CLW-2013.03.31-10Q
Table of Contents

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 March 31, 2013
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 April 24, 2013 was 22,203,628.


Table of Contents

CLEARWATER PAPER CORPORATION
Index to Form 10-Q
 
 
 
 
 
 
Page Number
 
 
 
PART I.
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
6 - 19
 
 
 
ITEM 2.
20 - 28
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II.
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 6.
 
 
 
 

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Part I
ITEM 1.
 
Condensed Consolidated Financial Statements
Clearwater Paper Corporation
Condensed Consolidated Statements of Operations
Unaudited (Dollars in thousands - except per-share amounts)
 
 
Three Months Ended
 
March 31,
 
2013
 
2012
Net sales
$
460,824

 
$
457,798

Costs and expenses:
 
 
 
Cost of sales
(414,209
)
 
(403,076
)
Selling, general and administrative expenses
(34,132
)
 
(29,074
)
Total operating costs and expenses
(448,341
)
 
(432,150
)
Income from operations
12,483

 
25,648

Interest expense, net
(10,982
)
 
(9,728
)
Debt retirement costs
(17,058
)
 

(Loss) earnings before income taxes
(15,557
)
 
15,920

Income tax benefit (provision)
14,675

 
(12,194
)
Net (loss) earnings
$
(882
)
 
$
3,726

Net (loss) earnings per common share:
 
 
 
Basic
$
(0.04
)
 
$
0.16

Diluted
(0.04
)
 
0.16

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

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Clearwater Paper Corporation
Condensed Consolidated Statements of Comprehensive Income
Unaudited (Dollars in thousands)
 
 
Three Months Ended
 
March 31,
 
2013
 
2012
Net (loss) earnings
$
(882
)
 
$
3,726

Other comprehensive income:
 
 
 
Defined benefit pension and other postretirement employee benefits:
 
 
 
Amortization of actuarial loss included in net
  periodic cost, net of tax expense of $1,706
  and $1,286
2,624

 
1,978

Amortization of prior service credit included in net
  periodic cost, net of tax benefit of $107 and $114
(163
)
 
(176
)
Other comprehensive income, net of tax
2,461

 
1,802

Comprehensive income
$
1,579

 
$
5,528

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


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Clearwater Paper Corporation
Condensed Consolidated Balance Sheets
Unaudited (Dollars in thousands – except per-share amounts)
 
 
March 31,
2013
 
December 31,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
9,538

 
$
12,579

Short-term investments
85,000

 
20,000

Receivables, net
156,251

 
154,143

Taxes receivable
11,281

 
20,828

Inventories
248,785

 
231,466

Deferred tax assets
26,385

 
17,136

Prepaid expenses
10,037

 
12,314

Total current assets
547,277

 
468,466

Property, plant and equipment, net
871,745

 
877,377

Goodwill
229,533

 
229,533

Intangible assets, net
45,954

 
47,753

Other assets, net
12,122

 
10,327

TOTAL ASSETS
$
1,706,631

 
$
1,633,456

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
168,566

 
$
165,596

Current liability for pensions and other postretirement employee benefits
9,137

 
9,137

Total current liabilities
177,703

 
174,733

Long-term debt
650,000

 
523,933

Liability for pensions and other postretirement employee benefits
199,711

 
204,163

Other long-term obligations
53,912

 
50,910

Accrued taxes
75,522

 
78,699

Deferred tax liabilities
58,358

 
60,124

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,
 23,934,427 and 23,840,683 shares issued
2

 
2

Additional paid-in capital
316,854

 
326,901

Retained earnings
358,802

 
359,684

Treasury stock, at cost, common shares-1,683,236 and 853,470 shares repurchased
(71,001
)
 
(30,000
)
Accumulated other comprehensive loss, net of tax
(113,232
)
 
(115,693
)
Total stockholders’ equity
491,425

 
540,894

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,706,631

 
$
1,633,456

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

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Clearwater Paper Corporation
Condensed Consolidated Statements of Cash Flows
Unaudited (Dollars in thousands)
 
 
Three Months Ended
 
March 31,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net (loss) earnings
$
(882
)
 
$
3,726

Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
22,151

 
19,548

Deferred tax (benefit) expense
(12,614
)
 
11,876

Equity-based compensation expense
4,785

 
1,080

Employee benefit plans
2,693

 
1,682

Deferred issuance costs and discounts on long-term debt
3,544

 
561

Disposal of plant and equipment, net

 
453

Changes in working capital, net
(9,868
)
 
15,772

Change in taxes receivable, net
9,547

 
(4,508
)
Excess tax benefits from equity-based payment arrangements

 
(2,145
)
Change in non-current accrued taxes, net
(3,177
)
 
3,643

Funding of qualified pension plans
(3,026
)
 
(15,525
)
Other, net
361

 
2,280

Net cash provided by operating activities
13,514

 
38,443

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Change in short-term investments, net
(65,000
)
 
30,001

Additions to plant and equipment
(19,471
)
 
(41,521
)
Net cash used for investing activities
(84,471
)
 
(11,520
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from long-term debt
275,000

 

Repayment of long-term debt
(150,000
)
 

Purchase of treasury stock
(50,166
)
 

Payment of long-term debt issuance costs
(4,723
)
 

Payment of tax withholdings on equity-based payment arrangements
(2,195
)
 
(12,963
)
Excess tax benefits from equity-based payment arrangements

 
2,145

Net cash provided by (used for) financing activities
67,916

 
(10,818
)
(Decrease) increase in cash
(3,041
)
 
16,105

Cash at beginning of period
12,579

 
8,439

Cash at end of period
$
9,538

 
$
24,544

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest, net of amounts capitalized
$
2,966

 
$

Cash paid for income taxes
967

 
3,036

Cash received from income tax refunds
631

 
600

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
 
 
 
Increase in accrued plant and equipment
$
2,213

 
$
8,670

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

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Clearwater Paper Corporation
Notes to Condensed 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 15 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. Our products are made primarily from wood fiber pulp.
On March 6, 2013, we announced the planned permanent closure of our Thomaston, Georgia converting and distribution facility. The shutdown will occur gradually as converting lines are relocated and installed at our other facilities, with some operations continuing to run into the first quarter of 2014.
FINANCIAL STATEMENT PREPARATION AND PRESENTATION
The accompanying Condensed Consolidated Balance Sheets at March 31, 2013 and December 31, 2012, and the related Condensed Consolidated Statements of Operations, Comprehensive Income and Cash Flows for the three months ended March 31, 2013 and March 31, 2012, 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, 2012, as filed with the Securities and Exchange Commission, or SEC, on February 22, 2013.
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 Condensed Consolidated Balance Sheet. As of March 31, 2013 and December 31, 2012, restricted cash totaling approximately $1.5 million was included in "Other assets, net" on our Condensed 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 March 31, 2013 and December 31, 2012, we had allowances for doubtful accounts of $2.0 million and $1.6 million, respectively.

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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 $1,422.0 million and $1,401.4 million at March 31, 2013 and December 31, 2012, respectively.
We did not capitalize interest for the three months ended March 31, 2013. For the three months ended March 31, 2012, we capitalized $2.1 million of interest expense associated with our through-air-dried, or TAD, tissue expansion project, which includes the construction of our new tissue manufacturing and converting facilities in Shelby, North Carolina, and upgrades to our tissue manufacturing facility in Las Vegas, Nevada.
STOCKHOLDERS’ EQUITY
On January 17, 2013, we announced that our Board of Directors had approved a new stock repurchase program authorizing the repurchase of up to $100 million of our common stock. The share repurchases are authorized to be carried out by the utilization of a number of different methods, including but not limited to, open market purchases, accelerated share buybacks and negotiated block purchases, and are expected to be completed in 2013.
On March 1, 2013, we entered into an accelerated share buyback, or ASB, agreement with a major financial institution to repurchase an aggregate of $50 million of our outstanding common stock. The total aggregate number of shares to be repurchased pursuant to this agreement will be determined by reference to average stock prices, less a fixed discount, over the term of the agreement. The share repurchase agreement is expected to be completed no later than approximately nine months after execution. Under the ASB agreement, we received 826,617 shares of common stock during the first quarter of 2013, and as of March 31, 2013, these shares are held as treasury stock and included in our Condensed Consolidated Balance Sheet. A total of approximately $40.8 million of the $50 million paid to the financial institution was used in the repurchase of these shares, which represent approximately 80% of the total shares expected to be repurchased under the agreement. We will receive any remaining shares upon the completion of the ASB agreement through the use of the remaining $9.2 million paid to the financial institution. For accounting purposes, the ASB agreement is considered a treasury stock purchase and a derivative contract indexed to our outstanding common shares for the future settlement provision. The derivative contracts are accounted for as equity instruments and do not require hedge or derivative accounting treatment.
During the first quarter of 2013, we made total repurchases of 829,766 shares of our outstanding common stock, which included the shares repurchased through our ASB agreement and 3,149 shares of common stock repurchases made through open market transactions, at an average price of $49.41 per share. As of March 31, 2013, approximately $59 million of the authorized repurchase program remains, including $9.2 million already paid to the financial institution as part of the ASB agreement. We account for share repurchases under the program as treasury stock and record the amounts paid to repurchase shares at cost as a component of stockholders' equity. We have not retired any treasury shares and may choose to reissue shares held in treasury stock in a future period.
DERIVATIVES
We had no activity during the three months ended March 31, 2013 and 2012 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 March 31, 2013, we had no firm-price contracts for natural gas in place. 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 February 2013, the Financial Accounting Standards Board issued Accounting Standard Update, or ASU, 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which expands the disclosure requirements for amounts reclassified out of accumulated other comprehensive income. This ASU requires an entity to present, either parenthetically on the face of the financial statements where net income is presented or in the notes to the financial statements, the effect of significant items reclassified in their entirety from accumulated other comprehensive income and identification of the respective line items effecting net income for instances when reclassification is required under GAAP. For items that are not required by GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures as required by GAAP. This ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements and is effective prospectively for annual and interim reporting periods beginning after December 15, 2012. We have adopted this ASU, which did not affect our Condensed Consolidated Financial Statements. See Note 9, "Accumulated Other Comprehensive Loss," and Note 10, "Pension and Other Postretirement Employee Benefit Plans," for further discussion.

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NOTE 3 Inventories
Inventories at the balance sheet dates consist of:
 
(In thousands)
March 31,
2013
 
December 31,
2012
Pulp, paperboard and tissue products
$
165,250

 
$
147,627

Materials and supplies
70,519

 
67,889

Logs, pulpwood, chips and sawdust
13,016

 
15,950

 
$
248,785

 
$
231,466

Inventories are stated at the lower of market or cost using the average cost method. The last-in, first-out, or LIFO, method was previously used to determine cost of logs, wood fiber and the majority of lumber until the sale of our Lewiston, Idaho sawmill in November 2011. During the three months ended March 31, 2012, the remaining lumber inventory from the sawmill was sold. The sale of this inventory, which was valued at costs prevailing in prior years under the LIFO method, had the effect of increasing earnings in the period ended March 31, 2012 by an immaterial amount.
NOTE 4 Intangible Assets
Intangible assets at the balance sheet dates are comprised of the following:
 
 
March 31, 2013
(Dollars in thousands, lives in years)
Useful
Life
 
Historical
Cost
 
Accumulated
Amortization
 
Net
Balance
Customer relationships
9.0
 
$
53,957

 
$
(12,736
)
 
$
41,221

Trade names and trademarks
10.0
 
5,300

 
(1,193
)
 
4,107

Non-compete agreements
2.5 - 5.0
 
1,674

 
(1,048
)
 
626

 
 
 
$
60,931

 
$
(14,977
)
 
$
45,954

 
 
 
 
 
 
 
 
  
December 31, 2012
(Dollars in thousands, lives in years)
Useful
Life
 
Historical
Cost
 
Accumulated
Amortization
 
Net
Balance
Customer relationships
9.0
 
$
53,957

 
$
(11,237
)
 
$
42,720

Trade names and trademarks
10.0
 
5,300

 
(1,060
)
 
4,240

Non-compete agreements
2.5 - 5.0
 
1,674

 
(881
)
 
793

 
 
 
$
60,931

 
$
(13,178
)
 
$
47,753

NOTE 5 Income Taxes
Consistent with authoritative guidance, our estimated annual effective tax rate is used to allocate expected annual income tax expense to interim periods. The rate is the ratio of estimated annual income tax expense to 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 expense 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.
The actual effective tax rate for the three months ended March 31, 2013 was approximately 94%, compared to a rate of approximately 77% for the same period in 2012. As discussed below, the higher rate resulted from the net impact of reporting discrete items in each reporting period totaling a net benefit of $9.0 million and net expense of $6.7 million, respectively. Our estimated annual effective tax rate for the first quarter of 2013 is approximately 37%, compared with approximately 35% for the comparable interim period in 2012. The increase is due to a reduction of the domestic production activities deduction resulting from our election to adopt tax bonus depreciation in 2013 and an increase in the relative weighting of the other permanent items in relation to forecasted book income. We recorded an income tax benefit of $14.7 million for the three months ended March 31, 2013, compared to $12.2 million of expense for the three months ended March 31, 2012.

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The tax benefit and effective tax rate for the three months ended March 31, 2013 was primarily the result of a $9.8 million tax benefit related to our decision to reverse our conversion made in the first quarter of 2012 of certain gallons of fuel claimed as Cellulosic Biofuel Producer Credit, or CBPC, back to gallons claimed under the Alternative Fuel Mixture Tax Credit, or AFMTC. The gallons had been converted by us in 2010 to the CBPC and in 2012 were converted back to AFMTC.
The net discrete benefit for the three months ended March 31, 2013 of $9.0 million in net tax benefit was comprised of a $5.6 million benefit relating to the conversion back to the CBPC and a resulting additional benefit of $4.2 million due to a decrease in our liabilities for uncertain tax positions. The remaining discrete expense of $0.8 million recorded in the three months ended March 31, 2013 was primarily an increase in uncertain tax positions.
The tax expense and effective tax rate in the first quarter of 2012 was primarily the result of net discrete expense of $5.5 million resulting from our decision to convert certain gallons of alternative fuel originally claimed in 2009 under the AFMTC, which had been converted by us in 2010 to the CBPC, back to gallons under the AFMTC. The $5.5 million is comprised of $2.5 million relating to the conversion back to the AFMTC and a resulting additional $3.0 million increase in our liabilities for uncertain tax positions.
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. The audit is ongoing, with no defined conclusion date as of March 31, 2013.
NOTE 6 Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at the balance sheet dates consist of:
 
(In thousands)
March 31, 2013
 
December 31, 2012
Trade accounts payable
$
76,719

 
$
75,949

Accrued wages, salaries and employee benefits
38,283

 
42,491

Accrued interest
13,562

 
5,242

Accrued taxes other than income taxes payable
9,138

 
6,993

Accrued utilities
7,834

 
8,205

Accrued discounts and allowances
5,984

 
4,785

Accrued transportation
3,335

 
4,417

Other
13,711

 
17,514

 
$
168,566

 
$
165,596

NOTE 7 Debt
$375 MILLION SENIOR NOTES DUE 2018
On October 22, 2010, we sold $375 million aggregate principal amount of senior notes, which we refer to as the 2010 Notes. The 2010 Notes mature on November 1, 2018, have an interest rate of 7.125% and were issued at their face value. The issuance of these notes generated net proceeds of $367.5 million after deducting offering expenses.
Effective in the first quarter of 2013, the 2010 Notes are guaranteed by all of our direct and indirect domestic subsidiaries. The 2010 Notes 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 the 2010 Notes. The 2010 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 2010 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 2010 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.
Prior to November 1, 2013, we may redeem up to 35% of the 2010 Notes at a redemption price equal to 107.125% of the principal amount plus accrued and unpaid interest with the proceeds from one or more qualified equity offerings. We have the option to redeem all or a portion of the 2010 Notes at any time before November 1, 2014 at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest and a “make whole” premium. On or after November 1, 2014, we may redeem all or a

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portion of the 2010 Notes at specified redemption prices plus accrued and unpaid interest. In addition, we may be required to make an offer to purchase the 2010 Notes upon the sale of certain assets and upon a change of control.
REDEMPTION OF $150 MILLION SENIOR NOTES DUE 2016 AND ISSUANCE OF $275 MILLION SENIOR NOTES DUE 2023
In June 2009, we issued senior unsecured notes, which we refer to as the 2009 Notes, in the aggregate principal amount of $150 million. The 2009 Notes were due on June 15, 2016 and had an interest rate of 10.625%. The 2009 Notes were issued at a price equal to 98.792% of their face value.
We had the option to redeem all or a portion of the 2009 Notes at any time prior to June 15, 2013 at a redemption price equal to 100% of the principal amount thereof plus a “make whole” premium and accrued and unpaid interest. On February 22, 2013, we exercised our option to redeem all of the 2009 Notes at a redemption price equal to approximately $166 million, which consisted of 100% of the principal amount, plus a $12.6 million “make whole” premium and accrued and unpaid interest of approximately $3.0 million. The make whole premium and a portion of the unpaid interest, as well as an unamortized discount and deferred issuance costs associated with the 2009 Notes, were recorded as components of the debt retirement costs totaling $17.1 million in the first quarter of 2013, as included in the accompanying Condensed Consolidated Statement of Operations. Proceeds to fund the redemption of the 2009 Notes were made available through the sale of $275 million aggregate principal amount of senior notes on January 23, 2013, 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. The issuance of these notes generated net proceeds of approximately $271 million after deducting offering expenses.
The 2013 Notes are guaranteed by our existing and future direct and indirect domestic subsidiaries. The 2013 Notes 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 the 2013 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. The 2013 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 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.
Prior to February 1, 2016, we may redeem up to 35% of the 2013 Notes at a redemption price equal to 104.5% of the principal amount plus accrued and unpaid interest with the proceeds from one or more qualified equity offerings. We have the option to redeem all or a portion of the 2013 Notes at any time before February 1, 2018 at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest and a “make whole” premium. On or after February 1, 2018, we may redeem all or a portion of the 2013 Notes at specified redemption prices plus accrued and unpaid interest. In addition, we may be required to make an offer to purchase the 2013 Notes upon the sale of certain assets and upon a change of control.
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 it expires on September 30, 2016.
As of March 31, 2013, there were no borrowings outstanding under the credit facility, but approximately $6.8 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 1.0%, plus between 0.25% and 0.75%. The percentage margin on all loans is based on our fixed charge coverage ratio for the most recent four quarters. As of March 31, 2013, we would have been permitted to draw approximately $118.2 million under the credit facility at LIBOR plus 1.75%, or base rate plus 0.25%.
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 March 31, 2013, the fixed charge coverage ratio for the last twelve months was 3.4-to-1.0.

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Table of Contents

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)
March 31, 2013
 
December 31, 2012
Long-term lease obligations, net of current portion
$
25,146

 
$
25,240

Director and other deferred compensation
13,451

 
9,939

Deferred proceeds
11,224

 
11,668

Other
4,091

 
4,063

 
$
53,912

 
$
50,910

NOTE 9 Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss at the balance sheet dates 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, 2012
$
(874
)
 
$
(114,819
)
 
$
(115,693
)
Other comprehensive income, net of tax2

 
2,461

 
2,461

Balance at March 31, 2013
$
(874
)
 
$
(112,358
)
 
$
(113,232
)

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 the reporting currency of U.S. dollars in 2012.
2 
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 include $4.3 million of actuarial loss amortization and $0.3 million amortization of prior service credit, less net tax expense of $1.6 million. 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 of our company-sponsored pension and OPEB plans for the periods presented:
 
Three Months Ended March 31,
 
 
 
 
 
Other Postretirement
 
Pension Benefit Plans
 
Employee Benefit Plans
(In thousands)
2013
 
2012
 
2013
 
2012
Service cost
$
485

 
$
600

 
$
206

 
$
202

Interest cost
3,359

 
3,663

 
1,318

 
1,633

Expected return on plan assets
(4,568
)
 
(4,900
)
 

 

Amortization of prior service cost (credit)
111

 
159

 
(381
)
 
(449
)
Amortization of actuarial loss
3,874

 
2,948

 
456

 
316

Net periodic cost
$
3,261

 
$
2,470

 
$
1,599

 
$
1,702

 
 
 
 
 
 
 
 

11

Table of Contents

As discussed in the notes to our Consolidated Financial Statements in our 2012 Form 10-K, our company-sponsored defined benefit pension plans were underfunded by $78.7 million at December 31, 2012. As a result of being underfunded, we are required to make contributions to our qualified pension plans. During the three months ended March 31, 2013, we contributed $3.0 million to these pension plans. In April 2013, we contributed an additional $1.6 million. Our remaining required contributions to our company-sponsored qualified pension plans in 2013 are expected to be approximately $15 million.
During the three months ended March 31, 2013, we made contributions of less than $0.1 million to our company-sponsored non-qualified pension plan, and we estimate contributions will total approximately $0.3 million in 2013. We do not anticipate funding our OPEB plans in 2013 except to pay benefit costs as incurred during the year by plan participants.
During the three months ended March 31, 2013, $4.1 million and $0.8 million of net periodic pension and OPEB costs were charged to cost of sales and selling, general and administrative expenses, respectively, in the accompanying Condensed Consolidated Statement 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 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. This method requires that the effect of potentially dilutive common stock equivalents be excluded from the calculation of dilutive earnings per share for the periods in which net losses are reported because the effect is anti-dilutive. For the three months ended March 31, 2013, 514,318 of our incremental shares related to restricted stock units and performance shares were excluded from our earnings per share calculation due to their anti-dilutive effect as a result of our net loss from operations for the current period. We also evaluated the derivative contracts associated with the ASB agreement discussed in Note 1, "Nature of Operations and Basis of Presentation," which could result 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 period ended March 31, 2013.
The following table reconciles the number of common shares used in calculating the basic and diluted net (loss) earnings per share:
 
Three Months Ended March 31,
 
2013
 
2012
Basic average common shares outstanding1
22,884,065

 
23,079,214

Incremental shares due to:
 
 
 
Restricted stock units

 
180,713

Performance shares

 
156,573

Diluted average common shares outstanding
22,884,065

 
23,416,500

 
 
 
 
Basic net (loss) earnings per common share
$
(0.04
)
 
$
0.16

Diluted net (loss) earnings per common share
(0.04
)
 
0.16

 
 
 
 
Anti-dilutive shares excluded from calculation
514,318

 
173,753


1 
Basic average common shares outstanding include restricted stock awards that are fully vested, but are deferred for future issuance.
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 and performance shares, based on estimated fair values.
Employee equity-based compensation expense was recognized as follows:
 
 
Three Months Ended March 31,
(In thousands)
2013
 
2012
Restricted stock units
$
375

 
$
156

Performance shares
938

 
1,347

Total employee equity-based compensation
$
1,313

 
$
1,503


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Table of Contents

As provided for in the Clearwater Paper Corporation 2008 Stock Incentive Plan, the performance measure used to determine the number of performance shares ultimately issued is a comparison of the percentile ranking of our total stockholder return compared to the total stockholder return of a selected peer group. The number of shares actually issued, as a percentage of the amount subject to the performance share award, could range from 0%-200%. On December 31, 2012, the service and performance period for 138,226 outstanding performance shares granted in 2010 ended. Those performance shares were settled and distributed in the first quarter of 2013. The number of shares actually settled, as a percentage of the outstanding amount, was 101.4%. After adjusting for the related minimum tax withholdings, a net 93,744 shares were issued in the first quarter of 2013. The related minimum tax withholdings payment made in the first quarter of 2013 in connection with issued shares was $2.2 million. No restricted stock units vested or were settled during the first quarter of 2013.
The following table summarizes the number of share-based awards granted under our 2008 Stock Incentive Plan during the three months ended March 31, 2013 and the grant-date fair value of the awards:
 
 
Three Months Ended March 31, 2013
 
Number of
Awards
 
Average Fair Value of
Award Per Share
Restricted stock units
67,109

 
$
43.08

Performance shares
120,485

 
63.46

DIRECTOR AWARDS
Each year, 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 director equity-based compensation expense of $3.5 million for the three months ended March 31, 2013, compared to equity-based compensation income of $0.4 million for the same period in 2012. At March 31, 2013 and December 31, 2012, the liability amounts associated with director equity-based compensation included in "Other long-term obligations" on the accompanying Condensed Consolidated Balance Sheets were $12.6 million and $9.1 million, respectively.
NOTE 13 Fair Value Measurements
The estimated fair values of our financial instruments at the dates presented below are as follows:
 
 
March 31, 2013
 
December 31, 2012
 
Carrying
 
Fair
 
Carrying
 
Fair
(In thousands)
Amount
 
Value
 
Amount
 
Value
Cash, short-term investments and restricted cash (Level 1)
$
96,069

 
$
96,069

 
$
34,079

 
$
34,079

Long-term debt (Level 1)
650,000

 
677,750

 
523,933

 
572,625

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.

13

Table of Contents

NOTE 14 Segment Information
The table below presents information about our reportable segments:
 
 
Three Months Ended March 31,
(In thousands)
2013
 
2012
Segment net sales:
 
 
 
Consumer Products
$
284,902

 
$
277,830

Pulp and Paperboard1
175,922

 
179,968

Total segment net sales
$
460,824

 
$
457,798

 
 
 
 
Operating income:
 
 
 
Consumer Products
$
10,124

 
$
26,271

Pulp and Paperboard1
17,553

 
11,658

 
27,677

 
37,929

Corporate
(15,194
)
 
(12,281
)
Income from operations
$
12,483

 
$
25,648

 
 
 
 
Depreciation and amortization:
 
 
 
Consumer Products
$
16,092

 
$
13,165

Pulp and Paperboard
5,659

 
6,011

Corporate
400

 
372

Total depreciation and amortization
$
22,151

 
$
19,548

 
1 
Results for Pulp and Paperboard for the three months ended March 31, 2012 include income and expenses associated with the November 2011 sale of the Lewiston, Idaho sawmill, the effects of which were immaterial in the aggregate.

14

Table of Contents

NOTE 15 Supplemental Guarantor Financial Information
All of our 100% owned, domestic subsidiaries guarantee the 2013 Notes and the 2010 Notes on a joint and several basis. As of March 31, 2013, 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
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Three Months Ended March 31, 2013
 
 
 
Guarantor
 
Non-Guarantor
 
 
 
 
(In thousands)
Issuer
 
Subsidiaries
 
Subsidiary
 
Eliminations
 
Total
Net sales
$
344,248

 
$
114,716

 
$
6,855

 
$
(4,995
)
 
$
460,824

Cost and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
(302,351
)
 
(110,657
)
 
(6,196
)
 
4,995

 
(414,209
)
Selling, general and administrative expenses
(27,908
)
 
(5,734
)
 
(490
)
 

 
(34,132
)
Total operating costs and expenses
(330,259
)
 
(116,391
)
 
(6,686
)
 
4,995

 
(448,341
)
Income (loss) from operations
13,989

 
(1,675
)
 
169

 

 
12,483

Interest expense, net
(10,982
)
 

 

 

 
(10,982
)
Debt retirement costs
(17,058
)
 

 

 

 
(17,058
)
(Loss) earnings before income taxes
(14,051
)
 
(1,675
)
 
169

 

 
(15,557
)
Income tax benefit (provision)
14,342

 
1,213

 
(35
)
 
(845
)
 
14,675

Equity in (loss) income of subsidiary
(328
)
 
134

 

 
194

 

Net (loss) earnings
$
(37
)
 
$
(328
)
 
$
134

 
$
(651
)
 
$
(882
)
Other comprehensive income, net of tax
2,461

 

 

 

 
2,461

Comprehensive income (loss)
$
2,424

 
$
(328
)
 
$
134

 
$
(651
)
 
$
1,579

 
 
 
 
 
 
 
 
 
 
Clearwater Paper Corporation
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Three Months Ended March 31, 2012  
 
 
 
Guarantor
 
Non-Guarantor
 
 
 
 
(In thousands)
Issuer
 
Subsidiaries
 
Subsidiary
 
Eliminations
 
Total
Net sales
$
338,947

 
$
116,834

 
$
7,011

 
$
(4,994
)
 
$
457,798

Cost and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
(295,510
)
 
(106,303
)
 
(6,257
)
 
4,994

 
(403,076
)
Selling, general and administrative expenses
(23,017
)
 
(5,567
)
 
(490
)
 

 
(29,074
)
Total operating costs and expenses
(318,527
)
 
(111,870
)
 
(6,747
)
 
4,994

 
(432,150
)
Income from operations
20,420

 
4,964

 
264

 

 
25,648

Interest expense, net
(9,728
)
 

 

 

 
(9,728
)
Earnings before income taxes
10,692

 
4,964

 
264

 

 
15,920

Income tax provision
(9,372
)
 
(1,744
)
 
(93
)
 
(985
)
 
(12,194
)
Equity in income of subsidiary
3,391

 
171

 

 
(3,562
)
 

Net earnings
$
4,711

 
$
3,391

 
$
171

 
$
(4,547
)
 
$
3,726

Other comprehensive income, net of tax
1,802

 

 

 

 
1,802

Comprehensive income
$
6,513

 
$
3,391

 
$
171

 
$
(4,547
)
 
$
5,528

 
 
 
 
 
 
 
 
 
 


15

Table of Contents

Clearwater Paper Corporation
Condensed Consolidating Balance Sheet
At March 31, 2013
 
(In thousands)
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Eliminations
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash
$
7,241

 
$
2

 
$
2,295

 
$

 
$
9,538

Short-term investments
85,000

 

 

 

 
85,000

Receivables, net
106,519

 
45,291

 
5,847

 
(1,406
)
 
156,251

Taxes receivable
13,531

 
(2,175
)
 
203

 
(278
)
 
11,281

Inventories
180,751

 
63,001

 
5,033

 

 
248,785

Deferred tax assets
21,578

 
5,374

 

 
(567
)
 
26,385

Prepaid expenses
9,267

 
634

 
136

 

 
10,037

Total current assets
423,887

 
112,127

 
13,514

 
(2,251
)
 
547,277

Property, plant and equipment, net
615,902

 
239,650

 
16,193

 

 
871,745

Goodwill
229,533

 

 

 

 
229,533

Intangible assets, net

 
44,634

 
1,320

 

 
45,954

Intercompany receivable (payable)
77,075

 
(63,588
)
 
(14,332
)
 
845

 

Investment in subsidiary
248,816

 
10,189

 

 
(259,005
)
 

Other assets, net
11,705

 
417

 

 

 
12,122

TOTAL ASSETS
$
1,606,918

 
$
343,429

 
$
16,695

 
$
(260,411
)
 
$
1,706,631

LIABILITIES AND STOCKHOLDERS’
  EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued
  liabilities
$
134,320

 
$
31,414

 
$
4,238

 
$
(1,406
)
 
$
168,566

Current liability for pensions and
  other postretirement employee
  benefits
9,137

 

 

 

 
9,137

Total current liabilities
143,457

 
31,414

 
4,238

 
(1,406
)
 
177,703

Long-term debt
650,000

 

 

 

 
650,000

Liability for pensions and other
  postretirement employee benefits
199,711

 

 

 

 
199,711

Other long-term obligations
52,158

 
1,754

 

 

 
53,912

Accrued taxes
73,434

 
1,776

 
312

 

 
75,522

Deferred tax liabilities (assets)
(3,267
)
 
59,669

 
1,956

 

 
58,358

Accumulated other comprehensive loss,
  net of tax
(113,232
)
 

 

 

 
(113,232
)
Stockholders’ equity excluding
  accumulated other comprehensive loss
604,657

 
248,816

 
10,189

 
(259,005
)
 
604,657

TOTAL LIABILITIES AND
  STOCKHOLDERS’ EQUITY
$
1,606,918

 
$
343,429

 
$
16,695

 
$
(260,411
)
 
$
1,706,631



16

Table of Contents

Clearwater Paper Corporation
Condensed Consolidating Balance Sheet
At December 31, 2012
 
(In thousands)
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Eliminations
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash
$
11,105

 
$
5

 
$
1,469

 
$

 
$
12,579

Short-term investments
20,000

 

 

 

 
20,000

Receivables, net
109,129

 
41,431

 
5,612

 
(2,029
)
 
154,143

Taxes receivable
20,712

 
116

 

 

 
20,828

Inventories
163,422

 
63,476

 
4,568

 

 
231,466

Deferred tax assets
11,750

 
4,595

 

 
791

 
17,136

Prepaid expenses
11,441

 
708

 
165

 

 
12,314

Total current assets
347,559

 
110,331

 
11,814

 
(1,238
)
 
468,466

Property, plant and equipment, net
618,076

 
242,818

 
16,483

 

 
877,377

Goodwill
229,533

 

 

 

 
229,533

Intangible assets, net

 
46,379

 
1,374

 

 
47,753

Intercompany receivable (payable)
68,951

 
(56,153
)
 
(12,007
)
 
(791
)
 

Investment in subsidiary
249,010

 
10,055

 

 
(259,065
)
 

Other assets, net
9,948

 
379

 

 

 
10,327

TOTAL ASSETS
$
1,523,077

 
$
353,809

 
$
17,664

 
$
(261,094
)
 
$
1,633,456

LIABILITIES AND STOCKHOLDERS’
  EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued
  liabilities
$
132,360

 
$
30,630

 
$
4,635

 
$
(2,029
)
 
$
165,596

Current liability for pensions and
  other postretirement employee
  benefits
9,137

 

 

 

 
9,137

Total current liabilities
141,497

 
30,630

 
4,635

 
(2,029
)
 
174,733

Long-term debt
523,933

 

 

 

 
523,933

Liability for pensions and other
  postretirement employee benefits
204,163

 

 

 

 
204,163

Other long-term obligations
49,102

 
1,808

 

 

 
50,910

Accrued taxes
76,617

 
1,771

 
311

 

 
78,699

Deferred tax liabilities (assets)
(13,129
)
 
70,590

 
2,663

 

 
60,124

Accumulated other comprehensive loss,
  net of tax
(115,693
)
 

 

 

 
(115,693
)
Stockholders’ equity excluding
  accumulated other comprehensive loss
656,587

 
249,010

 
10,055

 
(259,065
)
 
656,587

TOTAL LIABILITIES AND
  STOCKHOLDERS’ EQUITY
$
1,523,077

 
$
353,809

 
$
17,664

 
$
(261,094
)
 
$
1,633,456



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Table of Contents

Clearwater Paper Corporation
Condensed Consolidating Statement of Cash Flows
Three Months Ended March 31, 2013
 
(In thousands)
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiary
 
Eliminations
 
Total
CASH FLOWS FROM OPERATING
  ACTIVITIES
 
 
 
 
 
 
 
 
 
Net (loss) earnings
$
(37
)
 
$
(328
)
 
$
134

 
$
(651
)
 
$
(882
)
Adjustments to reconcile net (loss) earnings to net
  cash provided by (used in) operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
13,784

 
7,814

 
553

 

 
22,151

Deferred tax (benefit) expense
(1,565
)
 
(11,700
)
 
(707
)
 
1,358

 
(12,614
)
Equity-based compensation expense
4,785

 

 

 

 
4,785

Employee benefit plans
2,693

 

 

 

 
2,693

Deferred issuance costs and discounts on
  long-term debt
3,544

 

 

 

 
3,544

Changes in working capital, net
(6,301
)
 
(2,629
)
 
(938
)
 

 
(9,868
)
Change in taxes receivable, net
7,181

 
2,291

 
(203
)
 
278

 
9,547

Excess tax benefits from equity-based
  payment arrangements

 

 

 

 

Change in non-current accrued taxes
(3,183
)
 
5

 
1

 

 
(3,177
)
Funding of qualified pension plans
(3,026
)
 

 

 

 
(3,026
)
Other, net
420

 
(59
)
 

 

 
361

Net cash provided by (used in) operating activities
18,295

 
(4,606
)
 
(1,160
)
 
985

 
13,514

CASH FLOWS FROM INVESTING
  ACTIVITIES
 
 
 
 
 
 
 
 
 
Change in short-term investments, net
(65,000
)
 

 

 

 
(65,000
)
Additions to plant and equipment
(16,575
)
 
(2,557
)
 
(339
)
 

 
(19,471
)
Net cash used for investing activities
(81,575
)
 
(2,557
)
 
(339
)
 

 
(84,471
)
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
(50,166
)
 

 

 

 
(50,166
)
Investment (to) from parent
(8,500
)
 
7,160

 
2,325

 
(985
)
 

Payment of long-term debt issuance costs
(4,723
)
 

 

 

 
(4,723
)
Payment of tax withholdings on equity-
  based payment arrangements
(2,195
)
 

 

 

 
(2,195
)
Net cash provided by financing activities
59,416

 
7,160

 
2,325

 
(985
)
 
67,916

(Decrease) increase in cash
(3,864
)
 
(3
)
 
826

 

 
(3,041
)
Cash at beginning of period
11,105

 
5

 
1,469

 

 
12,579

Cash at end of period
$
7,241

 
$
2

 
$
2,295

 
$

 
$
9,538


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Table of Contents

Clearwater Paper Corporation
Condensed Consolidating Statement of Cash Flows
Three Months Ended March 31, 2012
 
(In thousands)
Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor
Subsidiary
 
Eliminations
 
Total
CASH FLOWS FROM OPERATING
  ACTIVITIES
 
 
 
 
 
 
 
 
 
Net earnings
$
4,711

 
$
3,391

 
$
171

 
$
(4,547
)
 
$
3,726

Adjustments to reconcile net earnings to net
  cash provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
11,825

 
7,196

 
527

 

 
19,548

Deferred tax expense (benefit)
12,462

 
(565
)
 
(21
)
 

 
11,876

Equity-based compensation expense
1,080

 

 

 

 
1,080

Employee benefit plans
1,682

 

 

 

 
1,682

Deferred issuance costs and discounts on
  long-term debt
561

 

 

 

 
561

Disposal of plant and equipment, net
453

 

 

 

 
453

Changes in working capital, net
(10,842
)
 
26,405

 
209

 

 
15,772

Change in taxes receivable, net
(5,865
)
 
1,877

 
93

 
(613
)
 
(4,508
)
Excess tax benefit from equity-based
  payment arrangements
(2,145
)
 

 

 

 
(2,145
)
Change in non-current accrued taxes
3,643

 

 

 

 
3,643

Funding of qualified pension plans
(15,525
)
 

 

 

 
(15,525
)
Other, net
2,363

 
(83
)
 

 

 
2,280

Net cash provided by operating activities
4,403

 
38,221

 
979

 
(5,160
)
 
38,443

CASH FLOWS FROM INVESTING
  ACTIVITIES
 
 
 
 
 
 
 
 
 
Change in short-term investments, net
30,001

 

 

 

 
30,001

Additions to plant and equipment
(39,019
)
 
(2,502
)
 

 

 
(41,521
)
Net cash used for investing activities
(9,018
)
 
(2,502
)
 

 

 
(11,520
)
CASH FLOWS FROM FINANCING
  ACTIVITIES
 
 
 
 
 
 
 
 
 
Investment from (to) parent
29,768

 
(35,298
)
 
370

 
5,160

 

Payment of tax withholdings on equity-
  based payment arrangements
(12,963
)
 

 

 

 
(12,963
)
Excess tax benefit from equity-based
  payment arrangements
2,145

 

 

 

 
2,145

Net cash provided by (used for) financing
  activities
18,950

 
(35,298
)
 
370

 
5,160

 
(10,818
)
Increase in cash
14,335

 
421

 
1,349

 

 
16,105

Cash at beginning of period
2,146

 
4,359

 
1,934

 

 
8,439

Cash at end of period
16,481

 
4,780

 
3,283

 

 
24,544




19

Table of Contents

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 our stock repurchase program and accelerated stock buyback program, the costs and benefits associated with the closure of our Thomaston, Georgia facility, future growth opportunities, future revenues, cash flows, capital expenditures, tax rates, operating costs, manufacturing capability, liquidity, benefit plan funding levels, capitalized interest, interest expenses, and the tax treatment of the alternative fuels and cellulosic biofuels tax credits. 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 2012 Form 10-K, as well as the following:
difficulties with the optimization and realization of the benefits expected from our new through-air-dried, or TAD, paper machine and converting lines in Shelby, North Carolina;
the loss of business from a significant customer;
increased dependence on wood pulp;
changes in transportation costs and disruptions in transportation services;
manufacturing or operating disruptions, including 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 costs for and availability of packaging supplies, chemicals, energy and maintenance and repairs;
competitive pricing pressures for our products, including as a result of increased capacity as additional manufacturing facilities are operated by our competitors;
changes in customer product preferences and competitors' product offerings;
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;
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;
changes in expenses and required contributions associated with our pension plans;
cyclical industry conditions;
reliance on a limited number of third-party suppliers for raw materials;
labor disruptions;
inability to successfully implement our expansion strategies;
inability to fund our debt obligations;
restrictions on our business from debt covenants and terms; and
changes in laws, regulations or industry standards affecting our business.
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.

20

Table of Contents

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 15 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. Our products are made primarily from wood fiber pulp.
Recent Developments
Thomaston Closure
On March 6, 2013, we announced the planned permanent closure of our Thomaston, Georgia converting and distribution facility. The shutdown will occur gradually as converting lines are relocated and installed at our other facilities, with some operations continuing to run into the first quarter of 2014. We expect the total impact of exit related costs to be approximately $6 million to $7 million, of which approximately $4 million to $5 million is expected to be incurred in 2013. The exit costs are primarily attributable to the costs of relocating the converting lines, which will be expensed as incurred in the Condensed Consolidated Statement of Operations. The cost savings benefits resulting from the equipment relocation and converting facility optimization, which are part of the company's previously announced cost savings programs, are expected to be fully realized beginning in the fourth quarter of 2014. In the first quarter of 2013, we recorded $0.2 million of costs associated with this announcement.
Capital Allocation
On January 23, 2013, we issued $275 million aggregate principal amount of 4.5% senior notes, which we refer to as the 2013 Notes. Approximately $166 million of the net proceeds from the issuance was used to redeem all of our $150 million aggregate principal amount of 10.625% senior notes due 2016, which we refer to as the 2009 Notes.
In January 2013, we announced that our Board of Directors approved a common stock repurchase program authorizing the repurchase of up to $100 million of our common stock, to be funded by a portion of the proceeds from the issuance of the 2013 Notes. In connection with this program, on March 1, 2013, we entered into a $50 million accelerated stock buyback, or ASB, agreement with a major financial institution. See Note 1 to the Condensed Consolidated Financial Statements, under the subheading "Stockholders' Equity," for additional discussion of the ASB program.
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 primarily be 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 March 31,
(Dollars in thousands)
2013
 
2012
  
Cost
 
Percentage of
Cost of Sales
 
Cost
 
Percentage of
Cost of Sales
Purchased pulp
$
71,635

 
17.3
%
 
$
61,736

 
15.3
%
Chemicals
47,447

 
11.5

 
45,870

 
11.4

Transportation1
45,445

 
11.0

 
41,698

 
10.4

Chips, sawdust and logs
37,098

 
8.9

 
40,348

 
10.0

Energy
31,853

 
7.7

 
27,007

 
6.7

Packaging supplies
24,269

 
5.9

 
22,157

 
5.5

Maintenance and repairs2
22,962

 
5.5

 
35,149

 
8.7

Depreciation
19,750

 
4.7

 
17,240

 
4.2

 
$
300,459

 
72.5
%
 
$
291,205

 
72.2
%
 
 
 
 
 
 
 
 
1
Includes internal and external transportation costs.
2
Excluding related labor costs.

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Table of Contents

Purchased pulp. We purchase a significant amount of the pulp needed to supply our consumer products, and to a lesser extent our pulp and paperboard, manufacturing facilities from external suppliers. For the three months ended March 31, 2013, total purchased pulp costs were 17.3% of our cost of sales, representing an increase of 2.0 percentage points compared to the same period in 2012, due primarily to increased usage associated with the ramp up of our Shelby, North Carolina TAD paper machine and higher purchased pulp costs as a result of major maintenance downtime taken at our Arkansas pulp and paperboard facility.
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 slightly for the quarter ended March 31, 2013, compared to the same period in 2012, due primarily to the first full quarter of production on our North Carolina TAD paper machine, which resulted in higher chemical consumption.
Transportation. Fuel prices largely impact transportation costs related to 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 first quarter of 2013, compared to the first quarter of 2012, were higher as a result of increased external shipments and lower than normal inventory levels at our tissue production and converting facilities. The reduced inventory levels required multiple shifts in regional distributions for our tissue product lines, and as a result we incurred an overall increase of internal tons shipped.
Chips, sawdust and logs. We purchase chips, sawdust and logs used to manufacture pulp. We source these residual wood fibers under both long-term and short-term supply agreements, as well as in the spot market