69,836

Logs, pulpwood, chips and sawdust
11,026

 
15,237

 
$
264,874

 
$
267,788

NOTE 4 Intangible Assets
Intangible assets at the balance sheet dates are comprised of the following:

 
June 30, 2014
(Dollars in thousands, lives in years)
Useful
Life
 
Historical
Cost
 
Accumulated
Amortization
 
Net
Balance
Customer relationships
9.0
 
$
53,957

 
$
(20,230
)
 
$
33,727

Trade names and trademarks
10.0
 
3,393

 
(1,188
)
 
2,205

Non-compete agreements
2.5 - 5.0
 
1,189

 
(913
)
 
276

 
 
 
$
58,539

 
$
(22,331
)
 
$
36,208

 
 
 
 
 
 
 
 
  
December 31, 2013
(Dollars in thousands, lives in years)
Useful
Life
 
Historical
Cost
 
Accumulated
Amortization
 
Net
Balance
Customer relationships
9.0
 
$
53,957

 
$
(17,234
)
 
$
36,723

Trade names and trademarks
10.0
 
5,300

 
(1,590
)
 
3,710

Non-compete agreements
2.5 - 5.0
 
1,674

 
(1,329
)
 
345

 
 
 
$
60,931

 
$
(20,153
)
 
$
40,778

As a result of the closure of our Long Island converting and distribution facility, we performed an assessment of the recoverability of our intangible assets by utilizing the income approach, which discounts projected future cash flows based on management’s expectations of the current and future operating environment. It was determined that the carrying amounts of certain trade names and trademarks related to the Long Island facility were exceeding their fair value. As a result, in the first quarter of 2014 we recorded a $1.3 million non-cash impairment charge in our accompanying Consolidated Statement of Operations. In addition, fully amortized non-compete agreements related to the Long Island facility were also disposed. There were no other such events or changes in circumstances that impacted our remaining definite-lived intangible assets.

8




NOTE 5 Income Taxes
Consistent with authoritative guidance, our estimated annual effective tax rate is used to allocate our expected annual income tax provision to interim periods. The rate is the ratio of our estimated annual income tax provision to our estimated pre-tax ordinary income, and excludes "discrete items," which are significant, unusual or infrequent items reported separately net of their related tax effect. The estimated annual effective tax rate is applied to the current interim period’s ordinary income to determine the income tax provision allocated to the interim period. The income tax effects of discrete items are then determined separately and recognized in the interim period in which the income or expense items arise.
For the three and six months ended June 30, 2014 and 2013, the effective tax rates attributable to continuing operations were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Statutory federal income tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
 
35.0
 %
State taxes, net of credits
0.9

 
1.3

 
0.9

 
1.3

Change in valuation allowances
1.6

 
2.9

 
2.5

 
2.9

Federal manufacturing deduction
(1.7
)
 

 
(1.7
)
 

Increase in uncertain tax positions

 

 

 
15.9

Interest accrued on uncertain tax positions
0.1

 
2.2

 
0.1

 
28.7

Cellulosic Biofuel Producer Credit conversion

 

 

 
(318.7
)
Federal credits and audit adjustments
(0.1
)
 
(1.8
)
 
(1.4
)
 
(1.8
)
State rate adjustments
4.6

 
0.3

 
3.2

 
(2.0
)
Return to provision adjustments
4.1

 
(2.1
)
 
3.1

 
(13.9
)
Other
(0.1
)
 
(0.4
)
 
0.3

 
0.8

Effective tax rate
44.4
 %
 
37.4
 %
 
42.0
 %
 
(251.8
)%
Our estimated annual effective tax rate for 2014 is approximately 35%, compared with approximately 38% for 2013. The decline in the effective tax rate is due to an increase in the benefit from the federal manufacturing deduction and an increase in the benefits from state income tax rates, offset by the reduction in federal credit benefits.
During the quarter ended June 30, 2014, we recognized the effects of enacted New York state law changes. As part of the analysis, we identified that, in prior years, we had not applied the proper apportionment factor when certain New York state net operating loss carryforwards were generated, which resulted in a $2.9 million overstatement that was corrected in the period and is included as a discrete item within state rate adjustments due to immateriality. Additionally, return to provision adjustments, including amended returns, generated expense of 7.4%, which was offset by other state return to provision adjustments benefit of 3.3%.
During the fourth quarter of 2012, the Internal Revenue Service, or IRS, commenced an audit of our tax returns for the tax years ending December 31, 2008 through December 31, 2012. This audit has moved into final review stages with the Joint Committee on Taxation. We expect to receive final approval with no additional changes from the Committee in 2014. As a result, we have recognized an additional deferred tax asset of $1.5 million and a tax benefit of the same amount. We have also estimated the state impact for these changes and presented this within the results above.
During the second quarter of 2013, the IRS commenced an audit of our wholly-owned subsidiary, Cellu Tissue Holdings, Inc., or Cellu Tissue, and its subsidiaries for the year ended December 27, 2010, the period immediately before our acquisition of Cellu Tissue. During the first quarter of 2014, we successfully closed the audit of Cellu Tissue. The estimated state effect for federal audit changes has been reflected in the quarterly results.

9




NOTE 6 Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at the balance sheet dates consist of:
(In thousands)
June 30, 2014
 
December 31, 2013
Trade accounts payable
$
136,104

 
$
108,192

Accrued wages, salaries and employee benefits
41,112

 
38,563

Accrued interest
9,664

 
9,691

Accrued discounts and allowances
8,268

 
6,410

Accrued utilities
7,796

 
8,309

Accrued taxes other than income taxes payable
6,761

 
6,322

Other
10,688

 
13,161

 
$
220,393

 
$
190,648

NOTE 7 Debt
ISSUANCE OF $300 MILLION SENIOR NOTES DUE 2025 AND REDEMPTION OF $375 MILLION SENIOR NOTES DUE 2018
On July 29, 2014, in an event subsequent to the close of our quarter ended June 30, 2014, we sold $300 million aggregate principal amount of senior notes, which we refer to as the 2014 Notes. The 2014 Notes mature on February 1, 2025, have an interest rate of 5.375% and were issued at their face value. The issuance of these notes generated net proceeds of approximately $298 million after deducting offering expenses. We elected to redeem all of our $375 million aggregate principal amount of senior notes sold on October 22, 2010, which we refer to as the 2010 Notes, using the net proceeds from the 2014 Notes along with company funds and $37 million from our senior secured revolving credit facility. We irrevocably deposited sufficient funds with the trustee under the indenture governing the 2010 Notes to redeem these notes.
The 2010 Notes had a maturity date of November 1, 2018, and an interest rate of 7.125%. We elected to redeem all of the 2010 Notes at a redemption price equal to 100% of the principal amount of $375 million and a “make whole” premium of approximately $18 million plus accrued and unpaid interest of approximately $9 million, for an aggregate amount of approximately $401 million. The make whole premium and a portion of the unpaid interest, as well as an approximate $5 million non-cash charge relating to the unamortized deferred issuance costs associated with the 2010 Notes, will be recorded as components of debt retirement costs and included in the Consolidated Statement of Operations in the third quarter of 2014.
The 2014 Notes are guaranteed by all of our direct and indirect domestic subsidiaries. The 2014 Notes will also be guaranteed by each of our future direct and indirect domestic subsidiaries that do not constitute an immaterial subsidiary under the indenture governing the 2014 Notes. The 2014 Notes are equal in right of payment with all other existing and future unsecured senior indebtedness and are senior in right of payment to any future subordinated indebtedness. The 2014 Notes are effectively subordinated to all of our existing and future secured indebtedness, including borrowings under our secured revolving credit facility, which is secured by certain of our accounts receivable, inventory and cash. The terms of the 2014 Notes limit our ability and the ability of any restricted subsidiaries to incur certain liens, engage in sale and leaseback transactions and consolidate, merge with, or convey, transfer or lease substantially all of our or their assets to another person.
We may, on any one or more occasions, redeem all or a part of the 2014 Notes, upon not less than 30 days nor more than 60 days notice, at a redemption price equal to 100% of the principal amount of the 2014 Notes redeemed, plus the applicable premium as of, and accrued and unpaid interest, if any, to the date of redemption. Unless we default in the payment of the redemption price, interest will cease to accrue on the 2014 Notes or portions thereof called for redemption on the applicable redemption date. In addition, we may be required to make an offer to purchase the 2014 Notes upon the sale of certain assets and upon a change of control.
$275 MILLION SENIOR NOTES DUE 2023
On January 23, 2013, we sold $275 million aggregate principal amount of senior notes, which we refer to as the 2013 Notes. The 2013 Notes mature on February 1, 2023, have an interest rate of 4.5% and were issued at their face value.

10




The 2013 Notes are guaranteed by all of our direct and indirect domestic subsidiaries, and will also be guaranteed by each of our future direct and indirect domestic subsidiaries that we do not designate as an unrestricted subsidiary under the indenture governing these notes. The 2013 Notes are equal in right of payment with all other existing and future unsecured senior indebtedness and are senior in right of payment to any future subordinated indebtedness. In addition, they are effectively subordinated to all of our existing and future secured indebtedness, including borrowings under our secured revolving credit facility, which is secured by certain of our accounts receivable, inventory and cash. The terms of the notes limit our ability and the ability of any restricted subsidiaries to borrow money; pay dividends; redeem or repurchase capital stock; make investments; sell assets; create restrictions on the payment of dividends or other amounts to us from any restricted subsidiaries; enter into transactions with affiliates; enter into sale and lease back transactions; create liens; and consolidate, merge or sell all or substantially all of our or their assets.
REVOLVING CREDIT FACILITY
On November 26, 2008, we entered into a $125 million senior secured revolving credit facility with certain financial institutions. The amount available to us under the revolving credit facility is based on the lesser of 85% of our eligible accounts receivable plus approximately 65% of our eligible inventory, or $125 million. The revolving credit facility has been subsequently amended and expires on September 30, 2016.
As of June 30, 2014, there were no borrowings outstanding under the credit facility, but approximately $6.9 million of the credit facility was being used to support outstanding standby letters of credit. Loans under the credit facility bear interest (i) for LIBOR loans, LIBOR plus between 1.75% and 2.25% and (ii) for base rate loans, a per annum rate equal to the greater of (a) the prime rate for such day; (b) the federal funds effective rate for such day, plus 0.50%; or (c) LIBOR for a 30-day interest period as determined on such day, plus between 1.25% and 1.75%. The percentage margin on all loans is based on our fixed charge coverage ratio for the most recent four quarters. As of June 30, 2014, we would have been permitted to draw approximately $118.1 million under the credit facility at LIBOR plus 1.75%, or base rate plus 1.25%.
A minimum fixed charge coverage ratio is the only financial covenant requirement under our credit facility and is triggered when there are any commitments or obligations outstanding and availability falls below 12.5% or an event of default exists, at which time the minimum fixed charge coverage ratio must be at least 1.0-to-1.0. As of June 30, 2014, the fixed charge coverage ratio for the most recent four quarters was 3.4-to-1.0.
Our obligations under the revolving credit facility are secured by certain of our accounts receivable, inventory and cash. The terms of the credit facility contain various provisions that limit our discretion in the operations of our business by restricting our ability to, among other things, pay dividends; redeem or repurchase capital stock; create, incur or guarantee certain debt; incur liens on certain properties; make capital expenditures; enter into certain affiliate transactions; enter into certain hedging arrangements; and consolidate with or merge with another entity. The revolving credit facility contains usual and customary affirmative and negative covenants and usual and customary events of default.
NOTE 8 Other Long-Term Obligations
Other long-term obligations at the balance sheet dates consist of:
 
(In thousands)
June 30, 2014
 
December 31, 2013
Long-term lease obligations, net of current portion
$
24,632

 
$
24,815

Deferred compensation
12,909

 
14,149

Deferred proceeds
10,217

 
11,205

Other
2,454

 
2,773

 
$
50,212

 
$
52,942


11




NOTE 9 Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net of tax, is comprised of the following:
(In thousands)
Foreign Currency Translation Adjustments1
 
Pension and Other Post Retirement Employee Benefit Plans Adjustments
 
Total
Balance at December 31, 2013
$
(874
)
 
$
(57,219
)
 
$
(58,093
)
Other comprehensive income, net of tax2

 
2,404

 
2,404

Balance at June 30, 2014
$
(874
)
 
$
(54,815
)
 
$
(55,689
)
 
 
 
 
 
 
(In thousands)
Foreign Currency Translation Adjustments1
 
Pension and Other Post Retirement Employee Benefit Plans Adjustments
 
Total
Balance at December 31, 2012
$
(874
)
 
$
(114,819
)
 
$
(115,693
)
Other comprehensive income, net of tax2

 
4,912

 
4,912

Balance at June 30, 2013
$
(874
)
 
$
(109,907
)
 
$
(110,781
)
1 
This balance consists of unrealized foreign currency translation adjustments related to the operations of our Canadian subsidiary before its functional currency was changed from Canadian dollars to U.S. dollars in 2012.
2 
For the six months ended June 30, 2014 and 2013, net periodic costs associated with our pension and other postretirement employee benefit, or OPEB, plans included in other comprehensive income and reclassified from accumulated other comprehensive loss includes $4.9 million and $7.4 million, respectively, of actuarial loss amortization, $1.0 million and $0.1 million, respectively, of prior service credit amortization, net of tax of $1.5 million and $3.2 million, respectively, and none and $0.8 million, respectively, of curtailments. These accumulated other comprehensive loss components are included in the computation of net periodic pension and OPEB costs in Note 10, “Pension and Other Postretirement Employee Benefit Plans.”
NOTE 10 Pension and Other Postretirement Employee Benefit Plans
The following table details the components of net periodic cost (benefit) of our company-sponsored pension and OPEB plans for the periods presented:
 
Three Months Ended June 30,
(In thousands)
2014
 
2013
 
2014
 
2013
 
Pension Benefit Plans
 
Other Postretirement
Employee  Benefit Plans
Service cost
$
340

 
$
384

 
$
109

 
$
70

Interest cost
3,724

 
3,329

 
980

 
1,047

Expected return on plan assets
(5,083
)
 
(4,608
)
 

 

Amortization of prior service cost (credit)
51

 
58

 
(963
)
 
130

Amortization of actuarial loss (gain)
2,555

 
3,545

 
(142
)
 
(456
)
Curtailments

 
769

 

 

Net periodic cost (benefit)
$
1,587

 
$
3,477

 
$
(16
)
 
$
791

 
Six Months Ended June 30,
(In thousands)
2014
 
2013
 
2014
 
2013
 
Pension Benefit Plans
 
Other Postretirement
Employee  Benefit Plans
Service cost
$
695

 
$
869

 
$
226

 
$
276

Interest cost
7,412

 
6,688

 
2,282

 
2,365

Expected return on plan assets
(10,098
)
 
(9,176
)
 

 

Amortization of prior service cost (credit)
103

 
169

 
(1,089
)
 
(251
)
Amortization of actuarial loss (gain)
5,049

 
7,419

 
(142
)
 

Curtailments

 
769

 

 

Net periodic cost (benefit)
$
3,161

 
$
6,738

 
$
1,277

 
$
2,390

We are required to make contributions to our qualified pension plans. During the six months ended June 30, 2014, we contributed $8.9 million to these pension plans. In July 2014, we contributed an additional $4.5 million, and we expect to make additional contributions totaling approximately $4 million in the remainder of 2014.

12




During the six months ended June 30, 2014, we made contributions of approximately $0.3 million to our company-sponsored non-qualified pension plan, and we estimate contributions will total approximately $0.5 million in 2014. We do not anticipate funding our OPEB plans in 2014 except to pay benefit costs as incurred during the year by plan participants.
During the three and six months ended June 30, 2014, $1.0 million and $3.3 million, respectively, of net periodic pension and OPEB costs were charged to cost of sales, and $0.6 million and $1.1 million, respectively, were charged to selling, general and administrative expenses in the accompanying Consolidated Statements of Operations. During the three and six months ended June 30, 2013, $3.4 million and $7.5 million, respectively, of net periodic pension and OPEB costs were charged to cost of sales, and $0.8 million and $1.6 million, respectively, were charged to selling, general and administrative expenses in the accompanying Consolidated Statements of Operations.
NOTE 11 Earnings per Common Share
Basic earnings per share are based on the weighted average number of shares of common stock outstanding. Diluted earnings per share are based upon the weighted average number of shares of common stock outstanding plus all potentially dilutive securities that were assumed to be converted into common shares at the beginning of the period under the treasury stock method.
The following table reconciles the number of common shares used in calculating the basic and diluted net earnings per share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Basic average common shares outstanding1
20,256,137

 
22,279,056

 
20,614,305

 
22,574,300

Incremental shares due to:
 
 
 
 
 
 
 
Restricted stock units
78,508

 
61,192

 
73,692

 
53,208

Performance shares
182,026

 
217,602

 
181,612

 
205,927

Diluted average common shares outstanding
20,516,671

 
22,557,850

 
20,869,609

 
22,833,435

 
 
 
 
 
 
 
 
Basic net earnings per common share
$
0.61

 
$
0.52

 
$
0.91

 
$
0.48

Diluted net earnings per common share
0.61

 
0.52

 
0.90

 
0.47

 
 
 
 
 
 
 
 
Anti-dilutive shares excluded from calculation
210,771

 
36,212

 
248,429

 
150,492

1 
Basic average common shares outstanding include restricted stock awards that are fully vested, but are deferred for future issuance.
We evaluated the derivative contracts associated with the ASB agreement discussed in Note 1, "Nature of Operations and Basis of Presentation," which could have resulted in the issuance of shares to the engaged financial institution at the settlement date, and determined there was no impact on earnings per share or anti-dilutive shares for the three and six months ended June 30, 2013.
NOTE 12 Equity-Based Compensation
We recognize equity-based compensation expense for all equity-based payment awards made to employees and directors, including restricted stock units, performance shares and stock options, based on estimated fair values.
EMPLOYEE AWARDS
Employee equity-based compensation expense was recognized as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Restricted stock units
$
587

 
$
489

 
$
1,032

 
$
864

Performance shares
1,474

 
1,449

 
2,555

 
2,387

Stock options
407

 

 
543

 

Total employee equity-based compensation
$
2,468

 
$
1,938

 
$
4,130

 
$
3,251

During the first quarter of 2014, 38,319 previously deferred RSU shares were distributed. All of these shares were settled in prior years but distribution had been deferred to preserve tax deductibility for the company in the respective years because distribution of these shares would have resulted in certain executive compensation being above the Internal Revenue Code section 162(m) threshold for those years. After adjusting for minimum tax withholdings of the deferred shares, a net 23,234 shares were issued during the first quarter of 2014. The minimum tax withholdings payment made in 2014 in connection with the issued shares was $0.8 million.

13




In addition to RSUs and performance shares, in 2014 stock options were granted to certain employees. As of June 30, 2014 total stock options of 163,137 shares were granted with a weighted-average exercise price of $66.86 and a fair value, estimated under the Black-Scholes valuation model, of $22.99 per share underlying the option.
The following table summarizes the number of share-based awards granted under the Clearwater Paper Corporation 2008 Stock Incentive Plan during the six months ended June 30, 2014 and the grant-date fair value of the awards:
 
 
Six Months Ended
 
June 30, 2014
 
Number of
Shares Subject to Award
 
Average Fair Value of
Award Per Share
Restricted stock units
31,567

 
$
66.33

Performance shares
54,379

 
105.08

Stock options
163,137

 
22.99

DIRECTOR AWARDS
Annually, each outside member of our Board of Directors receives deferred equity-based awards that are measured in units of our common stock and ultimately settled in cash at the time of payment. Accordingly, the compensation expense associated with these awards is subject to fluctuations each quarter based on mark-to-market adjustments at each reporting period in line with changes in the market price of our common stock. As a result of the mark-to-market adjustment, we recorded benefits from director equity-based compensation of less than $0.1 million and $1.1 million for the three months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, we recorded director equity-based compensation expense of $2.8 million and $2.3 million, respectively.
As of June 30, 2014, the liability amounts associated with director equity-based compensation included in "Other long-term obligations" and "Accounts payable and accrued liabilities" on the accompanying Consolidated Balance Sheets were $11.9 million and $1.2 million, respectively. At December 31, 2013, all liability amounts associated with director equity-based compensation, totaling $13.2 million, were included in “Other long-term obligations.”
NOTE 13 Fair Value Measurements
The estimated fair values of our financial instruments at the dates presented below are as follows:
 
 
June 30,
 
December 31,
 
2014
 
2013
 
Carrying
 
Fair
 
Carrying
 
Fair
(In thousands)
Amount
 
Value
 
Amount
 
Value
Cash, short-term investments and restricted cash (Level 1)
$
83,013

 
$
83,013

 
$
95,206

 
$
95,206

Long-term debt (Level 1)
650,000

 
660,988

 
650,000

 
651,313

Accounting guidance establishes a framework for measuring the fair value of financial instruments, providing a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities, or “Level 1” measurements, followed by quoted prices of similar assets or observable market data, or “Level 2” measurements, and the lowest priority to unobservable inputs, or “Level 3” measurements.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used should seek to maximize the use of observable inputs and minimize the use of unobservable inputs.

14




NOTE 14 Segment Information
The table below presents information about our reportable segments:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Segment net sales1:
 
 
 
 
 
 
 
Consumer Products
$
299,130

 
$
289,708

 
$
585,638

 
$
574,610

Pulp and Paperboard
199,629

 
181,294

 
398,041

 
357,216

Total segment net sales
$
498,759

 
$
471,002

 
$
983,679

 
$
931,826

 
 
 
 
 
 
 
 
Operating (loss) income:
 
 
 
 
 
 
 
Consumer Products
$
12,705

 
$
14,815

 
$
12,182

 
$
24,939

Pulp and Paperboard
33,635

 
24,772

 
70,411

 
42,325

 
46,340

 
39,587

 
82,593

 
67,264

Corporate
(13,257
)
 
(9,873
)
 
(28,992
)
 
(25,067
)
Income from operations
$
33,083

 
$
29,714

 
$
53,601

 
$
42,197

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Consumer Products
$
15,071

 
$
17,030

 
$
30,561

 
$
33,122

Pulp and Paperboard
6,019

 
5,778

 
12,289

 
11,437

Corporate
925

 
445

 
1,396

 
845

Total depreciation and amortization
$
22,015

 
$
23,253

 
$
44,246

 
$
45,404

1 
In 2013, pulp not utilized internally was sold by the Pulp and Paperboard segment to external customers resulting in net sales of $0.9 million and $2.1 million, respectively, during the three and six months ended June 30, 2013. Commencing in 2014, the majority of excess pulp is sold by the Consumer Products segment and totaled $0.7 million, of which $0.3 million was sold during the second quarter.


15




NOTE 15 Supplemental Guarantor Financial Information
All of our directly and indirectly owned, domestic subsidiaries guarantee the 2013 Notes and the 2010 Notes on a joint and several basis. As of June 30, 2014, the 2013 Notes and 2010 Notes were not guaranteed by Interlake Acquisition Corporation Limited, a foreign subsidiary. There are no significant restrictions on the ability of the guarantor subsidiaries to make distributions to Clearwater Paper, the issuer of the 2013 Notes and 2010 Notes. The following tables present the results of operations, financial position and cash flows of Clearwater Paper and its subsidiaries, the guarantor and non-guarantor entities, and the eliminations necessary to arrive at the information for Clearwater Paper on a consolidated basis.
Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income (Loss)
Three Months Ended June 30, 2014
 
 
 
Guarantor
 
Non-Guarantor
 
 
 
 
(In thousands)
Issuer
 
Subsidiaries
 
Subsidiary
 
Eliminations
 
Total
Net sales
$
383,697

 
$
112,676

 
$
7,809

 
$
(5,423
)
 
$
498,759

Cost and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
(323,733
)
 
(109,818
)
 
(5,983
)
 
5,423

 
(434,111
)
Selling, general and administrative expenses
(25,907
)
 
(5,320
)
 
(338
)
 

 
(31,565
)
Total operating costs and expenses
(349,640
)
 
(115,138
)
 
(6,321
)
 
5,423

 
(465,676
)
Income (loss) from operations
34,057

 
(2,462
)
 
1,488

 

 
33,083

Interest expense, net
(10,681
)
 
(7
)
 

 

 
(10,688
)
Earnings (loss) before income taxes
23,376

 
(2,469
)
 
1,488

 

 
22,395

Income tax provision
(7,272
)
 
(5,675
)
 
(390
)
 
3,395

 
(9,942
)
Equity in (loss) income of subsidiary
(7,046
)
 
1,098

 

 
5,948

 

Net earnings (loss)
$
9,058

 
$
(7,046
)
 
$
1,098

 
$
9,343

 
$
12,453

Other comprehensive income, net of tax
920

 

 

 

 
920

Comprehensive income (loss)
$
9,978

 
$
(7,046
)
 
$
1,098

 
$
9,343

 
$
13,373

Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income (Loss)
Six Months Ended June 30, 2014
 
 
 
Guarantor
 
Non-Guarantor
 
 
 
 
(In thousands)
Issuer
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Total
Net sales
$
752,028

 
$
230,053

 
$
14,322

 
$
(12,724
)
 
$
983,679

Cost and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
(625,835
)
 
(234,611
)
 
(13,018
)
 
12,724

 
(860,740
)
Selling, general and administrative expenses
(53,566
)
 
(10,837
)
 
(676
)
 

 
(65,079
)
Impairment of assets

 
(4,259
)
 

 

 
(4,259
)
Total operating costs and expenses
(679,401
)
 
(249,707
)
 
(13,694
)
 
12,724

 
(930,078
)
Income (loss) from operations
72,627

 
(19,654
)
 
628

 

 
53,601

Interest expense, net
(21,404
)
 
(18
)
 

 

 
(21,422
)
Earnings (loss) before income taxes
51,223

 
(19,672
)
 
628

 

 
32,179

Income tax (provision) benefit
(20,749
)
 
3,697

 
(184
)
 
3,736

 
(13,500
)
Equity in loss of subsidiary
(15,531
)
 
444

 

 
15,087

 

Net earnings (loss)
$
14,943

 
$
(15,531
)
 
$
444

 
$
18,823

 
$
18,679

Other comprehensive income, net of tax
2,404

 

 

 

 
2,404

Comprehensive income (loss)
$
17,347

 
$
(15,531
)
 
$
444

 
$
18,823

 
$
21,083


16




Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
Three Months Ended June 30, 2013
 
 
 
Guarantor
 
Non-Guarantor
 
 
 
 
(In thousands)
Issuer
 
Subsidiaries
 
Subsidiary
 
Eliminations
 
Total
Net sales
$
348,075

 
$
120,636

 
$
7,286

 
$
(4,995
)
 
$
471,002

Cost and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
(295,589
)
 
(117,418
)
 
(6,509
)
 
4,995

 
(414,521
)
Selling, general and administrative expenses
(20,542
)
 
(5,734
)
 
(491
)
 

 
(26,767
)
Total operating costs and expenses
(316,131
)
 
(123,152
)
 
(7,000
)
 
4,995

 
(441,288
)
Income (loss) from operations
31,944

 
(2,516
)
 
286

 

 
29,714

Interest expense, net
(11,094
)
 

 

 

 
(11,094
)
Earnings (loss) before income taxes
20,850

 
(2,516
)
 
286

 

 
18,620

Income tax (provision) benefit
(9,187
)
 
5,279

 
1

 
(3,055
)
 
(6,962
)
Equity in income of subsidiary
3,050

 
287

 

 
(3,337
)
 

Net earnings
$
14,713

 
$
3,050

 
$
287

 
$
(6,392
)
 
$
11,658

Other comprehensive income, net of tax
2,451

 

 

 

 
2,451

Comprehensive income
$
17,164

 
$
3,050

 
$
287

 
$
(6,392
)
 
$
14,109

Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
Six Months Ended June 30, 2013  
 
 
 
Guarantor
 
Non-Guarantor
 
 
 
 
(In thousands)
Issuer
 
Subsidiaries
 
Subsidiaries
 
Eliminations
 
Total
Net sales
$
692,323

 
$
235,352

 
$
14,141

 
$
(9,990
)
 
$
931,826

Cost and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
(597,940
)
 
(228,075
)
 
(12,705
)
 
9,990

 
(828,730
)
Selling, general and administrative expenses
(48,450
)
 
(11,468
)
 
(981
)
 

 
(60,899
)
Total operating costs and expenses
(646,390
)
 
(239,543
)
 
(13,686
)
 
9,990

 
(889,629
)
Income (loss) from operations
45,933

 
(4,191
)
 
455

 

 
42,197

Interest expense, net
(22,076
)
 

 

 

 
(22,076
)
Debt retirement costs
(17,058
)
 

 

 

 
(17,058
)
Earnings (loss) before income taxes
6,799

 
(4,191
)
 
455

 

 
3,063

Income tax benefit (provision)
5,155

 
6,492

 
(34
)
 
(3,900
)
 
7,713

Equity in income of subsidiary
2,722

 
421

 

 
(3,143
)
 

Net earnings
$
14,676

 
$
2,722

 
$
421

 
$
(7,043
)
 
$
10,776

Other comprehensive income, net of tax
4,912

 

 

 

 
4,912

Comprehensive income
$
19,588

 
$
2,722

 
$
421

 
$
(7,043
)
 
$
15,688


17




Clearwater Paper Corporation
Consolidating Balance Sheet
At June 30, 2014
 
(In thousands)
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Eliminations
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash
$
18,843

 
$

 
$
3,638

 
$

 
$
22,481

Restricted cash
1,501

 

 

 

 
1,501

Short-term investments
59,000

 

 

 

 
59,000

Receivables, net
126,894

 
39,288

 
3,112

 
(739
)
 
168,555

Taxes receivable
6,655

 
(3,254
)
 
269

 
3,170

 
6,840

Inventories
207,113

 
52,717

 
5,044

 

 
264,874

Deferred tax assets
20,903

 
8,070

 
(3
)
 
566

 
29,536

Prepaid expenses
7,498

 
489

 
98

 

 
8,085

Total current assets
448,407

 
97,310

 
12,158

 
2,997

 
560,872

Property, plant and equipment, net
632,272

 
224,649

 
16,363

 

 
873,284

Goodwill
229,533

 

 

 

 
229,533

Intangible assets, net
5,746

 
29,409

 
1,053

 

 
36,208

Intercompany receivable (payable)
95,532

 
(76,042
)
 
(15,754
)
 
(3,736
)
 

Investment in subsidiary
181,676

 
6,019

 

 
(187,695
)
 

Pension assets
11,284

 

 

 

 
11,284

Other assets, net
8,189

 
1,185

 

 

 
9,374

TOTAL ASSETS
$
1,612,639

 
$
282,530

 
$
13,820

 
$
(188,434
)
 
$
1,720,555

LIABILITIES AND STOCKHOLDERS’
  EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued
  liabilities
$
173,928

 
$
42,272

 
$
4,932

 
$
(739
)
 
$
220,393

Current liability for pensions and
  other postretirement employee
  benefits
8,778

 

 

 

 
8,778

Total current liabilities
182,706

 
42,272

 
4,932

 
(739
)
 
229,171

Long-term debt
650,000

 

 

 

 
650,000

Liability for pensions and other
  postretirement employee benefits
105,015

 

 

 

 
105,015

Other long-term obligations
49,159

 
1,053

 

 

 
50,212

Accrued taxes
1,449

 
926

 
319

 

 
2,694

Deferred tax liabilities
69,117

 
56,603

 
2,550

 

 
128,270

Accumulated other comprehensive loss,
  net of tax
(55,689
)
 

 

 

 
(55,689
)
Stockholders’ equity excluding
  accumulated other comprehensive loss
610,882

 
181,676

 
6,019

 
(187,695
)
 
610,882

TOTAL LIABILITIES AND
  STOCKHOLDERS’ EQUITY
$
1,612,639

 
$
282,530

 
$
13,820

 
$
(188,434
)
 
$
1,720,555



18




Clearwater Paper Corporation
Consolidating Balance Sheet
At December 31, 2013
 
(In thousands)
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Eliminations
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash
$
18,273

 
$

 
$
5,402

 
$

 
$
23,675

Restricted cash
1,500

 

 

 

 
1,500

Short-term investments
70,000

 

 

 

 
70,000

Receivables, net
119,278

 
38,063

 
2,700

 
(1,167
)
 
158,874

Taxes receivable
3,709

 
(15,882
)
 
324

 
22,352

 
10,503

Inventories
198,476

 
65,017

 
4,295

 

 
267,788

Deferred tax assets
42,289

 
6,094

 
5

 
(10,850
)
 
37,538

Prepaid expenses
4,704

 
695

 
124

 

 
5,523

Total current assets
458,229

 
93,987

 
12,850

 
10,335

 
575,401

Property, plant and equipment, net
636,662

 
231,225

 
16,811

 

 
884,698

Goodwill
229,533

 

 

 

 
229,533

Intangible assets, net

 
39,619

 
1,159

 

 
40,778

Intercompany receivable (payable)
91,865

 
(63,932
)
 
(16,431
)
 
(11,502
)
 

Investment in subsidiary
196,763

 
5,575

 

 
(202,338
)
 

Pension assets
4,488

 

 

 

 
4,488

Other assets, net
8,772

 
1,155

 

 

 
9,927

TOTAL ASSETS
$
1,626,312

 
$
307,629

 
$
14,389

 
$
(203,505
)
 
$
1,744,825

LIABILITIES AND STOCKHOLDERS’
  EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued
  liabilities
$
140,125

 
$
45,736

 
$
5,954

 
$
(1,167
)
 
$
190,648

Current liability for pensions and
  other postretirement employee
  benefits
8,778

 

 

 


 
8,778

Total current liabilities
148,903

 
45,736

 
5,954

 
(1,167
)
 
199,426

Long-term debt
650,000

 

 

 

 
650,000

Liability for pensions and other
  postretirement employee benefits
109,807

 

 

 

 
109,807

Other long-term obligations
51,740

 
1,202

 

 

 
52,942

Accrued taxes
1,430

 
911

 
317

 

 
2,658

Deferred tax liabilities
59,338

 
63,017

 
2,543

 

 
124,898

Accumulated other comprehensive loss,
  net of tax
(58,093
)
 

 

 

 
(58,093
)
Stockholders’ equity excluding
  accumulated other comprehensive loss
663,187

 
196,763

 
5,575

 
(202,338
)
 
663,187

TOTAL LIABILITIES AND
  STOCKHOLDERS’ EQUITY
$
1,626,312

 
$
307,629

 
$
14,389

 
$
(203,505
)
 
$
1,744,825



19




Clearwater Paper Corporation
Consolidating Statement of Cash Flows
Six Months Ended June 30, 2014
 
(In thousands)
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Eliminations
 
Total
CASH FLOWS FROM OPERATING
  ACTIVITIES
 
 
 
 
 
 
 
 
 
Net earnings (loss)
$
14,943

 
$
(15,531
)
 
$
444

 
$
18,823

 
$
18,679

Adjustments to reconcile net earnings (loss) to
  net cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
28,559

 
14,515

 
1,172

 

 
44,246

Equity-based compensation expense
6,910

 

 

 

 
6,910

Impairment of assets

 
4,259

 

 

 
4,259

Deferred tax provision (benefit)
29,648

 
(8,390
)
 
15

 
(11,416
)
 
9,857

Employee benefit plans
979

 

 

 

 
979

Deferred issuance costs and discounts on
  long-term debt
949

 

 

 

 
949

Disposal of plant and equipment, net
204

 
218

 

 

 
422

Changes in working capital, net
10,145

 
7,089

 
(2,416
)
 

 
14,818

Changes in taxes receivable, net
(2,946
)
 
(12,628
)
 
55

 
19,182

 
3,663

Changes in non-current accrued taxes, net
19

 
15

 
2

 

 
36

Funding of qualified pension plans
(8,889
)
 

 

 

 
(8,889
)
Other, net
(850
)
 
(166
)
 

 

 
(1,016
)
Net cash flows from operating activities
79,671

 
(10,619
)
 
(728
)
 
26,589

 
94,913

CASH FLOWS FROM INVESTING
  ACTIVITIES
 
 
 
 
 
 
 
 
 
Changes in short-term investments, net
11,000

 

 

 

 
11,000

Additions to plant and equipment
(24,994
)
 
(7,500
)
 
(118
)
 

 
(32,612
)
Proceeds from the sale of assets
38

 
581

 

 

 
619

Net cash flows from investing activities
(13,956
)
 
(6,919
)
 
(118
)
 

 
(20,993
)
CASH FLOWS FROM FINANCING
  ACTIVITIES
 
 
 
 
 
 
 
 
 
Purchase of treasury stock
(74,322
)
 

 

 

 
(74,322
)
Investment from (to) parent
9,969

 
17,538

 
(918
)
 
(26,589
)
 

Payment of tax withholdings on equity-
  based payment arrangements
(792
)
 

 

 

 
(792
)
Net cash flows from financing activities
(65,145
)
 
17,538

 
(918
)
 
(26,589
)
 
(75,114
)
Increase (decrease) in cash
570

 

 
(1,764
)
 

 
(1,194
)
Cash at beginning of period
18,273

 

 
5,402

 

 
23,675

Cash at end of period
$
18,843

 
$

 
$
3,638

 
$

 
$
22,481


20




Clearwater Paper Corporation
Consolidating Statement of Cash Flows
Six Months Ended June 30, 2013
 
(In thousands)
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor
Subsidiary
 
Eliminations
 
Total
CASH FLOWS FROM OPERATING
  ACTIVITIES
 
 
 
 
 
 
 
 
 
Net earnings
$
14,676

 
$
2,722

 
$
421

 
$
(7,043
)
 
$
10,776

Adjustments to reconcile net earnings to net
  cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
27,153

 
17,144

 
1,107

 

 
45,404

Equity-based compensation expense
5,581

 

 

 

 
5,581

Deferred tax provision (benefit)
4,362

 
(14,202
)
 
(587
)
 
1,043

 
(9,384
)
Employee benefit plans
5,098

 

 

 

 
5,098

Deferred issuance costs and discounts on
  long-term debt
4,017

 

 

 

 
4,017

Changes in working capital, net
(43,863
)
 
392

 
(334
)
 

 
(43,805
)
Changes in taxes receivable, net
9,270

 
(879
)
 
(121
)
 
3,648

 
11,918

Changes in non-current accrued taxes, net
(2,775
)
 
10

 
2

 

 
(2,763
)
Funding of qualified pension plans
(4,633
)
 

 

 

 
(4,633
)
Other, net
(113
)
 
(124
)
 

 

 
(237
)
Net cash flows from operating activities
18,773

 
5,063

 
488

 
(2,352
)
 
21,972

CASH FLOWS FROM INVESTING
  ACTIVITIES
 
 
 
 
 
 
 
 
 
Changes in short-term investments, net
(60,000
)
 

 

 

 
(60,000
)
Additions to plant and equipment
(23,934
)
 
(6,267
)
 
(1,212
)
 

 
(31,413
)
Net cash flows from investing activities
(83,934
)
 
(6,267
)
 
(1,212
)
 

 
(91,413
)
CASH FLOWS FROM FINANCING
  ACTIVITIES
 
 
 
 
 
 
 
 
 
Proceeds from long-term debt
275,000

 

 

 

 
275,000

Repayment of long-term debt
(150,000
)
 

 

 

 
(150,000
)
Purchase of treasury stock
(59,984
)
 

 

 

 
(59,984
)
Investment (to) from parent
(4,670
)
 
1,200

 
1,118

 
2,352

 

Payments for long-term debt issuance costs
(4,779
)
 

 

 

 
(4,779
)
Payment of tax withholdings on equity-
  based payment arrangements
(2,195
)
 

 

 

 
(2,195
)
Net cash flows from financing activities
53,372

 
1,200

 
1,118

 
2,352

 
58,042

(Decrease) increase in cash
(11,789
)
 
(4
)
 
394

 

 
(11,399
)
Cash at beginning of period
11,105

 
5

 
1,469

 

 
12,579

Cash at end of period
$
(684
)
 
$
1

 
$
1,863

 
$

 
$
1,180




21




ITEM 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the costs and benefits associated with the closure of our Long Island, New York, and Thomaston, Georgia facilities, cash flows, capital expenditures, tax rates, operating costs, including energy costs, timing of major maintenance and repairs, liquidity, benefit plan funding, interest expenses, and the completion and results of ongoing tax audits. Words such as “anticipate,” “expect,” “intend,” “plan,” “target,” “project,” “believe,” “schedule,” “estimate,” “may,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are based on management’s current expectations, estimates, assumptions and projections that are subject to change. Our actual results of operations may differ materially from those expressed or implied by the forward-looking statements contained in this report. Important factors that could cause or contribute to such differences include those risks discussed in the section entitled “Risk Factors” in our 2013 Form 10-K, as well as the following:
customer acceptance, timing and quantity of purchases of our new through-air-dried, or TAD, products;
competitive pricing pressures for our products, including as a result of increased capacity as additional manufacturing facilities are operated by our competitors;
difficulties with the optimization and realization of the benefits expected from our new TAD paper machine and converting lines in Shelby, North Carolina;
the loss of or changes in prices in regards to a significant customer;
manufacturing or operating disruptions, including increased energy and chemical consumption, equipment malfunction and damage to our manufacturing facilities caused by fire or weather-related events and IT system failures;
changes in the cost and availability of wood fiber and wood pulp;
changes in transportation costs and disruptions in transportation services;
labor disruptions;
changes in costs for and availability of packaging supplies, chemicals, energy and maintenance and repairs;
changes in customer product preferences and competitors' product offerings;
changes in expenses and required contributions associated with our pension plans;
environmental liabilities or expenditures;
changes in the U.S. and international economies and in general economic conditions in the regions and industries in which we operate;
increased supply and pricing pressures resulting from increasing Asian paper production capabilities;
cyclical industry conditions;
reliance on a limited number of third-party suppliers for raw materials;
inability to successfully implement our expansion strategies;
inability to fund our debt obligations;
restrictions on our business from debt covenants and terms;
changes in laws, regulations or industry standards affecting our business; and
our qualification to retain, or ability to utilize, tax credits associated with alternative fuels or cellulosic biofuels and the tax treatment associated with receipt of such credits.
Forward-looking statements contained in this report present management’s views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management’s views to reflect events or circumstances occurring after the date of this report.

22




OVERVIEW
Background
Clearwater Paper Corporation is a leading North American producer of private label tissue and paperboard products. We manufacture quality consumer tissue, away-from-home tissue, parent rolls (non-converted tissue product), machine-glazed tissue, bleached paperboard and pulp at 13 manufacturing locations in the U.S. and Canada. Our private label consumer tissue products - facial and bath tissue, paper towels and napkins - are used primarily at-home and are principally sold to major retailers and wholesale distributors, which include grocery, drug, mass-merchant and discount stores. Our paperboard is sold primarily in the high-end segment of the packaging industry, which demands high-quality construction and print surfaces for graphics.
Recent Developments
Facility Closures
On February 17, 2014, we announced the permanent and immediate closure of our Long Island, New York, tissue converting and distribution facility. As of June 30, 2014, we have incurred $10.3 million of costs associated with the closure, of which $1.8 million was incurred during the quarter ended June 30, 2014. We expect the total impact of exit related costs for this facility to be approximately $15 million. The cost savings benefits resulting from the Long Island facility consolidation and optimization, which are incremental to our previously announced cost savings programs, are expected to be approximately $6 million in operating costs savings in 2014 and approximately $12 million on an annual basis thereafter beginning in 2015.
On March 6, 2013, we announced the planned permanent closure of our Thomaston, Georgia converting and distribution facility. The shutdown occurred gradually as converting lines were relocated and installed at our other facilities, with all operations at Thomaston ceasing at the end of 2013. We have incurred $7.1 million of costs associated with this closure, of which $0.4 million was incurred during the quarter ended June 30, 2014. The cost savings benefits resulting from the equipment relocation and converting facility optimization, which are part of our previously announced cost savings programs, are expected to be fully realized beginning in the fourth quarter of 2014.
Capital Allocation
On July 29, 2014, in an event subsequent to the close of our quarter ended June 30, 2014, we sold $300 million of aggregate principal amount senior notes, which we refer to as the 2014 Notes. The 2014 Notes mature on February 1, 2025, have an interest rate of 5.375% and were issued at their face value. The issuance of these notes generated net proceeds of approximately $298 million after deducting offering expenses. We elected to redeem all of our $375 million aggregate principal amount of senior notes sold on October 22, 2010, which we refer to as the 2010 Notes, using the net proceeds from the 2014 Notes along with company funds and $37 million from our senior secured revolving credit facility. We irrevocably deposited sufficient funds with the trustee under the indenture governing the 2010 Notes to redeem these notes. The redemption costs include the principal amount of the 2010 Notes and a “make whole” premium plus accrued and unpaid interest for an aggregate amount of approximately $401 million.
On February 5, 2014, we announced that our Board of Directors had approved a new stock repurchase program authorizing the repurchase of up to $100.0 million of our common stock. The repurchase program authorizes purchases of our common stock from time to time through open market purchases, negotiated transactions or other means, including accelerated stock repurchases and 10b5-1 trading plans in accordance with applicable securities laws and other restrictions. We have no obligation to repurchase stock under this program and may suspend or terminate the program at any time. In total, we have repurchased 1,192,260 shares of our outstanding common stock as of June 30, 2014, of which 733,676 shares were repurchased during the second quarter of 2014 at an average price of $61.32 per share, pursuant to this repurchase program. As of June 30, 2014, we had $25.7 million of authorization remaining for this stock repurchase program.

23




Components and Trends in our Business
Net sales
Net sales predominantly consist of sales of consumer tissue and paperboard products, net of discounts, returns and allowances and any sales taxes collected. Prices for our consumer tissue products tend to be primarily driven by the value of our products to our customers, and are generally priced relative to the prices of branded tissue products. Demand and pricing for our pulp and paperboard products are largely determined by general global market conditions and the demand for high quality paperboard.
Operating costs
  
Three Months Ended June 30,
(Dollars in thousands)
2014
 
2013
  
Cost
 
Percentage of
Cost of Sales
 
Cost
 
Percentage of
Cost of Sales
Purchased pulp
$
76,138

 
17.5
%
 
$
73,049

 
17.6
%
Chemicals
50,377

 
11.6

 
48,644

 
11.7

Transportation1
46,500

 
10.7

 
45,814

 
11.1

Chips, sawdust and logs
35,300

 
8.1

 
35,656

 
8.6

Energy
34,066

 
7.8

 
31,453

 
7.6

Packaging supplies
24,707

 
5.7

 
26,206

 
6.3

Maintenance and repairs2
22,017

 
5.1

 
20,773

 
5.0

Depreciation
19,388

 
4.6

 
20,792

 
5.0

 
$
308,493

 
71.1
%
 
$
302,387

 
72.9
%
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
(Dollars in thousands)
2014
 
2013
 
Cost
 
Percentage of
Cost of Sales
 
Cost
 
Percentage of
Cost of Sales
Purchased pulp
$
149,210

 
17.3
%
 
$
144,684

 
17.4
%
Chemicals
99,439

 
11.6

 
96,091

 
11.6

Transportation1
92,436

 
10.7

 
91,259

 
11.0

Energy
71,134

 
8.3

 
63,306

 
7.6

Chips, sawdust and logs
70,853

 
8.2

 
72,754

 
8.8

Packaging supplies
49,975

 
5.8

 
50,475

 
6.1

Maintenance and repairs2
41,126

 
4.8

 
43,735

 
5.3

Depreciation
39,383

 
4.6

 
40,542

 
4.9

 
$
613,556

 
71.3
%
 
$
602,846

 
72.7
%
1
Includes internal and external transportation costs.
2
Excluding related labor costs.
Purchased pulp. We purchase a significant amount of the pulp needed to manufacture our consumer products, and to a lesser extent our paperboard, from external suppliers. For the three and six months ended June 30, 2014, total purchased pulp costs increased by $3.1 million and $4.5 million, respectively, but decreased 0.1 percentage points in both periods as a percentage of cost of sales due to an overall increase in our cost of sales, which is discussed further under "Results of Operations." The higher purchased pulp costs were due primarily to increased TAD tissue production and higher year-to-date market pricing for purchased softwood pulp.
Chemicals. We consume a substantial amount of chemicals in the production of pulp and paperboard, as well as in the production of TAD tissue. The chemicals we generally use include polyethylene, caustic, starch, sodium chlorate, latex and specialty paper process chemicals. A large portion of the chemicals used in our manufacturing processes, particularly in the pulp-making process, are petroleum based and are impacted by petroleum prices.
Our chemical costs increased $1.7 million and $3.3 million, respectively, for the the three and six months ended June 30, 2014 compared to the same periods in 2013. The increase in chemical costs is due primarily to increased production and higher pricing for polyethylene, as well as other tissue and paperboard processing chemicals. In addition, during the second quarter of 2014 our Arkansas pulp and paperboard facility experienced operational issues that caused both the pulp mill and paper machine to consume elevated levels of chemicals. The Arkansas facility operational issues are discussed further under "Discussion of Business Segments."

24




Transportation. Fuel prices largely impact transportation costs for delivery of raw materials to our manufacturing facilities, internal inventory transfers and delivery of our finished products to customers. Changing fuel prices particularly affect our margins for consumer products because we supply customers throughout the U.S. and transport unconverted parent rolls from our tissue mills to our tissue converting facilities. Our transportation costs for the second quarter of 2014 were higher when compared to the second quarter of 2013 due to increased paperboard, non-retail tissue and converted products shipments. Transportation costs for the six months ended June 30, 2014 increased compared to the same period in 2013 due primarily to higher carrier costs attributable to limited shipping availability as a result of extreme weather conditions in the Midwest and Northeast during the first quarter of 2014. In addition, we have also experienced higher overall costs associated with increased paperboard shipments. These higher costs were partially offset by the absence of regional internal inventory distribution costs that occurred during the first quarter of 2013 as a result of reduced inventory levels during our TAD transition.
Energy. We use energy in the form of electricity, hog fuel, steam and natural gas to operate our mills. Energy prices have fluctuated widely over the past decade. We have taken steps, and intend to continue to take steps, to reduce our exposure to volatile energy prices through conservation. In addition, cogeneration facilities that produce steam and electricity at our East Hartford, Connecticut and Lewiston, Idaho manufacturing sites help to lower our energy costs. TAD tissue production, however, involves increased natural gas usage as compared to conventional tissue manufacturing and, as a result, our natural gas requirements have increased with the ramp up of our North Carolina TAD paper machine. Energy costs for the three and six months ended June 30, 2014 were 8.3% and 12.4% higher, respectively, than the same periods ended 2013 due to higher natural gas consumption and pricing, which were both negatively impacted by the extremely cold weather conditions in the Midwest and Northeast during the first quarter of 2014, as well as higher electricity costs during the second quarter of 2014 due to increased production at certain of our facilities. In addition, during the second quarter of 2014 our Arkansas pulp and paperboard facility experienced operational issues that caused the pulp mill to consume elevated levels of energy.
To help mitigate our exposure to changes in natural gas prices, from time to time we have used firm-price contracts to supply a portion of our natural gas requirements. As of June 30, 2014, these contracts covered approximately 50% of our expected average monthly natural gas requirements for the remainder of 2014. Our energy costs in future periods will depend principally on our ability to produce a substantial portion of our electricity needs internally, on changes in market prices for natural gas and on our ability to reduce our energy usage through conservation.
Chips, sawdust and logs. We purchase chips, sawdust and logs to manufacture pulp. We source residual wood fibers under both long-term and short-term supply agreements, as well as in the spot market. Overall costs decreased by $0.4 million and $1.9 million for chips, sawdust and logs for the three and six months ended June 30, 2014, when compared to the same 2013 periods. The decline was primarily due to lower overall pricing at our Idaho pulp and paperboard facility, as well as operational issues experienced at our Arkansas facility during the second quarter of 2014 involving both the pulp mill and paper machine, which negatively impacted production at that facility. These were partially offset by higher usage at our Idaho facility and higher pricing at our Arkansas facility caused by supply limitations as a result of regional wet weather conditions during the second quarter of 2014.
Packaging supplies. As a significant producer of private label consumer tissue products, we package to order for retail chains, wholesalers and cooperative buying organizations. Under our agreements with those customers, we are responsible for the expenses related to the unique packaging of our products for direct retail sale to consumers. For the three and six months ended June 30, 2014, packaging costs decreased $1.5 million and $0.5 million, respectively, when compared to the prior year periods due primarily to lower overall packaging costs as a result of our recently closed Long Island and Thomaston facilities, partially offset by increased pricing for poly wrapping and corrugated cardboard.
Maintenance and repairs. We regularly incur significant costs to maintain our manufacturing equipment. We perform routine maintenance on our machines and periodically replace a variety of parts such as motors, pumps, pipes and electrical parts.
Major equipment maintenance and repairs in our Pulp and Paperboard segment also require maintenance shutdowns approximately every 18 months to 24 months, which increases costs and may reduce net sales in the quarters in which the major maintenance shutdowns occur. Our next planned major maintenance outage is scheduled for the spring of 2015. We did not have any major outages during the first half of 2014, compared to the first half of 2013 during which we incurred four days of machine downtime in the first quarter at a cost of $5.0 million, excluding labor, at our Arkansas facility.
In addition to ongoing maintenance and repair costs, we make capital expenditures to increase our operating capacity and efficiency, improve safety at our facilities and comply with environmental laws. We spent $16.9 million and $31.7 million, respectively, on capital expenditures during the three and six months ended June 30, 2014, compared to $16.9 million and $30.3 million, respectively, of capital expenditures during the same periods ended 2013.
Depreciation. We record substantially all of our depreciation expense associated with our plant and equipment in "Cost of sales" on our Consolidated Statements of Operations. Depreciation expense for the three and six months ended June 30, 2014 was slightly down when compared with the prior year primarily as a result of the facility closures.

25




Other. Other costs not included in the above table primarily consist of wage and benefit expenses and miscellaneous operating costs. Although period cut-offs and inventory levels can impact cost of sales amounts, we would expect this impact to be relatively steady as a percentage of costs on a period-over-period basis. We experienced lower wage and benefit expenses in the first half of 2014, compared to the first half of 2013, primarily as a result of lower pension and medical related costs and the facility closures.
Selling, general and administrative expenses
Selling, general and administrative expenses primarily consist of compensation and associated expenses for sales and administrative personnel, as well as commission expenses related to sales of our products. Our selling, general and administrative expenses for the three months ended June 30, 2014 and 2013 were $31.6 million and $26.8 million, respectively. The higher expense for the second quarter of 2014 was primarily a result of increases in profit-dependent compensation accruals and information systems related expenses, as well as a smaller mark-to-market benefit of less than $0.1 million in the second quarter of 2014 related to our directors' common stock units that will ultimately be settled in cash, compared to a $1.1 million benefit in the second quarter of 2013.
Interest expense
Interest expense for the first half of 2014 is mostly comprised of interest on $275 million aggregate principal amount of 4.5% senior notes due 2023 issued in January 2013, which we refer to as the 2013 Notes, and $375 million aggregate principal amount of 7.125% senior notes due 2018 issued in October 2010, which we refer to as the 2010 Notes. A portion of the proceeds from the 2013 Notes were used to redeem $150 million of 10.625% senior unsecured notes issued in June 2009, which we refer to as the 2009 Notes. Interest expense also includes amortization of deferred issuance costs associated with all of our notes and our revolving credit facility.
Income taxes
Income taxes are based on reported earnings and tax rates in the jurisdictions in which our operations occur and offices are located, adjusted for available credits, changes in valuation allowances and differences between reported earnings and taxable income using current tax laws and rates. We generally expect our effective income tax rate, excluding discrete items, to remain fairly constant, but it could fluctuate due to changes in tax law.
During the quarter ended June 30, 2014, we recognized the effects of enacted New York state law changes. As part of the analysis, we identified that, in prior years, we had not applied the proper apportionment factor when certain New York state net operating loss carryforwards were generated, which resulted in a $2.9 million overstatement that was corrected in the period and is included as a discrete item within state rate adjustments due to immateriality. Additionally, return to provision adjustments, including amended returns, generated expense of 7.4%, which was offset by other state return to provision adjustments benefit of 3.3%.
During the fourth quarter of 2012, the IRS commenced an audit of our tax returns for the tax years ending December 31, 2008 through December 31, 2012. This audit has moved into final review stages with the Joint Committee on Taxation. We expect to receive final approval with no additional changes from the Committee in 2014. As a result, we have recognized an additional deferred tax asset of $1.5 million and a tax benefit of the same amount. We have also estimated the state effect for these changes and presented this within the quarterly results.
During the second quarter of 2013, the IRS commenced an audit of our wholly-owned subsidiary, Cellu Tissue Holdings, Inc., and its subsidiaries for the year ended December 27, 2010, the period immediately before our acquisition of Cellu Tissue Holdings, Inc. During the first quarter of 2014, we successfully closed the audit of Cellu Tissue Holdings, Inc. The estimated state effect for the federal audit changes had been reflected in the quarterly results.

26




RESULTS OF OPERATIONS
Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013
The following table sets forth data included in our Consolidated Statements of Operations as a percentage of net sales.
 
Three Months Ended June 30,
(Dollars in thousands)
2014
 
2013
Net sales
$
498,759

 
100.0
%
 
$
471,002

 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
(434,111
)
 
87.0

 
(414,521
)
 
88.0

Selling, general and administrative expenses
(31,565
)
 
6.3

 
(26,767
)
 
5.7

Total operating costs and expenses
(465,676
)
 
93.4

 
(441,288
)
 
93.7

Income from operations
33,083

 
6.6

 
29,714

 
6.3

Interest expense, net
(10,688
)
 
2.1

 
(11,094
)
 
2.4

Earnings before income taxes
22,395

 
4.5

 
18,620

 
4.0

Income tax provision
(9,942
)
 
2.0

 
(6,962
)
 
1.5

Net earnings
$
12,453

 
2.5
%
 
$
11,658

 
2.5
%
Net sales—Second quarter 2014 net sales increased by $27.8 million, or 5.9%, compared to the second quarter of 2013, primarily due to increased paperboard volumes and pricing during the second quarter of 2014 compared to the second quarter of 2013. In addition, higher overall retail tissue net selling prices and increased non-retail tissue shipments contributed to the favorable comparison. These items are further discussed below under “Discussion of Business Segments.”
Cost of sales—Cost of sales was 87.0% of net sales for the second quarter of 2014 and 88.0% of net sales for the same period in 2013. The decrease as a percentage of net sales was primarily a result of higher margins due to higher net sales during the second quarter of 2014. Our overall cost of sales for the second quarter of 2014 increased 4.7%, when compared to the second quarter of 2013, due primarily to incremental costs associated with operational issues at our Arkansas pulp and paperboard facility involving both the pulp mill and paper machine, which is further discussed below under "Discussion of Business Segments," as well as $2.2 million of costs related to the closure of our Thomaston and Long Island facilities during the second quarter of 2014, compared to $1.0 million of costs related to the closure of our Thomaston facility during the second quarter of 2013.
Selling, general and administrative expenses—Selling, general and administrative expenses increased $4.8 million primarily as a result of increases in profit-dependent compensation accruals and information systems related expenses, as well as a smaller mark-to-market benefit of less than $0.1 million in the second quarter of 2014 related to our directors' common stock units, compared to a $1.1 million benefit in the second quarter of 2013.
Interest expense—Interest expense of $10.7 million for the second quarter of 2014 was relatively comparable to the same period of 2013.

27




Income tax provision—We recorded income tax expense of $9.9 million in the three months ended June 30, 2014, compared to $7.0 million in same three month period of 2013. The rate determined under generally accepted accounting principles, or GAAP, for the three months ended June 30, 2014 was 44.4% compared to 37.4% for the same period of 2013. The higher rate was the result of the net impact of reporting discrete items, primarily relating to state deferred items.
During the second quarters of 2014 and 2013, there were a number of items that were included in the calculation of our income tax provision that we do not believe were indicative of our core operating performance. Excluding these items, the adjusted tax rate for the second quarter of 2014 was 38.0%, compared to 37.1% for the second quarter of 2013. The following table details these items:
 
Three Months Ended
 
June 30,
(In thousands)
2014
 
2013
Income tax provision
$
(9,942
)
 
$
(6,962
)
Special items, tax impact:
 
 
 
Directors' equity-based compensation benefit
13

 
435

Costs associated with Thomaston facility closure
(132
)
 
(386
)
Costs associated with Long Island facility closure
(650
)
 

Discrete tax items related to state tax rate change
1,388

 

Adjusted income tax provision
$
(9,323
)
 
$
(6,913
)


28




Discussion of Business Segments
Consumer Products
 
Three Months Ended
  
June 30,
(Dollars in thousands - except per ton amounts)
2014
 
2013
Net sales
$
299,130

 
$
289,708

Operating income
12,705

 
14,815

Percent of net sales
4.2
%
 
5.1
%
 
 
 
 
Shipments (short tons)
 
 
 
Non-retail
59,832

 
57,012

Retail
75,009

 
75,045

Total tissue tons
134,841

 
132,057

Converted products cases (in thousands)
14,101

 
14,021

 
 
 
 
Sales price (per short ton)
 
 
 
Non-retail
$
1,492

 
$
1,475

Retail
2,795

 
2,740

Total tissue
$
2,217

 
$
2,194

Our Consumer Products segment net sales for the second quarter of 2014 increased $9.4 million compared to the second quarter of 2013. The increase was primarily due to higher retail tissue net selling prices, which were driven by increased sales of higher-priced TAD tissue, and higher non-retail sales. These benefits were partially offset by lower pricing for conventional retail tissue.
Segment operating income for the second quarter of 2014 decreased by $2.1 million, or 14.2%, compared to the same period in 2013. The decrease was due primarily to $2.2 million of costs related to the closure of our Thomaston and Long Island facilities during the second quarter of 2014, as compared to $1.0 million of costs related to the closure of our Thomaston facility during the second quarter of 2013, as well as higher energy costs, partially offset by lower depreciation costs due to the closures of two facilities.
Pulp and Paperboard
 
Three Months Ended
  
June 30,
(Dollars in thousands - except per ton amounts)
2014
 
2013
Net sales
$
199,629

 
$
181,294

Operating income
33,635

 
24,772

Percent of net sales
16.8
%
 
13.7
%
 
 
 
 
Paperboard shipments (short tons)
195,924

 
190,518

Paperboard sales price (per short ton)
$
1,017

 
$
946

Net sales for the Pulp and Paperboard segment increased by $18.3 million, or 10.1%, in the second quarter of 2014, compared to the second quarter of 2013. The higher segment net sales were primarily due to a 7.5% increase in paperboard net selling prices as a result of higher market pricing implemented during the end of the first quarter of 2014 and an improved sales mix. In addition, paperboard shipments increased 2.8% as a result of continued strong market conditions and seasonal backlogs.
Operating income for the segment increased $8.9 million during the second quarter of 2014, compared to the same period in 2013, primarily due to the improved pricing and volume coupled with lower packaging, wages and benefits and depreciation costs. These improvements were partially offset by incremental costs associated with operational issues at our Arkansas pulp and paperboard facility involving both the pulp mill and paper machine, which caused the facility to consume elevated levels of energy and chemicals while producing at lower throughputs. This disruption in our production efficiency negatively impacted production costs during the second quarter of 2014. In addition, segment operating income was negatively impacted by costs associated with boiler maintenance performed at both our Idaho and Arkansas pulp and paperboard facilities during the second quarter of 2014.

29




Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013
The following table sets forth data included in our Consolidated Statements of Operations as a percentage of net sales.
 
Six Months Ended June 30,
(Dollars in thousands)
2014
 
2013
Net sales
$
983,679

 
100.0
%
 
$
931,826

 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
(860,740
)
 
87.5

 
(828,730
)
 
88.9

Selling, general and administrative expenses
(65,079
)
 
6.6

 
(60,899
)
 
6.5

Impairment of assets
(4,259
)
 
0.4

 

 

Total operating costs and expenses
(930,078
)
 
94.6

 
(889,629
)
 
95.5

Income from operations
53,601

 
5.4

 
42,197

 
4.5

Interest expense, net
(21,422
)
 
2.2

 
(22,076
)
 
2.4

Debt retirement costs

 

 
(17,058
)
 
1.8

Earnings before income taxes
32,179

 
3.3

 
3,063

 
0.3

Income tax (provision) benefit
(13,500
)
 
1.4

 
7,713

 
0.8

Net earnings
$
18,679

 
1.9

 
$
10,776

 
1.2

Net sales—Net sales for the six months ended June 30, 2014 increased $51.9 million, or 5.6%, when compared to the six months ended June 30, 2013. The increase in net sales was primarily due to increased shipments and net selling prices for paperboard, as well as higher overall tissue net selling prices during the first half of 2014. These gains were partially offset by a less than 1.0% decrease in overall tissue shipments. These items are discussed below under “Discussion of Business Segments.”
Cost of sales—Cost of sales was 87.5% of net sales for the six months ended June 30, 2014 and 88.9% of net sales for the same period in 2013. Our overall cost of sales during the first half of 2014 increased $32.0 million, or 3.9%, when compared to the first half of 2013, due primarily to incremental costs associated with the extreme cold weather conditions in the Midwest and Northeast during the first quarter of 2014 and operational issues during the second quarter of 2014 at our Arkansas pulp and paperboard facility, both of which caused negative impacts across different cost categories. These items are further discussed below under “Discussion of Business Segments.” In addition, we incurred $11.4 million of costs related to the closure of our Thomaston and Long Island facilities in the first half of 2014, compared to $1.2 million of costs related to the closure of our Thomaston facility in the first half of 2013.
Selling, general and administrative expenses—Selling, general and administrative expenses increased $4.2 million primarily due to higher profit-dependent compensation accruals and higher information systems related expenses. In addition, during the first half of 2014 we recorded a $2.8 million mark-to-market expense adjustment related to our directors' common stock units, compared to a $2.3 million expense adjustment in the first half of 2013.
Impairment of assets—During the six months ended June 30, 2014, as a result of the permanent closure of our Long Island facility, we assessed both our intangible and long-lived assets for recoverability. As a result of this assessment, we recorded non-cash impairment losses during the first quarter of 2014 for intangible and long-lived assets in the amounts of $1.3 million and $3.0 million, respectively.
Interest expense—Interest expense decreased $0.7 million during the six months ended June 30, 2014, compared to the same period of 2013. The decrease was primarily attributable to reduced interest rates on our debt as a result of the refinancing in the first quarter of 2013 of the 2009 Notes with proceeds from the issuance of the 2013 Notes, which carry a significantly lower interest rate.
Debt retirement costs—Debt retirement costs include a one-time charge in connection with the complete redemption of the 2009 Notes on February 22, 2013. Total costs of $17.1 million include cash charges of approximately $14 million related to a “make whole” premium plus accrued and unpaid interest and a non-cash charge of approximately $3 million related to the write-off of deferred issuance costs and unamortized discounts.

30




Income tax provision—We recorded income tax expense of $13.5 million in the six months ended June 30, 2014, compared to a benefit of $7.7 million in the same six month period of 2013. The rate determined under GAAP for the six months ended June 30, 2014 was approximately 42.0% compared to a benefit of approximately 252.0% for the same period of 2013. The net decrease to our effective tax rate in the six months ended June 30, 2013, was primarily the result of $9.8 million in tax benefit related to our decision to reverse our 2012 conversion of certain gallons of fuel claimed as Cellulosic Biofuel Producer Credit back to gallons claimed under the Alternative Fuel Mixture Tax Credit.

 
Six Months Ended
 
June 30,
(In thousands)
2014
 
2013
Income tax (provision) benefit
$
(13,500
)
 
$
7,713

Special items, tax impact:
 
 
 
Debt retirement costs

 
(6,277
)
Directors' equity-based compensation expense
(1,002
)
 
(843
)
Costs associated with Thomaston facility closure
(402
)
 
(453
)
Costs associated with Long Island facility closure
(3,688
)
 

Discrete tax items related to state tax rate change
1,388

 

Discrete tax items related to tax credit conversions

 
(9,766
)
Adjusted income tax provision
$
(17,204
)
 
$
(9,626
)

31




Discussion of Business Segments
Consumer Products
 
Six Months Ended
  
June 30,
(Dollars in thousands - except per ton amounts)
2014
 
2013
Net sales
$
585,638

 
$
574,610

Operating income
12,182

 
24,939

Percent of net sales
2.1
%
 
4.3
%
 
 
 
 
Shipments (short tons)
 
 
 
Non-retail
116,671

 
112,247

Retail
145,928

 
152,406

Total tissue tons
262,599

 
264,653

Converted products cases (in thousands)
27,538

 
27,802

 
 
 
 
Sales price (per short ton)
 
 
 
Non-retail
$
1,491

 
$
1,454

Retail
2,817

 
2,699

Total tissue
$
2,228

 
$
2,171

Our Consumer Products segment reported an increase in net sales of $11.0 million, or 1.9%, for the first half of 2014, compared to the first half of 2013. The higher net sales were due to increases of 4.4% and 2.5%, respectively, in retail and non-retail net selling prices, as well as an increase in non-retail tissue shipments. The higher net selling prices for retail tissue were driven primarily by increased sales of higher-priced TAD tissue products. These increases were partially offset by a decrease in retail tissue shipments and lower pricing for conventional retail tissue.
Segment operating income for the six months ended June 30, 2014 decreased by $12.8 million compared to the same period in 2013, primarily driven by $11.4 million of costs related to the closure of our Thomaston and Long Island facilities, compared to $1.2 million of costs related to the closure of our Thomaston facility in the first half of 2013, as well as other incremental costs associated with the extreme cold weather conditions in the Midwest and Northeast during the first quarter of 2014, which negatively impacted our energy and transportation costs. This was partially offset by decreased depreciation and wage and benefit expenses due to the facility closures.
Pulp and Paperboard
 
Six Months Ended
  
June 30,
(Dollars in thousands - except per ton amounts)
2014
 
2013
Net sales
$
398,041

 
$
357,216

Operating income
70,411

 
42,325

Percent of net sales
17.7
%
 
11.8
%
 
 
 
 
Paperboard shipments (short tons)
396,589

 
376,868

Paperboard sales price (per short ton)
$
1,002

 
$
940

Net sales for our Pulp and Paperboard segment increased by $40.8 million, or 11.4%, for the six months ended June 30, 2014, compared to the same period ended June 30, 2013. This increase was primarily due to a 5.2% increase in paperboard shipments, which was a result of significantly higher market demand and backlogs during the first half of 2014. In addition, paperboard net selling prices increased 6.6% as a result of increased demand resulting from positive market conditions and an improved sales mix.
Operating income for the segment increased $28.1 million during the first half of 2014, compared to the first half of 2013, primarily due to the improved paperboard volume and pricing coupled with lower maintenance and fiber costs. These improvements were partially offset by increased energy and transportation costs associated with extreme cold weather conditions in the Midwest and Northeast during the first quarter of 2014, as well as operational issues at our Arkansas pulp and paperboard facility that caused the facility to consume elevated levels of energy and chemicals while producing at lower throughputs. This disruption in our production efficiency negatively impacted production costs during the first half of 2014.

32




EARNINGS BEFORE INTEREST, TAX, DEPRECIATION AND AMORTIZATION (EBITDA) AND ADJUSTED EBITDA
We use earnings before interest (including debt retirement costs), taxes, depreciation and amortization, or EBITDA, and EBITDA adjusted for certain items, or Adjusted EBITDA, as supplemental performance measures that are not required by, or presented in accordance with GAAP. EBITDA and Adjusted EBITDA should not be considered as alternatives to net earnings, operating income or any other performance measure derived in accordance with GAAP, or as alternatives to cash flows from operating activities or a measure of our liquidity or profitability. In addition, our calculation of EBITDA and Adjusted EBITDA may or may not be comparable to similarly titled measures used by other companies.
We present EBITDA, Adjusted EBITDA and Adjusted income tax provision because we believe they assist investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use EBITDA and Adjusted EBITDA: (i) as factors in evaluating management’s performance when determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies and (iii) because our credit agreement and the indentures governing the 2010 Notes and 2013 Notes use measures similar to EBITDA to measure our compliance with certain covenants.
The following table provides our EBITDA and Adjusted EBITDA for the periods presented, as well as a reconciliation to net earnings.
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Net earnings
$
12,453

 
$
11,658

 
$
18,679

 
$
10,776

Interest expense, net1
10,688

 
11,094

 
21,422

 
39,134

Income tax provision (benefit)
9,942

 
6,962

 
13,500

 
(7,713
)
Depreciation and amortization expense
22,015

 
23,253

 
44,246

 
45,404

EBITDA
$
55,098

 
$
52,967

 
$
97,847

 
$
87,601

Directors' equity-based compensation (benefit) expense
(36
)
 
(1,141
)
 
2,781

 
2,331

Costs associated with Thomaston facility closure
374

 
1,013

 
1,124

 
1,196

Costs associated with Long Island facility closure
1,843

 

 
10,275

 

Adjusted EBITDA
$
57,279

 
$
52,839

 
$
112,027

 
$
91,128

1 
Interest expense, net for the six months ended June 30, 2013 includes debt retirement costs of $17.1 million.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents information regarding our cash flows for the six months ended June 30, 2014 and 2013:
(In thousands)
2014
 
2013
Net cash flows from operating activities
$
94,913

 
$
21,972

Net cash flows from investing activities
(20,993
)
 
(91,413
)
Net cash flows from financing activities
(75,114
)
 
58,042

Cash Flows Summary
Net cash flows from operating activities for the six months ended June 30, 2014 increased by $72.9 million compared to the same period in 2013. The improvement was largely due to $14.8 million of cash flows generated from working capital, compared to $43.8 million of cash flows used in working capital in the same period of 2013, as well as higher earnings, after adjusting for noncash related items, which increased $24.8 million over the first half of 2013. The cash flows generated from working capital were driven primarily by process improvements to our capital management that resulted in higher accounts payable and accrued liabilities, as well as higher accrued interest due to the timing of interest payments on our debt. These increases were partially offset by $8.9 million in contributions to our qualified pension plans in the first half of 2014, as compared to $4.6 million of contributions in the same period of 2013.
Net cash flows from investing activities increased by $70.4 million, largely as a result of the conversion of $11.0 million of short-term investments into cash during the first half of 2014, compared to the conversion of $60.0 million of excess cash proceeds from the issuance of our 2013 Notes into short-term investments during the first half of 2013. Capital spending for plant and equipment increased by $1.2 million when compared to the prior year comparable period.

33




Net cash flows used for financing activities were $75.1 million for the first half of 2014, and were largely driven by $74.3 million of repurchases of our outstanding common stock pursuant to our 2014 $100.0 million stock repurchase program. Net cash flows from financing activities for the first half of 2013 of $58.0 million primarily consisted of proceeds from the issuance of the 2013 Notes, partially offset by the retirement of the 2009 Notes and $60.0 million in repurchases of our outstanding common stock pursuant to a previous stock repurchase program.
Capital Resources
Due to the competitive and cyclical nature of the markets in which we operate, as well as an uncertain economic environment, there is uncertainty regarding the amount of cash flows we will generate during the next twelve months. However, we believe that our cash flows from operations, our cash on hand and short-term investments, as well as available borrowing capacity under our revolving credit facility will be adequate to fund our debt service requirements and provide cash required to support our ongoing operations, capital expenditures, stock repurchase program and working capital needs for the next twelve months.
We may choose to refinance all or a portion of our indebtedness on or before maturity. We cannot be certain that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. As of June 30, 2014, our short-term investments were not restricted and were largely invested in demand deposits.
Debt Arrangements
As of June 30, 2014, our annual debt service obligation, consisting of cash payments for interest on the 2010 Notes and the 2013 Notes, was estimated to be $39.1 million for 2014. On July 29, 2014, subsequent to the close of our second quarter ended June 30, 2014, we issued the 2014 Notes, receiving net proceeds of approximately $298 million after deducting offering expenses. We will use the net proceeds from the 2014 Notes along with company funds and $37 million from our senior secured revolving credit facility to redeem the 2010 Notes in the third quarter of 2014. We irrevocably deposited sufficient funds with a trustee under the indenture governing the 2010 Notes to redeem the notes.
Semi-annual interest payments of $8.1 million under the 2014 Notes are payable on February 1 and August 1 each year, with the initial interest payment due February 1, 2015. Our debt service obligation for 2014, consisting of cash payments for interest on the 2010, 2013 and 2014 Notes, is estimated to be $34.4 million. Our debt service obligation for 2015, consisting of cash payments for interest on the 2013 and 2014 Notes, is estimated to be $28.5 million.
The terms of the 2013 Notes limit our ability and the ability of any restricted subsidiaries to borrow money; pay dividends; redeem or repurchase capital stock; make investments; sell assets; create restrictions on the payment of dividends or other amounts to us from any restricted subsidiaries; enter into transactions with affiliates; enter into sale and lease back transactions; create liens; and consolidate, merge or sell all or substantially all of our assets. The terms of the 2014 Notes limit our ability and the ability of any restricted subsidiaries to incur certain liens, engage in sale and leaseback transactions and consolidate, merge with, or convey, transfer or lease substantially all of our or their assets to another person.
Credit Arrangements
As of June 30, 2014, there were no borrowings outstanding under our credit facility, but approximately $6.9 million of the credit facility was being used to support outstanding standby letters of credit. Loans under the credit facility bear interest (i) for LIBOR loans, at LIBOR plus between 1.75% and 2.25% and (ii) for base rate loans, at a per annum rate equal to the greatest of (a) the prime rate for such day; (b) the federal funds effective rate for such day, plus 0.50%; or (c) LIBOR for a 30-day interest period as determined on such day, plus between 1.25% and 1.75%. The percentage margin on all loans is based on our fixed charge coverage ratio for our most recent four quarters. As of June 30, 2014, we would have been permitted to draw approximately $118.1 million under the credit facility at LIBOR plus 1.75%, or base rate plus 1.25%.

34




CONTRACTUAL OBLIGATIONS
Due to the issuance of the 2014 Notes and the redemption of the 2010 Notes during the third quarter of 2014, the following pro forma table reflects what our contractual obligations would have been had both debt transactions occurred on June 30, 2014:
 
 
Payments Due by Period
(In thousands)
 
Total
 
Less
Than 1 Year
 
1-3 Years
 
3-5 Years
 
More Than
5 Years
Long-term debt
 
$
575,000

 
$

 
$

 
$

 
$
575,000

Interest on long-term debt
 
280,823

 
6,188

 
57,134

 
57,000

 
160,501

Borrowings under revolving credit facility
 
37,400

 
37,400

 

 

 

Total
 
$
893,223

 
$
43,588

 
$
57,134

 
$
57,000

 
$
735,501

As of June 30, 2014, there have been no other significant changes to our contractual obligations table disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.
OFF-BALANCE SHEET ARRANGEMENTS
We currently are not a party to off-balance sheet arrangements that would require disclosure under this section.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP requires our management to select and apply accounting policies that best provide the framework to report our results of operations and financial position. The selection and application of those policies requires management to make difficult, subjective and complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. As a result, it is possible that materially different amounts would be reported under different conditions or using different assumptions.
As of June 30, 2014, there have been no significant changes with regard to the critical accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.
See Note 2 "Recently Adopted and New Accounting Standards" to the Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information regarding recently adopted and new accounting pronouncements.


35




ITEM 3.
 
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to market risks on financial instruments includes interest rate risk on our secured revolving credit facility. As of June 30, 2014, there were no borrowings outstanding under the credit facility. The interest rates applied to borrowings under the credit facility are adjusted often and therefore react quickly to any movement in the general trend of market interest rates. For example, a one percentage point increase or decrease in interest rates, based on assumed outstanding credit facility borrowings of $10.0 million, would have a $0.1 million annual effect on interest expense. We currently do not attempt to mitigate the effects of short-term interest rate fluctuations on our credit facility borrowings through the use of derivative financial instruments.
Commodity Risk
We are exposed to market risk for changes in natural gas commodity pricing, which we have from time-to-time partially mitigated through the use of firm price contracts for a portion of our natural gas requirements for our manufacturing facilities. As of June 30, 2014, these contracts covered approximately 50% of our expected average monthly natural gas requirements for the remainder of 2014.
Foreign Currency Risk
We have minimal foreign currency exchange risk. Virtually all of our international sales are denominated in U.S. dollars.
Quantitative Information about Market Risks
On July 29, 2014, in an event subsequent to the close of our quarter ended June 30, 2014, we issued $300 million of aggregate principal amount senior notes, which we refer to as the 2014 Notes. We will use the net proceeds from the issuance of the 2014 Notes along with company funds and $37 million from our senior secured revolving credit facility to redeem all of our $375 million aggregate principal amount senior notes sold on October 22, 2010, which we refer to as the 2010 Notes. Due to the issuance of the 2014 Notes and the redemption of the 2010 Notes during the third quarter of 2014, the following pro forma table reflects our revised quantitative information about market risks had both of these debt transactions occurred on June 30, 2014:
 
 
Expected Maturity Date
(Dollars in thousands)
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total      
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
$

 
$

 
$

 
$

 
$

 
$
575,000

 
$
575,000

Average interest rate
 
%
 
%
 
%
 
%
 
%
 
4.957
%
 
4.957
%
Pro forma fair value at
  June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
$
566,750


ITEM 4.
 
Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Subject to the limitations noted above, our management, with the participation of our CEO and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the second quarter of 2014. Based on that evaluation, the CEO and CFO have concluded that, as of June 30, 2014, our disclosure controls and procedures were effective to meet the objective for which they were designed and operated at the reasonable assurance level.
Changes in Internal Controls
There was no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II
ITEM 1.
 
Legal Proceedings
On August 13, 2012, we were notified that the U.S. Environmental Protection Agency, or EPA, submitted a civil referral to the U.S. Department of Justice, or DOJ, alleging violations of the Clean Air Act stemming from an EPA investigation that included an inspection of our Lewiston, Idaho pulp facility in July 2009 and a subsequent information request dated February 24, 2011. On July 19, 2013, the EPA issued to us an additional information request. Prior to the filing of any formal action, we and the DOJ agreed to discuss the resolution of the allegations. On October 21, 2013, the parties entered into a new agreement to toll the statute of limitations. The tolling period commenced as of September 14, 2012 and expires on October 31, 2014, unless further extended by the parties. Discussions with the DOJ and EPA are ongoing.
In addition to the matters discussed above, we may from time to time be involved in claims, proceedings and litigation arising from our business and property ownership. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition.

ITEM 1A.
 
Risk Factors
There are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013. See Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, entitled “Risk Factors.”

37




ITEM 2.
 
Unregistered Sales of Equity Securities and Uses of Proceeds
Issuer Purchases of Equity Securities
On February 5, 2014, we announced that our Board of Directors had approved a new stock repurchase program authorizing the repurchase of up to $100.0 million of our common stock. The repurchase program authorizes purchases of our common stock from time to time through open market purchases, negotiated transactions or other means, including accelerated stock repurchases and 10b5-1 trading plans in accordance with applicable securities laws and other restrictions. We have no obligation to repurchase stock under this program and may suspend or terminate the program at any time. During the quarter ended June 30, 2014, we repurchased 733,676 shares of our outstanding common stock at an average price of $61.32 per share pursuant to our share repurchase program. As of June 30, 2014, we had $25.7 million of authorization remaining pursuant to our stock repurchase program.
The following table provides information about share repurchases that we made during the three months ended June 30, 2014 (in thousands, except share and per share amounts):
Period
Total
Number of
Shares
Purchased
 
Average
Price Paid per
Share
 
Total
Number of
Shares
Purchased as
Part of Publicly
Announced
Program
 
Approximate
Dollar Value of
Shares that May
Yet Be  Purchased
Under the
Program
April 1, 2014 to April 30, 2014
470,948

 
$
61.10

 
470,948

 
$
41,893

May 1, 2014 to May 31, 2014
58,459

 
$
61.41

 
58,459

 
$
38,303

June 1, 2014 to June 30, 2014
204,269

 
$
61.81

 
204,269

 
$
25,678

Total
733,676

 
$
61.32

 
733,676

 
 
ITEM 6.
 
Exhibits
The exhibit index is located on page 40 of this Form 10-Q.

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SIGNATURES
Pursuant to the requirements 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.
 
 
 
 
 
 
 
 
 
CLEARWATER PAPER CORPORATION
 
 
 
 
(Registrant)
 
 
 
 
 
 
 
 
Date: July 31, 2014
 
By
/s/ JOHN D. HERTZ
 
 
 
 
John D. Hertz
 
 
 
 
Senior Vice President, Finance and
 
 
 
 
Chief Financial Officer
 
 
 
 
(Duly Authorized Officer; Principal
 
 
 
 
Financial Officer)
 
 
 
 
 
 
 
 
 
 
Date: July 31, 2014
 
By
/s/ JOHNATHAN D. HUNTER
 
 
 
 
Johnathan D. Hunter
 
 
 
 
Vice President, Corporate Controller
 
 
 
 
(Duly Authorized Officer; Principal
 
 
 
 
Accounting Officer)
 
 
 
 
 
 
 
 
 
 

39




CLEARWATER PAPER CORPORATION
EXHIBIT INDEX
 
EXHIBIT
NUMBER
 
DESCRIPTION
10.11*
 
Clearwater Paper Corporation Annual Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 9, 2014).
 
 
 
10.21
 
Clearwater Paper Corporation 2008 Stock Incentive Plan-Form of Restricted Stock Unit Award, to be used for special restricted stock unit awards.
 
 
 
(31)
 
Rule 13a-14(a)/15d-14(a) Certifications.
 
 
(32)**
 
Furnished statements of the Chief Executive Officer and Chief Financial Officer under 18 U.S.C Section 1350.
 
 
101.INS
 
XBRL Instance Document.
 
 
101.SCH
 
XBRL Taxonomy Extension Schema.
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase.
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase.
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.
1 
Management contract or compensatory plan, contract or arrangement.
 
 
* 
Incorporated by reference.
 
 
** 
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.

40