2
0
1
8
A N N U A L R E P O R T
2018 Annual Stockholder Letter
Dear Stockholders,
Since Clearwater Paper became a standalone company over a decade ago, our core mission
has remained the same – to be a cost-efficient, agile, and valued provider to retail companies
and high-end packaged goods and commercial print sector suppliers.
In 2018, we generated $1.7 billion in net sales, adjusted EBITDA of $177 million, and cash flow
from operations of $169 million. Our results are a testament to the hard work of our exceptional
team operating in an industry that is undergoing tremendous change, particularly in the
tissue business. Despite significant challenges, we accomplished major milestones on the
strategic priorities established for 2018:
Implemented a regional operating model in our Consumer Products business, which is
beginning to produce results by taking millions of miles off the road and reducing external
warehousing costs;
Accelerated the start-up of converting lines in Shelby, North Carolina, which has reduced
transportation costs;
Sold our recycled tissue mill in Ladysmith, Wisconsin, to focus on producing premium and
ultra-quality tissue for the retail market; and
Realized $10 million in annual run-rate benefit in 2018, and we continue to work towards
realizing the full benefits from, our continuous pulp digester at our mill in Lewiston, Idaho.
Additionally, we
Achieved an annual run-rate of $20 million of annual savings from restructuring our sales,
general, and administrative areas;
Negotiated our debt covenants to provide the flexibility needed to execute on our strategic
priorities; and
Won industry awards for energy efficiencies, greenhouse gas reductions, and
environmental stewardship.
Looking ahead, we expect that 2019 will be a year of transition. As we manage through
headwinds in the consumer business, we are looking to capitalize on our strategic investments
to reduce costs and ramp tissue production at our Shelby mill. We continue to believe in the
long-term industry fundamentals in both the tissue and paperboard businesses.
I look forward to sharing our progress with you throughout 2019 and beyond, as we work to
build a stronger company for our employees, produce high quality products for our customers,
enrich the communities in which we operate, and create value for our stockholders.
Sincerely,
Linda K. Massman
President and CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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
(State or other jurisdiction of incorporation or organization)
20-3594554
(IRS Employer Identification No.)
601 W. Riverside Avenue, Suite 1100
Spokane, Washington
(Address of principal executive offices)
99201
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Registrant’s telephone number, including area code: (509) 344-5900
TITLE OF EACH CLASS
Common Stock ($0.0001 par value per share)
NAME OF EACH EXCHANGE ON WHICH REGISTERED
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
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
Yes
been subject to such filing requirements for the past 90 days.
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
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,” “smaller reporting company” and "emerging growth company"
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
As of June 30, 2018 (the last business day of the registrant’s most recently completed second quarter), the aggregate market value of the
common stock held by non-affiliates of the registrant was $373.9 million. Shares of common stock beneficially held by each officer and
director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 11, 2019, 16,515,156 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed on or about April 2, 2019, with the Securities and Exchange Commission in connection
with the registrant’s 2019 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.
CLEARWATER PAPER CORPORATION
Index to 2018 Form 10-K
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures About Market Risks
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
ITEM 15.
ITEM 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
SIGNATURES
PAGE
NUMBER
2-8
9-18
19
20
21
21
22
22
23-41
42
43-90
91
91-92
92
93
93
94
94
94
95-99
100
101
Part I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
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
production quality and quantity, costs and timing associated with the expansion of our Shelby, North Carolina facility;
our strengths and related benefits; our strategy; pulp production and the continuous digester at our Idaho facility;
competitive market conditions, raw materials and input usage and costs, including energy costs and usage; sellling,
general and administrative cost reduction benefits; strategic projects and related costs and benefits; energy
conservation; cash flows; capital expenditures; return on investment from capital projects; tax rates; operating costs;
selling, general and administrative expenses; timing of and costs related to major maintenance and repairs; liquidity;
benefit plan funding levels; capitalized interest; and interest expenses. 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 in operating results include those risks discussed in Item 1A of this report,
as well as the following:
•
•
•
•
•
•
•
•
•
•
•
competitive pricing pressures for our products, including as a result of increased capacity as additional
manufacturing facilities are operated by our competitors;
the loss of, changes in prices in regard to, or reduction in, orders from a significant customer;
changes in customer product preferences and competitors' product offerings;
our ability to complete construction of our new tissue manufacturing operations in Shelby, North Carolina on
time and within current cost expectations;
customer acceptance and timing and quantity of purchases of our tissue products, including the existence
of sufficient demand for and the quality of tissue produced by our expanded Shelby, North Carolina
operations when they are completed;
consolidation and vertical integration of converting operations in the paperboard industry;
our ability to successfully implement our operational efficiencies and cost savings strategies, along with
related capital projects, and achieve the expected operational or financial results of those projects,
including from the continuous digester at our Lewiston, Idaho facility;
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 the U.S. and international economies and in general economic conditions in the regions and
industries in which we operate;
• manufacturing or operating disruptions, including IT system and IT system implementation failures,
•
•
•
•
equipment malfunctions and damage to our manufacturing facilities;
changes in costs for and availability of packaging supplies, chemicals, energy and maintenance and
repairs;
larger competitors having operational and other advantages;
cyclical industry conditions;
changes in expenses, required contributions and potential withdrawal costs associated with our pension
plans;
environmental liabilities or expenditures;
cyber-security risks;
reliance on a limited number of third-party suppliers for raw materials;
our ability to attract, motivate, train and retain qualified and key personnel;
•
•
•
•
• material weaknesses in our internal control over financial reporting;
•
•
•
our substantial indebtedness and ability to service 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. You are advised, however,
to consult any further disclosures we make on related subjects in our quarterly reports on Form 10-Q and current
reports on Form 8-K filed with the Securities and Exchange Commission, or SEC.
1
ITEM 1.
Business
GENERAL
Clearwater Paper manufactures quality consumer tissue, away-from-home (or AFH) tissue, parent roll tissue, bleached
paperboard and pulp at manufacturing facilities across the nation. The Company is a premier supplier of private label
tissue to major retailers and wholesale distributors, including grocery, drug, mass merchants and discount stores. In
addition, the company produces bleached paperboard used by quality-conscious printers and packaging converters,
and offers services that include custom sheeting, slitting and cutting. Clearwater Paper's employees build shareholder
value by developing strong customer relationships through quality and service.
On December 16, 2016, we acquired Manchester Industries, or Manchester, an independently-owned paperboard
sales, sheeting and distribution supplier to the packaging and commercial print industries. The addition of Manchester's
customers to our paperboard business extended our reach and service platform to small and mid-sized folding carton
plants, as we now offer a range of converting services that include custom sheeting, slitting and cutting. These converting
operations include five strategically located facilities in Virginia, Pennsylvania, Indiana, Texas and Michigan.
On March 31, 2017, we permanently closed our Oklahoma City, Oklahoma converting facility.
On August 21, 2018, we completed the sale of our Ladysmith, Wisconsin tissue manufacturing facility to a private
buyer.
Company Strengths
Leading private label tissue manufacturer with a broad U.S. footprint. Our Consumer Products business is a premier
private label tissue manufacturer. We have through-air-dried, or TAD, tissue manufacturing facilities in Shelby, North
Carolina and Las Vegas, Nevada, and non-TAD manufacturing facilities located in Lewiston, Idaho and Neenah,
Wisconsin, as well as converting operations strategically located across the United States. In addition, in 2019 we
expect to complete construction of a new NTT machine at our Shelby facility that will produce a variety of high-quality
ultra-premium and premium bath, paper towel and napkin products. We believe we were the seventh largest tissue
manufacturer in the North American tissue market as of December 31, 2018, based on tissue parent roll capacity. Our
broad manufacturing footprint allows us to service a diverse customer base, on a cost effective basis, including major
grocery store chains and retailers across the U.S.
High quality brand-equivalent tissue and other products to meet retailers' private label strategies. Our Consumer
Products business produces high-quality products that match the quality of the leading national brands. We focus on
high value tissue products across a wide variety of categories and retail channels. We also manufacture a broad range
of cost-competitive consumer tissue products, as well as recycled tissue and tissue parent rolls.
High quality premium bleached paperboard products. Our Pulp and Paperboard business produces premium
paperboard products with ultra-smooth print surfaces, superior cleanliness, and excellent forming and sealing
characteristics. Products are available in several thicknesses to provide the level of rigidity and strength needed for a
wide range of applications. The high quality of our paperboard allows buyers to use our products for packaging where
branding and quality are critical, such as ice cream containers, drink cups, health and beauty packaging, pharmaceutical
packaging, and point of purchase displays.
Long-standing customer relationships. Our Consumer Products business supplies private label tissue products to
several of the largest national retail chains. Our top 10 Consumer Products customers in 2018 accounted for
approximately 80% of our total consumer products net sales. The average tenure of these customer relationships was
approximately 12 years. Our Consumer Products business served 69 customers in 2018 across a broad geographic
area. We also have long-standing customer relationships with our paperboard customers. Our top 10 paperboard
customers in 2018 accounted for approximately 40% of our total paperboard net sales. The average tenure of these
customer relationships was approximately 30 years.
Strategically positioned Pulp and Paperboard facilities. Our Pulp and Paperboard mill in Lewiston, Idaho is one of only
two solid bleach sulfate, or SBS, paperboard mills, and the only coated SBS paperboard mill, in the Western U.S. to
offer a full range of specialized products to meet the needs of customers for traditional folding carton, plates, cups and
liquid packaging products. This facility's geographic location reduces transportation costs to customers in North America
as well as Asia, which allows us to compete on a cost-advantaged basis relative to East Coast producers. Our Cypress
Bend, Arkansas mill is centrally located, which reduces transportation costs to the Midwestern and Eastern U.S. and
complements the Lewiston mill in shipping to customers nationwide.
2
Largely integrated pulp and tissue operations. Our Consumer Products business sources a significant portion of its
pulp supply internally from our pulp and paperboard operations in Idaho. This relationship provides our Consumer
Products business with a secure pulp supply as well as significant transportation and drying cost savings, provides
our pulp and paperboard business with a steady demand source and helps mitigate input cost volatility associated
with purchasing external pulp.
Strategy
Our long-term strategy is to expand our business to meet the needs of our customers and optimize the profitability of
both our consumer products business and our paperboard business. In the near-term, our focus is on successfully
completing strategic capital projects, optimizing the operating efficiency and cost effectiveness of both segments of
our company and reducing debt.
ORGANIZATION
Our businesses are organized into two operating segments: Consumer Products and Pulp and Paperboard. Additional
information relating to the amounts of net sales, operating income, depreciation and amortization, identifiable assets
and capital expenditures attributable to each of our operating segments for 2016-2018, as well as geographic information
regarding our net sales, is set forth in Note 19, "Segment Information" to our consolidated financial statements included
under Part II, Item 8 of this report.
Consumer Products Segment
Our Consumer Products segment manufactures and sells a complete line of at-home tissue products as well as AFH
products. Our integrated manufacturing and converting operations and geographic footprint enable us to deliver a
broad range of cost-competitive products with brand equivalent quality to our customers. In 2018, our Consumer
Products segment had net sales of $884.8 million. A listing of our Consumer Products segment facilities is included
under Part I, Item 2 of this report.
Tissue Industry Overview
The U.S. tissue market can be divided into two market segments: the at-home or consumer retail purchase segment,
which represented approximately two-thirds of our U.S. tissue sales in 2018; and the AFH segment, which represents
the remaining one-third of U.S. tissue market sales and includes tissue for locations such as restaurants, hotels and
office buildings.
The U.S. at-home tissue segment consists of bath, paper towels, facial and napkin products categories. Each category
is further distinguished according to quality segments: ultra, premium, value and economy. As a result of manufacturing
process improvements and consumer preferences, the majority of at-home tissue sold in the U.S. is ultra and premium
quality.
At-home tissue producers are comprised of companies that manufacture branded tissue products, private label tissue
products, or both. Branded tissue suppliers manufacture, market and sell tissue products under their own nationally
branded labels. Private label tissue producers manufacture tissue products for retailers to sell as their store brand.
In the U.S., at-home tissue is primarily sold through grocery stores, mass merchants, warehouse clubs, drug stores
and discount dollar stores. Tissue has historically been one of the strongest segments of the paper industry due to its
steady demand growth largely due to population growth in the U.S., that occur in a number of other paper industry
segments. In addition to economic and demographic drivers, tissue demand is affected by product innovations and
shifts in distribution channels.
Our Consumer Products Business
We believe that we are the only U.S. consumer tissue manufacturer that solely produces a full line of quality private
label tissue products for large retail trade channels. Most U.S. tissue producers manufacture only branded products,
or both branded and private label products, or in the case of certain smaller or midsize manufacturers, only produce
a limited range of tissue products or quality segments. Because we do not mass produce and market branded tissue
products, we believe we are able to offer products that match the quality of leading national brands, but generally at
lower prices. We utilize independent companies to routinely test our product quality.
3
In bathroom tissue, the majority of our sales are high quality two-ply ultra and premium products. In paper towels, we
produce and sell ultra quality towels as well as premium and value towels. In the facial category, we sell ultra-lotion
three-ply and a complete line of two-ply premium products, as well as value facial tissue. In napkins, we manufacture
ultra two- and three-ply dinner napkins, as well as premium and value one-ply luncheon napkins. Value grade products
utilizing recycled fiber are also produced for customers who wish to further diversify their product portfolio. We compete
primarily in the at-home portion of the U.S. tissue market, which made up approximately 90% of our Consumer Products
segment sales in 2018.
We manufacture and sell a line of AFH products to customers with commercial and industrial tissue needs. Products
include conventional one- and two-ply bath tissue, two-ply paper towels, hard wound towels and dispenser napkins.
As of December 31, 2018, our consumer products were manufactured on 8 paper machines at four facilities located
throughout the U.S. Parent rolls from our paper machines are then converted and packaged at our converting facilities
located across the U.S. Two of our paper machines, located in Las Vegas, Nevada and Shelby, North Carolina, produce
TAD tissue that we convert into national brand comparable, ultra quality towels and bath tissue. Our new paper machine
in Shelby, which we expect to be completed in early 2019 and will be fully operational in 2020, will provide national
brand comparable ultra-premium and premium quality towels and bath tissue.
We had one customer in the Consumer Products segment, the Kroger Company, that accounted for approximately
11.1% of our total consolidated net sales in 2018, approximately 15.3%, of our total consolidated net sales in 2017,
and approximately 13.4%, of our total company net sales in 2016.
We sell private label tissue products through our own sales force and compete based on product quality, customer
service and price. We deliver customer-focused business solutions by assisting in managing product assortment,
category management, and pricing and promotion optimization.
Pulp and Paperboard Segment
Our Pulp and Paperboard segment manufactures and markets bleached paperboard for the high-end segment of the
packaging industry and is a leading producer of SBS paperboard. It also offers services that include custom sheeting,
slitting and cutting of paperboard. This segment also produces hardwood and softwood pulp, which is primarily used
as the basis for our paperboard products, and slush pulp, which supplies to our Consumer Products segment. In 2018,
our Pulp and Paperboard segment had net sales of $839.4 million. A listing of our Pulp and Paperboard segment
facilities is included under Part I, Item 2 of this report.
Pulp and Paperboard Industry Overview
SBS paperboard is a premium paperboard grade that is most frequently used to produce folding cartons, liquid
packaging, cups and plates, blister and carded packaging, top sheet, and commercial printing items. SBS paperboard
is used for such products because it is manufactured using virgin fiber combined with the kraft bleaching process,
which results in superior cleanliness, brightness and consistency. SBS paperboard is often manufactured with a clay
coating to provide superior surface printing qualities. We also have the capability to produce targeted grades with a
percentage of post-consumer furnish. SBS paperboard can also be extrusion coated with a barrier film to provide
moisture protection for some uses.
In general, the process of making paperboard begins by chemically cooking wood fibers to make pulp. The pulp is
bleached to provide a white, bright pulp, which is formed into paperboard. Bleached pulp that is to be used as market
pulp is dried and baled on a pulp drying machine, bypassing the paperboard machines. The various grades of
paperboard are wound into rolls for converting to final end users. Liquid packaging and cup stock grades are often
coated with polyethylene, a plastic coating, in a separate operation to create a resistant and durable liquid barrier.
Folding Carton Category. Folding carton is the largest portion of the SBS category of the U.S. paperboard industry,
comprising approximately 40% of the category in 2018. Within the folding carton segment there are varying qualities
of SBS paperboard. The high end of the folding carton category in general requires a premium print surface and
includes uses such as packaging for pharmaceuticals, cosmetics and other premium retail goods. SBS paperboard is
also used in the packaging of frozen foods, beverages and baked goods.
Liquid Packaging and Cup Category. SBS liquid packaging paperboard is primarily used in the U.S. for the packaging
of juices. In Japan and other Asian countries, SBS liquid packaging paperboard is primarily used for the packaging of
milk and a wide range of consumable liquids, including alcoholic beverages. The cup segment of the market consists
primarily of hot and cold drink cups and food packaging. The hot and cold cups are primarily used to serve beverages
in quick-service restaurants, while round food containers are often used for packaging premium ice-cream, hot noodle
and dry food products.
4
Commercial Printing Category. Commercial printing applications use bleached bristols, which are heavyweight paper
grades, to produce postcards, signage and promotional literature. Bristols can be clay coated on one side or both sides
for applications such as brochures, presentation folders and paperback book covers. Customers in this segment are
accustomed to high-quality paper grades, which possess superior printability and brightness compared to most
paperboard packaging grades. Suppliers to this segment must be able to deliver small volumes, often within 24 hours.
Market Pulp. The majority of the pulp manufactured worldwide is used in paper and paperboard production, usually
at the same mill location. In those cases where a paper mill is not paired with pulp production operations or requires
pulp with different production qualities, it must purchase pulp on the open market. Market pulp is defined as pulp
produced for sale to these customers and it excludes tonnage consumed by the producing mill or shipped to any of
its affiliated mills within the same company.
Our Pulp and Paperboard Business
Our Pulp and Paperboard segment operates pulp and paperboard facilities in Idaho, which has two paperboard
machines, and Arkansas, which has one paperboard machine. As of December 31, 2018, we were one of the four
largest producers of bleached paperboard in North America with approximately 14% of the available production capacity.
Additionally, we provide custom sheeting, slitting, and cutting of paperboard products from five converting facilities.
Our overall pulp and paperboard production consists primarily of folding carton, liquid packaging, cup and plate products,
blister and carded packaging, top sheet, commercial printing grades and hardwood and softwood pulp.
Folding carton board used in pharmaceuticals, cosmetics and other premium packaging, such as those that incorporate
foil and holographic lamination, accounts for the largest portion of our total paperboard sales. We focus on high-end
folding carton applications where the heightened product quality requirements provide for differentiation among
suppliers, generally resulting in margins that are more attractive than less demanding packaging applications.
Our liquid packaging paperboard is known for its cleanliness and printability, and is engineered for long-lived
performance due to its three-ply, softwood construction. Our reputation for producing liquid packaging meeting the
most demanding standards for paperboard quality and cleanliness has resulted in meaningful sales in Japan, where
consumers have a particular tendency to associate blemish-free, vibrant packaging with the cleanliness, quality and
freshness of the liquids contained inside.
We also sell cup stock and plate stock grades for use in standard food service products.
With the exception of our capability to supply just-in-time sheeting and narrow rolls, we do not produce converted
paperboard end-products, so we are not simultaneously a supplier of and a competitor to our customers in key market
segments, notably folding carton and cup. Of the five largest SBS paperboard producers in the U.S., we are the only
producer that does not convert SBS paperboard into folding cartons, cups, plates, or liquid packaging end-use products.
We position our independent status to attract a diverse group of loyal customers because when there is increased
market demand for paperboard, we do not divert our production to internal uses.
We can convert paperboard parent rolls to flat sheets and narrow rolls, which expands our in-market service capabilities
and allows us to support small and mid-sized folding carton converters that buy sheeted paperboard to convert into
packaging end-products. Providing a service platform in this way expands the key folding carton segment of our
business and does not compete with our customers in other key market segments.
At our Idaho facility we produce bleached softwood pulp primarily for internal use, including in our Consumer Products
segment.
With the recent installation of a continuous pulp digester at our Idaho facility, our pulp mills are capable of producing
approximately 904,000 tons of pulp on an annual basis. We completed the continuous pulp digester installation at our
Idaho facility at the end of the third quarter of 2017. In 2018, we produced approximately 838,000 tons of pulp in the
aggregate and utilized approximately 81% of that production, or approximately 680,000 tons, to produce approximately
810,000 tons of paperboard. The increase in tonnage from pulp to paperboard production is due to the addition of
coatings and other manufacturing processes. We also used approximately 19% of our pulp production, or approximately
156,000 tons, in our Consumer Products segment to produce tissue products. The remaining pulp production of less
than 1%, or approximately 2,000 tons, was sold externally by our Consumer Products segment.
We utilize various methods for the sale and distribution of our paperboard and softwood pulp. The majority of our
paperboard is sold to packaging converters domestically through sales managers located throughout the U.S., with a
smaller percentage channeled through distribution to commercial printers. Additionally, we directly sell sheeted
paperboard products to folding carton converters, merchants and commercial printers. The majority of our international
paperboard sales are conducted through sales agents and are primarily denominated in U.S. dollars. Our principal
methods of competing are product quality, customer service and price.
5
RAW MATERIALS AND INPUT COSTS
For our manufacturing operations, the principal raw material used is wood fiber, which consists of purchased pulp and
chips, sawdust and logs. In 2018, our Consumer Products segment sourced approximately 51% of its total pulp supply
internally, with the remainder purchased from external suppliers. We own and operate a wood chipping facility located
in Clarkston, Washington, near our Lewiston, Idaho, facility, which we believe bolsters our wood fiber position and
provides short-term and long-term cost savings.
We utilize a significant amount of chemicals in the production of pulp and paper, including caustic, polyethylene, starch,
sodium chlorate, latex and specialty process paper chemicals. A portion of the chemicals used in our manufacturing
processes, particularly in the pulp-making process, are petroleum-based or are impacted by petroleum prices.
Transportation is a significant cost input for our business. Fuel prices, mileage driven and line-haul rates impact our
transportation costs for delivery of raw materials to our manufacturing facilities, internal inventory transfers and delivery
of our finished products to customers.
We consume substantial amounts of energy, such as electricity, hog fuel, steam and natural gas. We purchase a
significant portion of our natural gas and electricity under supply contracts, most of which are between a specific facility
and a specific local provider. Under most of these contracts, the providers have agreed to provide us with our
requirements for a particular type of energy at a specific facility. Most of these contracts have pricing mechanisms that
adjust or set prices based on current market prices. In addition, we use firm-price contracts to mitigate price risk for
certain of our energy requirements.
As a significant producer of private label consumer tissue products, we also incur expenses related to packaging
supplies used for retail chains, wholesalers and cooperative buying organizations.
Our maintenance and repairs are expensed as incurred. We perform routine maintenance on our machines and
equipment and periodically replace a variety of parts such as motors, pumps, pipes and electrical parts.
We also record depreciation expense associated with our plant and equipment.
Further information regarding our raw material and input costs is included under "Operating Costs" within Part II, Item
7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report.
SEASONALITY
Our Consumer Products segment experiences a decrease in shipments during the fourth quarter generally as a result
of decreased consumer demand, retail brand holiday promotions, and end of year inventory management by non-
retail customers. In addition, customer buying patterns for our paperboard generally result in lower sales for certain
grades of our Pulp and Paperboard segment during the first and fourth quarters, when compared to the second and
third quarters of a given year.
ENVIRONMENTAL
Information regarding environmental matters is included under Part II, Item 7 “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” of this report, and is incorporated herein by reference.
WEBSITE
Interested parties may access our periodic and current reports filed with the SEC, at no charge, by visiting our website,
www.clearwaterpaper.com. In the menu select “Investor Relations,” then select “Financial Information & SEC Filings.”
Information on our website is not part of this report.
EMPLOYEES
As of December 31, 2018, we had approximately 3,130 employees, of which approximately 1,750 were employed by
our Consumer Products segment, approximately 1,230 were employed by our Pulp and Paperboard segment, and
approximately 150 were corporate administration employees. This workforce consisted of approximately 710 salaried
employees and approximately 2,420 hourly and fixed rate employees. As of December 31, 2018, approximately 48%
of our workforce was covered under collective bargaining agreements.
6
Unions represent hourly employees at three of our manufacturing sites. We had three hourly union labor contracts
that expired in 2017 and 2018 and are currently being renegotiated:
CONTRACT
EXPIRATION
DATE
August 31, 2017 Consumer Products Division & Pulp &
Paperboard Division -
Lewiston, Idaho
DIVISION AND LOCATION
August 31, 2017 Consumer Products Division & Pulp &
Paperboard Division -
Lewiston, Idaho
Pulp & Paperboard Division -
Lewiston, Idaho,
No. 4 Power Boiler Unit
May 31, 2018
UNION
United Steel Workers (USW)
International Brotherhood of
Electrical Workers (IBEW)
International Association of
Machinists (IAM)
APPROXIMATE
NUMBER OF HOURLY
EMPLOYEES
855
60
30
The following hourly union labor contract expires in 2019:
CONTRACT
EXPIRATION
DATE
July 31, 2019
DIVISION AND LOCATION
Pulp & Paperboard Division -
Cypress Bend, Arkansas
UNION
United Steel Workers (USW)
APPROXIMATE
NUMBER OF HOURLY
EMPLOYEES
260
7
EXECUTIVE OFFICERS OF THE REGISTRANT
The following individuals are deemed our “executive officers” under the Securities Exchange Act of 1934 as of December
31, 2018. Executive officers of the company are generally appointed as such at the annual meeting of our board, and
each officer holds office until the officer’s successor is duly elected and qualified or until the earlier of the officer’s
death, resignation, retirement, removal by the board or as otherwise provided in our bylaws. There are no arrangements
or understandings between any of our executive officers and any other persons pursuant to which they were selected
as officers. No family relationships exist among any of our executive officers.
Linda K. Massman (age 52), has served as President and Chief Executive Officer, as well as a director, since January
2013. Ms. Massman served as President and COO from November 2011 to December 2012. She served as CFO and
Senior Vice President, Finance from May 2011 to November 2011, and as CFO and Vice President, Finance from
December 2008 to May 2011. From September 2008 to December 2008, Ms. Massman served as Vice President of
Potlatch Corporation pending completion of the spin-off of Clearwater Paper Corporation. From May 2002 to August
2008, Ms. Massman was Group Vice President, Finance and Corporate Planning, for SUPERVALU Inc., a grocery
retail company. In 2017, Ms. Massman served in the position of board chair for the American Forest & Paper Association
(AF&PA), the national trade association of the forest products industry. Ms. Massman has served as a director of
TreeHouse Foods, Inc. (NYSE:THS) since July 2016 and is a member of its Audit Committee. She served as a member
of their Nominating and Governance Committee from 2016 to 2018. Ms. Massman also served as a director of Black
Hills Corporation (NYSE: BKH), an energy company, from January 2015 to July 2018 and was a member of its
Compensation Committee.
John D. Hertz (age 52) joined the company in June 2012 as Senior Vice President, and has served as Senior Vice
President, Finance and Chief Financial Officer since August 2012. From June 2010 to June 2012, Mr. Hertz was the
Vice President and Chief Financial Officer of Novellus Systems, Inc. From October 2007 to June 2010, he served as
Novellus' Vice President of Corporate Finance and Principal Accounting Officer and as Vice President and Corporate
Controller from June 2007 to October 2007. From 2000 to 2007, Mr. Hertz worked for Intel Corporation where he held
a number of positions, including Central Finance Controller of the Digital Enterprise Group, Finance Controller of the
Enterprise Platform Services Division and Accounting Policy Controller. Prior to that, Mr. Hertz was a Senior Manager
with KPMG LLP.
Steve M. Bowden (age 55) has served as Senior Vice President, General Manager, Pulp and Paperboard Division
since October 1, 2018. Prior to joining the company, from September 2016 to November 2017, Mr. Bowden was the
North American Region Vice President - Labels for Constantia Fleibles, which was subsequently acquired by the Multi-
Color Corporation at which he served as President, North America Food and Beverage Division from November 2017
to September 2018. From March 2013 to September 2016, Mr. Bowden was President and COO of Quality Associates,
a contract packager. From March 2010 to September 2013, Mr. Bowden was the Executive Vice President, Marketing
and Strategy of xpedx, a division of International Paper focused on the print, packaging, and facility supplies product
segments. Mr. Bowden worked for International Paper for more than twenty-six years, including in sales management
and as a manager of a coated paperboard mill.
Michael S. Gadd (age 54) has served as Senior Vice President since May 2011 and General Counsel and Corporate
Secretary since December 2008. He served as Vice President from December 2008 to May 2011. From March 2006
to December 2008, Mr. Gadd served as Associate General Counsel of Potlatch Corporation, and served as Corporate
Secretary of Potlatch from July 2007 to December 2008. From January 2001 to January 2006, Mr. Gadd was an
attorney with Perkins Coie, LLP in Portland, Oregon.
Arsen S. Kitch (age 37) has served as Senior Vice President, General Manager, Consumer Products Division since
May 2018 and served as Vice President, General Manager, Consumer Products Division from January 2018 to May
2018. He served as Vice President, Finance from January 2015 through December 2017, and served as Senior Director,
Strategy and Planning from August 2013 through December 2014. Mr. Kitch was with Nestlé, a food manufacturer,
from 2011 to 2013 including as a Finance Director in his final position.
Kari G. Moyes (age 51) has served as Senior Vice President, Human Resources since February 2015, and served as
Vice President, Labor Relations from July 2013 through January 2015. From November 2010 through June 2013, Ms.
Moyes served as National Director of Human Resources for Nestlé. Prior to her tenure with Nestle, Ms. Moyes spent
10 years with Pepsico in various capacities.
8
ITEM 1A.
Risk Factors
Our business, financial condition, results of operations and liquidity are subject to various risks and uncertainties,
including those described below, and as a result, the trading price of our common stock could decline.
Increases in tissue supply, particularly in the premium and ultra categories, could adversely affect our
operating results and financial condition.
Over the past few years, several new or refurbished premium and ultra-quality tissue paper machines have been
completed or announced by us and by our competitors, including private label competitors, which will result in a
substantial increase in the supply of premium and ultra-quality tissue in the North American market. Additionally, several
new or refurbished conventional tissue machines have been installed or announced, including as a result of foreign
competitors increasing their presence and operations in North America. We believe that increasing tissue capacity,
together with intensifying competition experienced by our retail customers, has made it difficult for us to pass through
to our customers the significant increases in input costs we have experienced in the last several years. If demand for
tissue products in the North American market does not increase or consumer purchasing of premium and ultra-quality
tissue do not increase commensurate with the increased capacity, the increase in supply of ultra-quality tissue products
could have a material adverse affect on the price of premium and ultra-quality tissue products. In addition, increased
supply of premium and ultra-quality tissue may adversely affect the market prices for such tissue and result in the
displacement of demand for conventional tissue, which could adversely affect the market price for conventional tissue
products, which will continue to represent a significant portion of our total production for the foreseeable future.
The loss of, or a significant reduction in, orders from, or changes in prices in regards to, any of our large
customers could adversely affect our operating results and financial condition.
We derive a substantial amount of revenues from a concentrated group of customers. For example, our top 10 consumer
products customers in 2018 accounted for approximately 80% of our total consumer products net sales. We have
experienced increased price and promotion competition in our consumer products business, particularly in regards to
ultra-quality products, and this competition has decreased our gross margins and adversely affected our financial
condition. Our paperboard sales are also concentrated, with the top 10 paperboard customers in 2018 accounting for
approximately 40% of our total paperboard net sales. If we lose any of these customers or a substantial portion of their
business or if the terms of our relationship with any of them becomes less favorable to us, our net sales would decline,
which would harm our results of operations and financial condition. Some of our customers have the capability to
produce the parent rolls or products that they purchase from us.
We generally do not have long-term contracts with many of our customers that ensure a continuing level of business
from them. In addition, our agreements with our customers, including our largest customers, are not exclusive and
generally do not contain minimum volume purchase commitments. Our relationship with our largest and most important
customers will depend on our ability to continue to meet their needs for quality products and services at competitive
prices. If we lose one or more of these customers or if we experience a significant decline in the level of purchases
by any of them, we may not be able to quickly replace the lost business volume and our operating results and business
could be harmed. In the third quarter of 2017, our largest tissue customer made the decision to go from a single source
model to a multi-source model for its private label tissue supply beginning in the first quarter of 2018, which significantly
affected sales volumes for our conventional tissue in 2018.
Competitors' branded products and private label products could have an adverse effect on our financial results.
Our consumer products compete with well-known, branded products, as well as other private label products. Our
business may be harmed by new product offerings by competitors, the effects of consolidation within retailer and
distribution channels, and price competition from companies that may have greater financial resources than we do. If
we are unable to offer our existing customers, or new customers, tissue products comparable to branded products or
other companies' private label products in terms of quality, customer service, and/or price, we may lose business or
we may not be able to grow our existing business and be forced to sell lower-margin products, all of which could
negatively affect our financial condition and results of operations.
Changing retail purchasing patterns have increased the need to increase operating efficiencies and diversify
our customer base and sales channels.
We have historically sold a majority of our consumer tissue products through retail grocery stores. These and other
traditional retail outlets are facing increasingly intense competition from supercenters, club stores, wholesale grocers,
and drug, dollar, variety and specialty stores, as well as competitors who have incorporated the internet as a direct-
9
to-consumer channel and internet-only providers that sell tissue and other grocery products. The intense competition
faced by our customers has resulted in increased efforts by them to reduce costs from suppliers like us and requires
that we become more cost efficient in order to maintain our market share and profitability. The changing retail landscape
also requires that we develop and maintain relationships with a wider variety of retailers and retail channels to succeed
in this dynamic environment.
The expansion of our business through the construction of new tissue making and converting facilities may
not proceed as anticipated.
In connection with our long-term expansion strategy, we are adding a paper machine capable of producing certain
premium and ultra-premium quality tissue products, and have added converting facilities to our Shelby, North Carolina
site. The tissue machine being installed in North Carolina is highly complex and costly and it can be manufactured by
only one company in the world. Installing this machine and building the supporting facilities entails numerous risks,
including difficulties in completing the project on time due to construction or permitting issues, cost overruns, difficulties
in integrating the new operations and personnel, and uncertainties regarding the existence of sufficient customer
demand and acceptance of the quality of the tissue produced once the new paper machine becomes operational. Any
of these risks, if realized, could have a material adverse effect on our business, financial condition, results of operations
and liquidity. In addition, such events could also divert management’s attention from other business concerns. We did
experience significant cost overruns for the Shelby expansion in 2018.
Consolidation in the North American paperboard and converting industry may adversely affect our business.
The ongoing consolidation of paperboard and paperboard converting businesses, including through the acquisition
and integration of such converting businesses by larger competitors of ours, could result in a loss of customers and
sales in our pulp and paperboard business. A loss of paperboard customers or sales as a result of consolidations and
integrations could have a material adverse effect on our business, financial condition, results of operations and cash
flows.
Our operational efficiency optimization and cost-saving goals may not be fully achieved or may not support
the level of investment or commitment we are making.
Our near term strategy of improving our competitive position by investing to achieve increased operational efficiencies
and implementing cost control measures may not be fully achieved. Those goals, along with the capital projects we
have invested in or are investing in to help achieve these goals, including the recently installed continuous digester at
our Lewiston facility and warehouse automation at several facilities, may not achieve expected operational or financial
results in the time frames we anticipate, or at all. Such delays or failures could materially affect our business, cash
flows and financial condition. The continuous digester in Lewiston is currently delivering significantly less in expected
financial benefits and we continue to work to achieve the expected operational and financial benefits of the digester
project.
Our business and financial performance may be harmed by future labor disruptions.
As of December 31, 2018, approximately 48% of our full-time employees were represented by unions under collective
bargaining agreements. As these agreements expire, we may not be able to negotiate extensions or replacement
agreements on terms acceptable to us. In 2018 and 2017, collective bargaining agreements for hourly employees at
our Lewiston, Idaho facility, which affects approximately 945 employees, expired and are currently being re-negotiated.
Any failure to reach an agreement with one of the unions may result in strikes, lockouts, work slowdowns, stoppages
or other labor actions, any of which could have a material adverse effect on our operations and financial results.
We depend on external sources of wood pulp and wood fiber for a significant portion of our tissue production,
which subjects our business and results of operations to potentially significant fluctuations in the price of
market pulp and wood fiber.
Our Consumer Products segment sources a significant portion of its wood pulp requirements from external suppliers,
which exposes us to price fluctuation. In 2018, we sourced approximately 49% of our pulp requirements for tissue
manufacturing externally, comprising approximately 10.9% of our consolidated net sales.
Pulp prices can, and have, changed significantly from one period to the next. The volatility of pulp prices can adversely
affect our earnings if we are unable to pass cost increases on to our customers or if the timing of any price increases
for our products significantly trails the increases in pulp prices. In 2018, we were largely unable to pass on these pulp
price increases to our customers due to competitive conditions in the consumer tissue industry.
10
Wood fiber is the principal raw material used to create wood pulp, which in turn is used to manufacture our pulp and
paperboard products and consumer products. In 2018, our wood fiber costs were 9.6% of our consolidated net sales.
Wood fiber pricing is subject to regional market influences, and our cost of wood fiber may increase in the areas our
pulp and paperboard facilities are located due to market shifts in those regions. For example, much of the wood fiber
we use in our pulp manufacturing process in Lewiston, Idaho, is the by-product of sawmill operations. As a result, the
price of these residual wood fibers is affected by operating levels in the lumber industry. Significant reductions in home
building during the past decade resulted in the closure or curtailment of operations at many sawmills and consolidation
amongst suppliers. Further, the expansion of operations and production of other paper mills and wood pellet
manufacturers in the Inland Northwest region of the United States has increased the demand and price for wood fiber.
Additionally, the ability of paper and wood pellet mills in British Columbia to acquire wood fiber from the U.S. Inland
Northwest region with limited to no reciprocal ability by U.S. mills to acquire wood fiber from British Columbia, reduces
the supply of, and increases the costs, for wood fiber. The price of wood fiber is expected to remain volatile.
The primary source for wood fiber is timber, the availability of which may be limited by adverse weather, fire, insect
infestation, disease, ice storms, wind storms, flooding and other natural and man-made causes, thereby reducing
supply and increasing prices. For example, our Arkansas pulp and paperboard facility relies on whole log chips for a
significant portion of its wood fiber, and in the past this facility has experienced increases in the costs for wood fiber
due to extremely wet conditions in the Southeastern U.S. that limited accessibility and availability.
The effects on market prices for wood fiber resulting from various governmental programs involving tax credits or
payments related to biomass and other renewable energy projects or from environmental litigation or regulation are
uncertain and could result in a reduction in the supply of wood fiber available for our pulp and paperboard manufacturing
operations. Additionally, wood pellet facilities or fluff pulp facilities, can increase demand and prices for wood fiber. If
we and our pulp suppliers are unable to obtain wood fiber at favorable prices or at all, our costs will increase and our
operations and financial results may be harmed.
Disruptions in transportation services or increases in our transportation costs could have a material adverse
effect on our business.
Our business, particularly our consumer products business, is dependent on transportation services to deliver our
products to our customers and to deliver raw materials to us as well as for intercompany shipments of parent rolls.
Shipments of products and raw materials may be delayed or disrupted due to weather conditions, labor shortages or
strikes, regulatory actions or other events. If our transportation providers are unavailable or fail to deliver our products
in a timely manner, we may incur increased costs and we may be unable to manufacture and deliver our products on
a timely basis.
The costs of these transportation services are also affected by geopolitical and economic events. In 2018, our
transportation costs were 11.9% of our consolidated net sales, with those costs spiking in the second half of 2018 as
the result of higher line haul rates, diesel prices and weather related events. We have not been able in the past, and
may not be able in the future, to pass along part or all of any fuel price increases to customers. If we are unable to
increase our prices as a result of increased fuel or transportation costs, our gross margins may be materially adversely
affected.
United States and global economic conditions could have adverse effects on the demand for our products
and financial results.
U.S. and global economic conditions and currency exchange rates have a significant impact on our business and
financial results. Recessed global economic conditions and a strong U.S. dollar can affect our business in a number
of ways, including causing declines in global demand for consumer tissue and paperboard, and increased competition
from foreign manufacturers in the U.S. market.
We incur significant expenses to maintain our manufacturing equipment and any interruption in the operations
of our facilities may harm our operating performance.
We regularly incur significant expenses to maintain our manufacturing equipment and facilities. The machines and
equipment that we use to produce our products are complex, have many parts and some are run on a continuous
basis. We must perform routine maintenance on our equipment and will have to periodically replace a variety of parts
such as motors, pumps, pipes and electrical parts. In addition, our pulp and paperboard facilities require periodic
shutdowns to perform major maintenance. These scheduled shutdowns of facilities result in decreased sales and
increased costs in the periods in which they occur and could result in unexpected operational issues in future periods
as a result of changes to equipment and operational and mechanical processes made during the shutdown period.
We had two scheduled major maintenance shutdowns in 2017, which occurred during the second quarter at our
Arkansas facility and the third quarter at our Lewiston, Idaho pulp and paperboard facility. We did not have any major
11
maintenance shutdowns in 2018, but in 2019 we expect to have scheduled major maintenance at our Arkansas facility
in the fourth quarter and at our Idaho facility in the third quarter.
Unexpected production disruptions could cause us to shut down or curtail operations at any of our facilities. For example,
we had a fire at our Shelby, North Carolina facility in the first quarter of 2017 and the impregnation vessel that feeds
our continuous digester at our Idaho facility plugged in the fourth quarter of 2018. Disruptions could occur due to any
number of circumstances, including prolonged power outages, mechanical or process failures, shortages of raw
materials, natural catastrophes, disruptions in the availability of transportation, labor disputes, terrorism, changes in
or non-compliance with environmental or safety laws and the lack of availability of services from any of our facilities'
key suppliers. Any facility shutdowns may be followed by prolonged startup periods, regardless of the reason for the
shutdown. Those startup periods could range from several days to several weeks, depending on the reason for the
shutdown and other factors. Any prolonged disruption in operations at any of our facilities could cause significant lost
production, which would have a material adverse effect on our results of operations.
The cost of chemicals and energy needed for our manufacturing processes significantly affects our results
of operations and cash flows.
We use a variety of chemicals in our manufacturing processes, including petroleum-based polyethylene and certain
petroleum-based latex chemicals. In 2018, our chemical costs were 10.0% of our consolidated net sales. Prices for
these chemicals have been and are expected to remain volatile. In addition, chemical suppliers that use petroleum-
based products in the manufacture of their chemicals may, due to supply shortages and cost increases, ration the
amount of chemicals available to us, and therefore we may not be able to obtain at favorable prices the chemicals we
need to operate our business, if we are able to obtain them at all.
Our manufacturing operations also utilize large amounts of electricity and natural gas. In 2018, our energy costs were
4.9% of our consolidated net sales. Energy prices have fluctuated widely over the past decade, which in turn affects
our cost of sales. For example, we experienced a dramatic spike in prices for natural gas at our Lewiston, Idaho facility
in the first quarter of 2019 due to frigid temperatures in the Pacific Northwest as well as due to limited capacity on a
major pipeline that supplies the Pacific Northwest resulting from damage to that pipeline that occurred in Canada. We
purchase on the open market a substantial portion of the natural gas necessary to produce our products, and, as a
result, the price and other terms of those purchases are subject to change based on factors such as worldwide supply
and demand, geopolitical events, government regulation, weather, interruptions in pipeline and other delivery systems
and natural disasters. 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 reducing energy usage.
Any significant energy shortage or significant increase in our energy costs in circumstances where we cannot raise
the price of our products could have a material adverse effect on our results of operations. Any disruption in the supply
of energy could also affect our ability to meet customer demand in a timely manner and could harm our reputation and
our business.
Larger competitors have operational and other advantages over our operations.
The markets for our products are highly competitive, and companies that have substantially greater financial resources
compete with us in each market. Some of our competitors have advantages over us, including lower raw material and
labor costs and better access to the inputs of our products.
Our consumer products business faces competition from companies that produce the same type of products that we
produce or that produce alternative products that customers may use instead of our products. Our consumer products
business competes with the branded tissue products producers, such as Procter & Gamble, and branded label
producers who manufacture branded and private label products, such as Georgia-Pacific and Kimberly-Clark. These
companies are far larger than us, have more sales, marketing and research and development resources than we do,
and enjoy significant cost advantages due to economies of scale. In addition, because of their size and resources,
these companies may foresee market trends more accurately than we do and develop new technologies that render
our products less attractive or obsolete.
12
Our ability to successfully compete in the pulp and paperboard industry is influenced by a number of factors, including
manufacturing capacity, general economic conditions and the availability and demand for paperboard substitutes. Our
pulp and paperboard business competes with WestRock, Georgia-Pacific, and international producers, most of whom
are much larger than us. Any increase in manufacturing capacity by any of these or other producers could result in
overcapacity in the pulp and paperboard industry, which could cause downward pressure on pricing. For example,
several newer facilities in China have large paperboard manufacturing capacities, the output of which increases
paperboard supplies on the international market. Also, a large European manufacturer recently completed a paperboard
facility that exports into the North American market and a another has converted a U.S. facility into a facility that
produces SBS paperboard for the North American market. Increased production by foreign manufacturers may result
in increased competition in the North American paperboard markets from direct sales by foreign competitors into these
markets or increased competition in the U.S. as domestic manufacturers seek increased U.S. sales to offset displaced
overseas sales caused by increased sales by foreign suppliers into Asia and European markets. Furthermore,
customers could choose to use types of paperboard that we do not produce or could rely on alternative materials, such
as plastic, for their products. An increased supply of any of these products could cause us to lower our prices or lose
sales to competitors, either of which could have a material adverse effect on our results of operations and cash flows.
Cyclical industry conditions have in the past affected and may continue to adversely affect the operating
results and cash flows of our pulp and paperboard business.
Our pulp and paperboard business has historically been affected by cyclical market conditions. We may be unable to
sustain pricing in the face of weaker demand, and weaker demand may in turn cause us to take production downtime.
In addition to lost revenue from lower shipment volumes, production downtime causes unabsorbed fixed manufacturing
costs due to lower production levels. Our results of operations and cash flows may be materially adversely affected
in a period of prolonged and significant market weakness. We are not able to predict market conditions or our ability
to sustain pricing and production levels during periods of weak demand.
We rely on information technology in critical areas of our operations, and a disruption relating to such
technology could harm our financial condition.
We use information technology, or IT, systems in various aspects of our operations, including enterprise resource
planning, or ERP, management of inventories and customer sales. Some of these systems have been in place for long
periods of time. We have different legacy IT systems that we are continuing to integrate. If one of these systems was
to fail or cause operational or reporting interruptions, or if we decide to change these systems or hire outside parties
to provide these systems, we may suffer disruptions, which could have a material adverse effect on our manufacturing
and sales operation, results of operations and financial condition. In addition, we may underestimate the costs and
expenses of developing and implementing new systems.
We may be required to pay material amounts under multiemployer pension plans; one of the plans in which
we participate is in “critical and declining” financial status and this subjects us to potential liabilities,
particularly if we withdraw from this plan.
We contribute to two multiemployer pension plans. The amount of our annual contributions to these plans is negotiated
with the union representing our employees covered by the plan. In 2018, we contributed approximately $6 million to
these plans. If in future years we continue to participate in these plans, we may be required to make increased annual
contributions, which would reduce the cash available for business and other needs. The decision whether to continue
to participate in these multiemployer plans does not rest solely with us; rather, it is negotiated as part of the collective
bargaining agreements with labor unions that participate in these plans. There are risks associated with both continuing
to participate in multiemployer plans and with withdrawing from multiemployer plans.
If we were to withdraw partially or completely from a multiemployer plan that is underfunded, we would be liable for a
proportionate share of that plan's unfunded vested benefits as required by law. This is called a withdrawal liability.
If we continue to participate in a multiemployer pension plan, the future increases in annual contributions are difficult
to predict and largely beyond our control. For example, if any other contributing employer withdraws from a
multiemployer plan that is underfunded, and the withdrawing employer cannot satisfy its withdrawal liability, then the
proportionate share of the plan’s unfunded vested benefits that would be allocable to us and to the other remaining
contributing employers would increase.
One of the multiemployer pension plans to which we contribute, the PACE Industry Union-Management Pension Fund,
or PIUMPF, was certified to be in “critical status” for the plan year beginning January 1, 2010 and continued to be in
critical status through the plan year beginning January 1, 2014. For the plan years beginning January 1, 2015 through
13
January 1, 2018, PIUMPF was certified to be in "critical and declining status" under the Multiemployer Pension Reform
Act of 2014. The number of employers participating in PIUMPF fell from 135 during 2012 to 78 during 2017 and the
ratio of inactive participants to active employees participating in PIUMPF has increased from 3.4 inactive participants
per each active employee at the end of 2013 to 10.1 inactive participants per each active employee at the end of 2017.
PIUMPF predicts it will become insolvent in 2031. We believe we are now the largest contributing employer remaining
in PIUMPF. We therefore expect that if we remain in PIUMPF our annual contributions could increase, although we
have no way of knowing by how much.
If instead we were to withdraw from PIUMPF, either completely or partially, we would incur a statutory withdrawal
liability based on our proportionate share of PIUMPF’s unfunded vested benefits. Based on information available to
us, as well as information provided by PIUMPF, and reviewed by our actuarial consultant, we estimate that, as of
December 31, 2018, the withdrawal liability payments that we would be required to make to PIUMPF were we to
completely withdraw in 2019 would be approximately $5.7 million per year on a pretax basis. These payments would
continue for 20 years with an estimated present value in excess of $78 million on a pre-tax basis. If we were deemed
to be included in a “mass withdrawal” from PIUMPF, these payments could continue indefinitely.
Were we voluntarily to withdraw from PIUMPF in 2019 or later, we could be subject to substantial payments in addition
to the withdrawal liability payments described above. As a plan in critical and declining status, PIUMPF has adopted
a rehabilitation plan. That plan purports to require a withdrawing employer to make an additional, lump-sum payment
- above and beyond the statutory withdrawal liability - based on PIUMPF’s accumulated funding deficiency, or AFD.
We do not believe PIUMPF’s purported imposition of the AFD on withdrawing employers is legally enforceable. However,
we are aware that one large employer that withdrew from PIUMPF has recognized a liability for payment of an AFD
amount and that other withdrawing employers may have paid some amounts in respect to the AFD. There have been
and continue to be lawsuits in federal courts challenging PIUMPF’s AFD. Some of this litigation has ended without
resolving the issue. At least one lawsuit currently pending in the United States District Court for the District of Idaho
challenges the legality of the AFD; certain claims made in that suit have been dismissed but the court has allowed the
plaintiff to amend its complaint to allege claims that the imposition of the AFD assessment did not constitute a reasonable
measure under a rehabilitation plan. There are also efforts underway in the United States Congress intended to
address the financial situation of multiemployer plans, like PIUMPF, that are in critical and declining status. It is uncertain
whether such efforts will result in new legislation or if any new legislation will affect PIUMPF’s financial status.
If the AFD were held to be legally enforceable, and if we were to elect to withdraw in some future year, the amount of
our AFD liability at the time of our withdrawal would be material and subject to a variety of factors including without
limitation the nature and timing of a withdrawal, the solvency or insolvency of PIUMPF at the time of the withdrawal,
the level of contributions to the plan made by other contributing employers before our withdrawal, whether any employers
that had withdrawn in the intervening years had made AFD payments, and the effect of any Congressional action to
assist the funding of multiemployer plans.
We believe that the AFD, if held to be lawful, would be assessed only if an employer voluntarily withdraws from PIUMPF
and that plan insolvency or any other circumstance that does not involve a voluntary withdrawal by us would not require
us to make a payment in respect of the AFD. Therefore, since we currently have no plans to withdraw from PIUMPF,
we have not recognized any liability associated with a withdrawal from PIUMPF in our consolidated financial statements.
If we were to decide to withdraw voluntarily from PIUMPF in the future, and if the AFD were held to be enforceable
against us, the resulting liabilities would have a material adverse effect on our results of operations, financial position,
liquidity and cash flows. Similarly, if, in the absence of a voluntary withdrawal by us, our understandings (stated above)
are incorrect regarding the unenforceability of the AFD or the inapplicability of the AFD to us in the event of plan
insolvency or other circumstances not involving a voluntary withdrawal by us, the resulting liabilities would have a
material adverse effect on our results of operations, financial position, liquidity and cash flows.
Adverse changes to, or requirements under, pension laws and regulations or adverse changes, requirements or claims
pursuant to PIUMPF’s rehabilitation plan, such as the AFD, could increase the likelihood and amount of our liabilities.
Were PIUMPF to fail, or were we to withdraw from PIUMPF, these liabilities would be in addition to the pension
contributions we would have to make to any new pension plan adopted or contributed to by us to replace PIUMPF. All
of this could materially reduce the cash we would have available for business and other needs.
14
Our company-sponsored pension plans are currently underfunded, and we may be required to make cash
payments to the plans, reducing cash available for our business.
We have company-sponsored pension plans covering certain of our salaried and hourly employees. The volatility in
the value of equity and fixed income investments held by these plans, coupled with a low interest rate environment
resulting in higher liability valuations, has caused these plans to be underfunded as the projected benefit obligation
has exceeded the aggregate fair value of plan assets by varying year-end amounts since 2008. At December 31, 2018,
and 2017, our company sponsored pension plans were underfunded in the aggregate by $25.3 million and $6.8 million,
respectively. As a result of underfunding, we may be required to make contributions to our qualified pension plans in
future years, which would reduce the cash available for business and other needs. In 2018, we made no contributions
to these pension plans, and we are not required to make contributions in 2019.
We are subject to significant environmental regulation and environmental compliance expenditures, which
could increase our costs and subject us to liabilities.
We are subject to various federal, state and foreign environmental laws and regulations concerning, among other
things, water discharges, air emissions, hazardous material and waste management and environmental cleanup.
Environmental laws and regulations continue to evolve and we may become subject to increasingly stringent
environmental standards in the future, particularly under air quality and water quality laws and standards related to
climate change issues, such as reporting of greenhouse gas emissions. Increased regulatory activity at the state,
federal and international level is possible regarding climate change as well as other emerging environmental issues
associated with our manufacturing sites, such as water quality standards based on elevated fish consumption rates.
Compliance with regulations that implement new public policy in these areas might require significant expenditures
on our part or even the curtailment of certain of our manufacturing operations.
We are required to comply with environmental laws and the terms and conditions of multiple environmental permits.
In particular, the pulp and paper industry in the United States is subject to several performance based rules associated
with effluent and air emissions as a result of certain of its manufacturing processes. Federal, state and local laws and
regulations require us to routinely obtain authorizations from and comply with the evolving standards of the appropriate
governmental authorities, which have considerable discretion over the terms of permits. Failure to comply with
environmental laws and permit requirements could result in civil or criminal fines or penalties or enforcement actions,
including regulatory or judicial orders enjoining or curtailing our operations or requiring us to take corrective measures,
install pollution control equipment, or take other remedial actions, such as product recalls or labeling changes. We
also may be required to make additional expenditures, which could be significant, relating to environmental matters
on an ongoing basis. There can be no assurance that future environmental permits will be granted or that we will be
able to maintain and renew existing permits, and the failure to do so could have a material adverse effect on our results
of operations, financial condition and cash flows.
We own properties, conduct or have conducted operations at properties, and have assumed indemnity obligations for
properties or operations where hazardous materials have been or were used for many years, including during periods
before careful management of these materials was required or generally believed to be necessary. Consequently, we
will continue to be subject to risks under environmental laws that impose liability for historical releases of hazardous
substances and to liability for other potential violations of environmental laws or permits at existing sites or ones for
which we have indemnity obligations.
Our pension and health care costs are subject to numerous factors that could cause these costs to change.
In addition to our pension plans, we provide health care benefits to certain of our current and former salaried and
hourly employees. There is a risk of increased costs due to the Affordable Care Act’s individual mandate and required
coverage. Our health care costs vary with changes in health care costs generally, which have significantly exceeded
general economic inflation rates for many years. Our pension costs are dependent upon numerous factors resulting
from actual plan experience and assumptions about future investment returns. Pension plan assets are primarily made
up of equity and fixed income investments. Fluctuations in actual equity market returns as well as changes in general
interest rates may result in increased pension costs in future periods. Likewise, changes in assumptions regarding
current discount rates, expected rates of return on plan assets and mortality rates could also increase pension costs.
Significant changes in any of these factors may adversely impact our cash flows, financial condition and results of
operations.
15
We face cyber-security risks.
Our business operations rely upon secure information technology systems for data capture, processing, storage and
reporting. Despite careful security and controls design, implementation and updating, our information technology
systems could become subject to cyber-attacks. Network, system, application and data breaches could result in
operational disruptions or information misappropriation, which could result in lost sales, business delays, negative
publicity and could have a material adverse effect on our business, results of operations and financial condition.
We rely on a limited number of third-party suppliers for certain raw materials required for the production of
our products.
Our dependence on a limited number of third-party suppliers, and the challenges we may face in obtaining adequate
supplies of raw materials, involve several risks, including limited control over pricing, availability, quality, and delivery
schedules. We cannot be certain that our current suppliers will continue to provide us with the quantities of these raw
materials that we require or will continue to satisfy our anticipated specifications and quality requirements. Any supply
interruption in limited raw materials could materially harm our ability to manufacture our products until a new source
of supply, if any, could be identified and qualified. Although we believe there are other suppliers of these raw materials,
we may be unable to find a sufficient alternative supply channel in a reasonable time or on commercially reasonable
terms. Any performance failure on the part of our suppliers could interrupt production of our products, which would
have a material adverse effect on our business.
We May Fail to Attract, Motivate, Train and Retain Qualified Personnel, Including Key Personnel
Our ability to effectively run our business depends on our ability to attract, motivate, train and retain employees with
the skills necessary to understand and adapt to the competitive markets in which we operate. The increasing demand
for qualified personnel makes it more difficult for us to attract and retain employees with requisite skill sets, particularly
employees with specialized technical and trade experience. Changing demographics and labor work force trends also
may result in a loss of knowledge and skills as experienced workers retire. If we fail to attract, motivate, train and retain
qualified personnel, or if we experience excessive turnover, we may experience declining sales, manufacturing delays
or other inefficiencies, increased recruiting, training and relocation costs and other difficulties, and our results of
operations, cash flows and financial condition.
In addition, we rely on key executive and management personnel to manage our business efficiently and effectively.
The loss of any of our key personnel could adversely affect our results of operations, cash flows and financial condition.
Effective succession planning is also important to our long-term success. Our failure to identify candidates with the
leadership skills to manage our organization, and our failure to ensure effective transfers of knowledge and smooth
transitions involving key executives, could hinder our strategic planning and execution.
Expansion of our business through construction of new facilities or acquisitions may not proceed as
anticipated.
In the future, we may build other converting and papermaking facilities, pursue acquisitions of existing facilities, or
both. In addition, we may be unable to achieve anticipated benefits or cost savings from construction projects or
acquisitions in the timeframe we anticipate, or at all. Any inability by us to integrate and manage any new or acquired
facilities or businesses in a timely and efficient manner, any inability to achieve anticipated cost savings or other
anticipated benefits from these projects or acquisitions in the time frame we anticipate or any unanticipated required
increases in promotional or capital spending could adversely affect our business, financial condition, results of
operations or liquidity. Large construction projects or acquisitions can result in a decrease in our cash and short-term
investments, an increase in our indebtedness, or both, and also may limit our ability to access additional capital when
needed and divert management's attention from other business concerns.
We have identified material weaknesses in our internal control over financial reporting and such weaknesses
have led to a conclusion that our disclosure controls and procedures were not effective as of December 31,
2018.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on their systems of internal
control over financial reporting. In addition, our independent registered public accounting firm must report on its
evaluation of those controls. As disclosed in more detail under “Controls and Procedures” in Part II, Item 9A of this
Report, we have identified material weaknesses as of December 31, 2018 in our internal control over financial reporting.
Due to these material weaknesses, we have also concluded our disclosure controls and procedures were not effective
as of December 31, 2018.
Failure to have effective internal control over financial reporting and ineffectiveness of disclosure controls and
procedures could impair our ability to produce accurate financial statements on a timely basis and could lead to a
16
restatement of our financial statements. If, as a result of deficiencies in our internal control over financial reporting and
ineffectiveness of our disclosure controls and procedures, we cannot provide reliable financial statements, our business
decision processes may be adversely affected, our business and results of operations could be harmed, investors
could lose confidence in our reported financial information and our ability to obtain additional financing, or additional
financing on favorable terms, could be adversely affected. In addition, failure to maintain effective internal control over
financial reporting could result in investigations or sanctions by regulatory authorities.
If we fail to remediate these material weaknesses and maintain an effective system of disclosure controls or internal
control over financial reporting, we may not be able to rely on the integrity of our financial results, which could result
in inaccurate or late reporting of our financial results, as well as the inability to meet on a timely basis our reporting
obligations or to comply with SEC rules and regulations. Any of these could result in delisting actions by the New York
Stock Exchange, investigation and sanctions by regulatory authorities, or an event of default under our debt instruments,
and adversely affect our business and the trading price of our common stock.
To service our substantial indebtedness, we must generate significant cash flows. Our ability to generate cash
depends on many factors beyond our control.
As of December 31, 2018, we had approximately $796 million of outstanding indebtedness, and we could incur
substantial additional indebtedness in the future. Our ability to make payments on and to refinance our indebtedness,
including our outstanding notes, and to fund planned capital expenditures, will depend on our ability to generate cash
from our operations. This, to a significant extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control.
We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings
will be available to us under our senior secured revolving credit facilities in an amount sufficient to enable us to pay
our indebtedness, including our outstanding notes, or to fund our other liquidity needs. We cannot assure you that we
will be able to refinance any of our indebtedness, including our senior secured revolving credit facilities and our
outstanding notes, on commercially reasonable terms or at all.
The indenture for our outstanding notes that we issued in 2013 and the credit agreements governing our
senior secured revolving credit facilities, contain various covenants that limit our discretion in the operation
of our business.
The indenture governing our outstanding notes that we issued in 2013 and the credit agreements governing our senior
secured revolving credit facilities, contain various provisions that limit our discretion in the operation of our business
by restricting our ability to:
undergo a change in control;
•
sell assets;
•
pay dividends and make other distributions;
•
• make investments and other restricted payments;
•
•
•
•
•
•
•
redeem or repurchase our capital stock;
incur additional debt and issue preferred stock;
create liens;
consolidate, merge, or sell substantially all of our assets;
enter into certain transactions with our affiliates;
engage in new lines of business; and
enter into sale and lease-back transactions.
These restrictions on our ability to operate our business at our discretion could seriously harm our business by, among
other things, limiting our ability to take advantage of financing, merger and acquisition and other corporate opportunities,
or to borrow in order to fund further capital expenditures. In addition, our senior secured revolving credit facilities
require, among other things, that we maintain a maximum consolidated secured leverage ratio of 2.00 to 1.00 through
December 31, 2019 and of 1.50 to 1.00 from March 31, 2020 and thereafter, a minimum consolidated interest coverage
ratio of 1.25 to 1.00, and a minimum consolidated asset coverage ratio of 1.00 to 1.00. Events beyond our control
could affect our ability to meet these financial tests, and we cannot assure you that we will meet them.
Our failure to comply with the covenants contained in our senior secured revolving credit facilities or the
indentures governing our outstanding notes, including as a result of events beyond our control, could result
in an event of default that could cause repayment of the debt to be accelerated.
If we are not able to comply with the covenants and other requirements contained in the indentures governing our
outstanding notes, our senior secured revolving credit facilities or our other debt instruments, an event of default under
the relevant debt instrument could occur. If an event of default does occur, it could trigger a default under our other
17
debt instruments, prohibit us from accessing additional borrowings, and permit the holders of the defaulted debt to
declare amounts outstanding with respect to that debt to be immediately due and payable. Our assets and cash flow
may not be sufficient to fully repay borrowings under our outstanding debt instruments. In addition, we may not be
able to refinance or restructure the payments on the applicable debt. Even if we were able to secure additional financing,
it may not be available on favorable terms.
Certain provisions of our certificate of incorporation and bylaws and Delaware law may make it difficult for
stockholders to change the composition of our Board of Directors and may discourage hostile takeover
attempts that some of our stockholders may consider to be beneficial.
Certain provisions of our certificate of incorporation and bylaws and Delaware law may have the effect of delaying or
preventing changes in control if our Board of Directors determines that such changes in control are not in the best
interests of the company and our stockholders. The provisions in our certificate of incorporation and bylaws include,
among other things, the following:
•
•
•
•
•
•
•
a classified Board of Directors with three-year staggered terms;
the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other
terms, including preferences and voting rights, of those shares without stockholder approval;
stockholder action can only be taken at a special or regular meeting and not by written consent;
advance notice procedures for nominating candidates to our Board of Directors or presenting matters at
stockholder meetings;
removal of directors only for cause;
allowing only our Board of Directors to fill vacancies on our Board of Directors; and
supermajority voting requirements to amend our bylaws and certain provisions of our certificate of
incorporation.
While these provisions have the effect of encouraging persons seeking to acquire control of the company to
negotiate with our Board of Directors, they could enable the Board of Directors to hinder or frustrate a transaction
that some, or a majority, of the stockholders might believe to be in their best interests and, in that case, may prevent
or discourage attempts to remove and replace incumbent directors. We are also subject to Delaware laws that
could have similar effects. One of these laws prohibits us from engaging in a business combination with a
significant stockholder unless specific conditions are met.
18
ITEM 1B.
Unresolved Staff Comments
None.
19
ITEM 2.
Properties
FACILITIES
We own and operate facilities located throughout the United States. The following table lists, as of December 31,
2018, each of our existing facilities and its location, use, and 2018 capacity and production:
USE
LEASED OR OWNED CAPACITY1
PRODUCTION1
CONSUMER PRODUCTS
Tissue Manufacturing Facilities:
Las Vegas, Nevada
Lewiston, Idaho
Neenah, Wisconsin
Shelby, North Carolina3
TAD tissue
Tissue
Tissue
TAD tissue
Tissue Converting Facilities:
Elwood, Illinois2
Las Vegas, Nevada
Lewiston, Idaho
Neenah, Wisconsin
Shelby, North Carolina3
Tissue converting
Tissue converting
Tissue converting
Tissue converting
Tissue converting
PULP AND PAPERBOARD
Pulp Mills:
Cypress Bend, Arkansas
Lewiston, Idaho
Pulp
Pulp
Bleached Paperboard Mills:
Cypress Bend, Arkansas
Lewiston, Idaho
Paperboard
Paperboard
Sheeted Paperboard Facilities:
Mendon, Michigan2
Wilkes-Barre, Pennsylvania2
Dallas, Texas2
Richmond, Virginia2
Hagerstown, Indiana2
Paperboard sheeting
Paperboard sheeting
Paperboard sheeting
Paperboard sheeting
Paperboard sheeting
Owned
Owned
Owned
Owned/Leased
Owned/Leased
Owned
Owned
Owned
Owned/Leased
39,000 tons
190,000 tons
54,000 tons
77,000 tons
360,000 tons
73,000 tons
64,000 tons
90,000 tons
70,000 tons
36,000 tons
187,000 tons
52,000 tons
72,000 tons
347,000 tons
66,000 tons
60,000 tons
62,000 tons
55,000 tons
108,000 tons
405,000 tons
72,000 tons
315,000 tons
Owned
Owned
Owned
Owned
314,000 tons
590,000 tons
904,000 tons
303,000 tons
535,000 tons
838,000 tons
360,000 tons
480,000 tons
840,000 tons
335,000 tons
475,000 tons
810,000 tons
Owned/Leased
Owned/Leased
Owned/Leased
Owned/Leased
Owned/Leased
50,000 tons
36,000 tons
40,000 tons
23,000 tons
36,000 tons
16,000 tons
35,000 tons
20,000 tons
32,000 tons
193,000 tons
26,000 tons
121,000 tons
Columbia City, Oregon
Clarkston, Washington
Chip shipment
Wood chipping
Leased
Owned
CORPORATE
Alpharetta, Georgia
Spokane, Washington
Operations and administration
Corporate headquarters
Leased
Leased
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
1
2
3
Production amounts are approximations for full year 2018 and capacity amounts represent permitted capacities as of December 31, 2018. Annual capacity is an
estimate based on assumptions and judgments concerning, among other things, both market demand and product mix, which change from time-to-time.
The buildings located at these facilities are leased by Clearwater Paper or a wholly-owned subsidiary, and the operating equipment located within the buildings
are owned by Clearwater Paper or a wholly-owned subsidiary.
Some of the buildings located at the Shelby, North Carolina facility are leased by Clearwater Paper or a wholly-owned subsidiary, some buildings are owned, and
the operating equipment located within the buildings is owned by Clearwater Paper or a wholly-owned subsidiary.
20
ITEM 3.
Legal Proceedings
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, results of operations and cash flows.
ITEM 4.
Mine Safety Disclosures
Not applicable.
21
Part II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
MARKET FOR OUR COMMON STOCK
Our common stock is traded on the New York Stock Exchange under the symbol "CLW."
HOLDERS
On March 11, 2019, the last reported sale price for our common stock on the New York Stock Exchange was $26.74
per share. As of March 11, 2019, there were approximately 740 registered holders of our common stock.
ISSUER PURCHASES OF EQUITY SECURITIES
Please see Part II, Note 2, "Summary of Significant Accounting Policies" of this report for information relating to our
purchases of equity securities.
ITEM 6.
Selected Financial Data
All of the data listed below has been derived from our audited financial statements. Our historical financial and other
data is not necessarily indicative of our future performance. Amounts for 2014 forward reflect the sale of our specialty
business and mills on December 30, 2014.
(In thousands, except net
earnings (loss) per share amounts)
Net sales
(Loss) income from operations1
Net (loss) earnings1,2
Working capital3
Long-term debt, net of current portion
Stockholders’ equity
Capital expenditures
Property, plant and equipment, net
Total assets
Net (loss) earnings per basic common
share1
Average basic common shares
outstanding
Net earnings (loss) per diluted common
share1
Average diluted common shares
outstanding
2018
2017
2016
2015
2014
$
1,724,218
$
1,730,408
$
1,734,763
$
1,752,401
$
1,967,139
(97,909)
(143,767)
(5,348)
671,292
426,396
337,950
71,185
97,339
33,537
570,524
575,434
198,685
1,269,271
1,788,118
1,050,982
1,802,252
114,764
49,554
79,975
569,755
469,873
155,677
945,328
123,670
55,983
199,010
568,987
474,866
134,104
866,538
79,811
(2,315)
302,069
568,221
497,537
99,600
810,987
1,684,342
1,527,369
1,579,149
$
$
(8.72) $
5.91
$
2.91
$
2.98
$
(0.11)
16,487
16,464
17,001
18,762
20,130
(8.72) $
5.88
$
2.90
$
2.97
$
(0.11)
16,487
16,556
17,106
18,820
20,130
1
2
Loss from operations and net loss for the twelve months ended December 31, 2018 includes a non-cash goodwill impairment charge
associated with our Consumer Products segment of $195.1 million. For additional information, refer to Note 7 "Goodwill and Intangible
Assets."
Net earnings and net earnings per basic and diluted common share for the twelve months ended December 31, 2017 reflect a $70 million
tax benefit resulting from the remeasurement of the company's net deferred tax liabilities following passage of the Tax Cuts and Jobs Act
signed into law on December 22, 2017.
3 Working capital is defined as our current assets less our current liabilities, as presented on our Consolidated Balance Sheets.
22
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements
and notes thereto that appear elsewhere in this report. This discussion contains forward-looking statements reflecting
our current expectations that involve risks and uncertainties. Actual results may differ materially from those discussed
in these forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk
Factors” and elsewhere in this report.
Unless the context otherwise requires or unless otherwise indicates, references in this report to “Clearwater Paper
Corporation,” “we,” “our,” “the company” and “us” refer to Clearwater Paper Corporation and its subsidiaries.
OVERVIEW
Recent Events
Asset Divestiture
On August 21, 2018, we sold our Ladysmith, Wisconsin manufacturing facility for net cash proceeds of approximately
$71 million and recorded a related gain on divested assets of $24.0 million. Among other offsets, the net gain on
divested assets includes $34.0 million of assets sold and a $14.0 million goodwill write-off.
Shelby Expansion Project
We are nearing completion of building a new tissue machine and related converting equipment at a site adjacent to
our existing facility in Shelby, North Carolina. The new tissue machine will produce a variety of high-quality private
label ultra and premium bath, paper towel and napkin products. At full production capacity, the new tissue machine is
expected to produce approximately 70,000 tons of tissue products annually. The estimated cost for the project includes
approximately $360 million for the tissue machine, converting equipment and buildings, and approximately $60 million
for warehouse expansion that will consolidate all southeastern warehousing in Shelby. The total estimated cost of the
project has increased by approximately $80 million from our original estimates due to the combination of external and
internal factors, including acceleration of the startup of our converting operation in Shelby to help improve the Consumer
Products segment's operating model by lowering transportation costs. The external and internal factors include a very
tight construction labor market, additional engineering requirements, weather-related delays and significantly higher
material costs, including steel costs that were exacerbated by tariffs first imposed in 2018. To partially offset the
increased cost for the Shelby expansion, we elected to reduce approximately $30 million in other capital expenditures
originally forecasted for 2018.
We project that the construction of the new facility will be completed in early 2019 and will be fully operational in 2020.
As of December 31, 2018, we have incurred a total of $371.8 million on construction related activities and the new
tissue machine in Shelby, of which $295.7 million was incurred in 2018. We also capitalized $8.9 million of interest as
of December 31, 2018, related to the Shelby expansion, of which $7.7 million was incurred in 2018.
Selling, General and Administrative Cost Structure Changes
In the second half of 2017, we examined our selling, general and administrative, or SG&A, cost structure as part of
our effort to maintain our longer-term competitiveness. As a result of this review, in the fourth quarter of 2017 we
began executing on a plan that is expected to result in lower SG&A expenses beginning in 2018. In 2018, we incurred
$6.9 million of expenses associated with these efforts, which consisted primarily of severance and professional services
expenses. As of December 31, 2018, we had achieved approximately $13 million in cost reductions, compared to 2017
SG&A expenses, as a result of these changes.
Goodwill Impairment
We conducted our annual impairment test as of the November 1, 2018 measurement date and concluded, in connection
with the preparation of our 2018 financial statements, that the estimated fair value of the Consumer Products reporting
unit was below the carrying value of the reporting unit, resulting in a non-cash impairment charge of $195.1 million.
This amount represents the remaining goodwill associated with our Consumer Products reporting unit that was originally
recorded as the result of our acquisition of Cellu Tissue Holdings, Inc. in 2010.
23
Developments and Trends in our Business
Net Sales
Prices for our consumer tissue products are affected by competitive conditions and the prices of branded tissue
products. Tissue has historically been one of the strongest segments of the paper and forest products industry due to
its steady demand growth. Our Consumer Products segment competes based on product quality, customer service
and price. We deliver customer-focused business solutions by assisting in managing product assortment, category
management, and pricing and promotion optimization.
In recent years, the industry has seen an increase in premium and ultra tissue products as industry participants have
added or improved through-air-dried, or TAD, or equivalent production capacity as well as added conventional tissue
capacity. Demand and pricing for consumer tissue products is currently being affected by the increased capacity, as
well as changing dynamics in the at-home tissue segment as a result of changing consumer purchasing habits,
consolidations and new entrants in the consumer retail channel, and new and evolving sales and distribution channels.
These changing conditions contributed to a very competitive environment for consumer tissue in 2018, and we expect
these conditions to continue in 2019. Reflecting these increasingly competitive conditions, in the third quarter of 2017,
our largest tissue customer made the decision to go from a single source model to a multisource model for its private
label tissue supply beginning in the first quarter of 2018. This significantly affected sales volumes for our conventional
tissue in 2018.
Our pulp and paperboard business is affected by macro-economic conditions around the world and has historically
experienced cyclical market conditions. As a result, historical prices for our products and sales volumes have been
volatile. Product pricing is significantly affected by the relationship between supply and demand for our products.
Product supply in the industry is influenced primarily by fluctuations in available manufacturing production, which tends
to increase during periods when prices remain strong. In addition, currency exchange rates affect U.S. supplies of
paperboard, as non-U.S. manufacturers are more attracted to the U.S. market when the dollar is relatively strong.
Paperboard pricing increased in 2018 compared to 2017.
The markets for our products are highly competitive. Our business is capital intensive, which leads to high fixed costs
and large capital outlays and generally results in continued production as long as prices are sufficient to cover variable
costs. These conditions have contributed to substantial price competition, particularly during periods of reduced
demand. Some of our competitors have lower production costs, greater buying power and are integrated, and, as a
result, may be less adversely affected than we are by price decreases.
Net sales consist of sales of consumer tissue, paperboard, and to a lesser extent pulp, net of discounts, returns and
allowances and any sales taxes collected.
24
Operating Costs
Prices for our principal operating cost items are variable and directly affect our results of operations. In a strong
economy, we normally would expect at least some upward pressure on our operating costs. Competitive market
conditions, however, can limit our ability to pass cost increases through to our customers. The following table shows
our principal operating cost items and associated percentage of net sales for each of the past three years:
2018
2017
2016
Years Ended December 31,
(Dollars in thousands)
Wages and benefits4
Transportation1
Purchased pulp
Chemicals
Chips, sawdust and logs
Depreciation
Packaging supplies
Energy
Maintenance and repairs2
Other operating costs
Total cost of sales4
Cost3
$ 283,138
204,848
187,790
173,082
165,305
87,723
86,668
84,035
71,786
1,344,375
193,637
$1,538,012
Percentage of
Net Sales
Cost3
Percentage of
Net Sales
Cost
Percentage of
Net Sales
16.4% $ 278,622
200,177
11.9
193,358
10.9
165,328
10.0
135,802
9.6
5.1
5.0
4.9
91,312
88,245
87,287
88,221
4.2
1,328,352
78.0
201,989
11.2
89.2% $1,530,341
16.1% $ 295,209
182,145
11.6
196,848
11.2
166,954
9.5
148,583
7.8
5.3
5.1
5.0
80,652
86,273
87,163
5.1
95,800
76.7
1,339,627
153,932
11.7
88.4% $1,493,559
17.1%
10.5
11.3
9.6
8.6
4.6
5.0
5.0
5.5
77.2
8.9
86.1%
1
2
3
4
Includes internal and external transportation costs.
Excluding related labor costs.
Costs for Manchester operations, which we acquired in December 16, 2016, are included from that acquisition date forward.
In 2018, we adopted a new accounting standard, ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs, which resulted in a change in the presentation of pension and
postretirement benefit (costs) income other than service costs on a line outside of “Income from operations.” The corresponding prior period
amounts have been reclassified to conform with the current period presentation.
Wages and benefits. Costs related to our employees primarily consist of wages and related benefit costs and payroll
taxes. Wage and benefit costs for 2018 increased compared to 2017 primarily due to severance related costs associated
with our SG&A cost structure changes and the impact of annual wage increases, in addition to costs for hiring and
training new employees for the Shelby expansion project.
Transportation. Fuel prices, mileage driven and line-haul rates largely impact transportation costs for the 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 2018 increased compared to 2017 due primarily to increased paperboard shipments and higher
line haul rates on both internal and external shipments.
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 2018, although pulp prices remained high, our total
purchased pulp costs decreased compared to 2017, due primarily to no planned major maintenance outages at our
pulp and paperboard facilities in 2018 and lower tissue shipments in our Consumer Products segment.
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 paper processing chemicals. A portion of the chemicals used in our manufacturing processes, particularly
in the paperboard extrusion process, are petroleum-based and are impacted by petroleum prices. In 2018, our chemical
costs increased compared to 2017 due to higher prices and higher paperboard production.
Chips, sawdust and logs. We purchase chips, sawdust and logs that we use to manufacture pulp. We source residual
wood fibers under both long-term and short-term supply agreements, as well as in the spot market. Chips, sawdust
25
and log costs increased in 2018 compared to 2017 due to increased paperboard production and higher prices for these
materials at both of our pulp and paperboard locations.
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 2018 decreased compared to 2017,
primarily due to accelerating depreciation in 2017 on certain Oklahoma City assets in connection with the March 2017
closure of this facility, partially offset by increased depreciation as a result of higher capital spending.
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 their consumers.
For 2018, packaging costs decreased compared to 2017, primarily due to reduced tissue finished good case shipments,
which were partially offset by higher pricing for packaging materials.
Energy. We use energy in the form of electricity, hog fuel, steam and natural gas to operate our mills. Energy prices
may fluctuate widely from period-to-period due primarily to volatility in weather and electricity and natural gas rates.
We generally strive to reduce our exposure to volatile energy prices through conservation. In addition, a cogeneration
facility that produces steam and electricity and the recently installed continuous digester at our Lewiston, Idaho
manufacturing site helps to lower our energy costs.
Energy costs for 2018 decreased compared to 2017 due to favorable natural gas and electricity prices in our pulp and
paperboard segment, as well as lower natural gas usage at our Idaho pulp and paperboard facility.
To help mitigate our exposure to changes in natural gas prices, we use firm-price contracts to supply a portion of our
natural gas requirements. As of December 31, 2018, these contracts covered approximately 14% of our expected
average monthly natural gas requirements for 2019, which includes approximately 12% of the expected average
monthly requirements for the first quarter of 2019. 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.
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 to 24 months at both our Idaho and Arkansas facilities, which increase costs and may reduce
net sales in the quarters in which the major maintenance shutdowns occur. In 2018, maintenance costs decreased
compared to 2017, due to no planned major maintenance at our pulp and paperboard facilities in 2018. In 2019, we
expect to have shutdowns for major maintenance at our Idaho facility in the third quarter and at our Arkansas facility
in the fourth quarter.
Other. Other costs consist of miscellaneous operating costs, which decreased for the year ended December 31, 2018
compared to 2017 primarily due to lower costs for temporary employees, operating supplies, property taxes and
purchased paper. These decreases were partially offset by a lower amount of insurance recoveries in 2018, compared
to 2017, which included claim settlements for fires at our Las Vegas and Shelby facilities.
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.
Interest expense
Interest expense is comprised of interest on our $275 million aggregate principal amount of 4.5% senior notes issued
January 2013 and due 2023, which we refer to as the 2013 Notes, and interest on our $300 million aggregate principal
amount of 5.375% senior notes issued in 2014 and due in 2025, which we refer to as the 2014 notes. Interest expense
also includes interest on the amount drawn under our revolving credit facilities and amortization of deferred issuance
costs associated with all of our notes and revolving credit facilities. These interest expense amounts are partially offset
by capitalized interest associated with major capital project spending.
Income taxes
Income taxes are based on reported earnings and tax rates in 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.
26
The following table details our tax provision and effective tax rates for the years ended December 31, 2018, 2017 and
2016:
(Dollars in thousands)
Income tax provision (benefit)
Effective tax rate
2018
2017
2016
$
10,305
$ (56,385)
$
31,112
7.7%
(137.7)%
38.6%
The rate for 2018 includes a $10.0 million benefit from Federal tax credits for alternative energy production related to
our Lewiston pulp optimization project. The benefit for 2017 was primarily driven by a $70 million tax benefit resulting
from the remeasurement of our net deferred tax liabilities following passage of the Tax Cuts and Jobs Act in December
2017.
The estimated annual effective tax rate for 2019 is expected to be approximately 25%.
27
RESULTS OF OPERATIONS
Our business is organized into two reporting segments: Consumer Products and Pulp and Paperboard. Intersegment
costs for pulp transferred from our Pulp and Paperboard segment to our Consumer Products segment are recorded
at cost, and thus no intersegment sales or cost of sales for these transfers are included in our segments' results. Our
financial and other data are not necessarily indicative of our future performance.
YEAR ENDED DECEMBER 31, 2018 COMPARED TO YEAR ENDED DECEMBER 31, 2017
The following table sets forth data included in our Consolidated Statements of Operations as a percentage of net sales.
(Dollars in thousands)
Net sales
Costs and expenses:
Cost of sales1
Selling, general and administrative expenses1
Goodwill impairment
Gain on divested assets, net
Total operating costs and expenses
(Loss) income from operations
Interest expense, net
Non-operating pension and other postretirement benefit
(costs) income1
(Loss) earnings before income taxes
Income tax (provision) benefit
Net (loss) earnings
Years Ended December 31,
2018
2017
$ 1,724,218
100.0% $ 1,730,408
100.0%
(1,538,012)
(112,988)
(195,079)
23,952
(1,822,127)
(97,909)
(30,620)
(4,933)
(133,462)
(10,305)
$ (143,767)
89.2
6.6
11.3
1.4
105.7
5.7
1.7
(1,530,341)
(128,882)
—
—
(1,659,223)
71,185
(31,374)
0.3
7.7
0.6
8.3% $
1,143
40,954
56,385
97,339
88.4
7.4
—
—
95.9
4.1
1.8
0.1
2.4
3.3
5.6%
1
In 2018, the Company adopted a new accounting standard, ASU 2017-07, which resulted in a change in the presentation of pension and
postretirement benefit (costs) income other than service costs on a line outside of “Income from operations.” The corresponding prior period
amounts have been reclassified to conform with the current period presentation.
Net sales—Net sales for 2018 decreased by $6.2 million, or less than 1.0%, compared to 2017, primarily due to the
August 2018 sale of our Ladysmith facility, as well as decreased shipments and a lower average selling price during
2018 in our Consumer Products segment, partially offset by increased shipments and a favorable sales mix in our
Pulp and Paperboard segment.
Cost of sales—Cost of sales was 89.2% of net sales for 2018 compared to 88.4% of net sales for 2017. Cost of sales
was $7.7 million higher in 2018 due primarily to increased costs for wood fiber, chemicals, transportation and wages
and benefits. These cost increases were partially offset by lower maintenance, energy and packaging costs, as well
as lower depreciation expense.
Selling, general and administrative expenses—Selling, general and administrative expenses decreased $15.9 million
during 2018 compared to 2017. The decrease was due in part to lower commission and marketing expense, reduced
travel expenses and lower profit dependent accruals, which were partially offset by higher severance and professional
services expenses related to cost structure changes. Selling, general and administrative expenses for 2017 included
$4.3 million of asset write-downs to held for sale value on certain assets at our former Oklahoma City facility and $3.2
million of expenses associated with the execution of a sublease for the Oklahoma City facility.
Goodwill impairment—In the fourth quarter of 2018, we recorded a non-cash goodwill impairment charge associated
with our Consumer Products segment of $195.1 million. See Item 8, Financial Statements and Supplementary Data
under Note 7 "Goodwill and Intangible Assets" and "Critical Accounting Policies and Estimates - Goodwill" included
on page 40 for further information.
Gain on divested assets, net—On August 21, 2018, we sold our Ladysmith facility for net cash proceeds of approximately
$71 million. In total, $24.0 million of gain was recorded on the sale, which included $34.0 million of net assets sold,
$14.0 million of goodwill write-off and other expenses related to the sale.
Interest expense—Interest expense decreased $0.8 million during 2018, compared to 2017 as higher interest expense
associated with a larger average balance on our revolving credit facilities was more than offset by higher capitalized
interest of $9.0 million in 2018 compared to capitalized interest of $4.6 million in 2017.
28
Income tax provision—We recorded income tax expense of $10.3 million in 2018, compared to an income tax benefit
of $56.4 million in 2017. The rate determined under generally accepted accounting principles, or GAAP, for 2018 was
a provision of approximately 8% compared to a benefit in 2017 of approximately 138%. The net change to our effective
tax rate in 2018 was primarily the result of recognizing benefits related to tax reform in 2017 and current year goodwill
impairment expense which did not have a corresponding tax impact.
During 2018 and 2017, 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 tax
rates for 2018 and 2017 would have been approximately 5% and 34%, respectively. See the section entitled "Non-
GAAP Measures" on pages 34-36 of this report for a reconciliation of these adjusted income tax benefit and
provision amounts to the comparable income tax provision amounts.
29
DISCUSSION OF BUSINESS SEGMENTS
Consumer Products
(Dollars in thousands - except per ton amounts)
Net sales
Operating (loss) income1
Percent of net sales
Shipments (short tons)
Retail
Non-retail
Total tissue tons
Converted products cases (in thousands)
Sales price (per short ton)
Retail
Non-retail
Total tissue
Years Ended December 31,
2018
$ 884,812
(173,858)
2017
$ 941,907
28,973
(19.6)%
3.1%
293,856
58,577
352,433
48,699
309,067
55,562
364,629
51,221
$
$
2,703
1,506
2,504
$
$
2,775
1,440
2,572
1
In 2018, the Company adopted a new accounting standard, ASU 2017-07, which resulted in a change in the presentation of pension and
postretirement benefit (costs) income other than service costs on a line outside of “Income from operations.” The corresponding prior period
amounts have been reclassified to conform with the current period presentation.
Net sales for our Consumer Products segment decreased by $57.1 million, or 6.1%, in 2018 compared to 2017, due
to the sale of our Ladysmith facility in the third quarter of 2018, lower average retail tissue net selling prices and
decreased converted case shipments. These unfavorable comparisons were partially offset by higher average net
selling prices and increased shipments for non-retail tissue products.
The segment had an operating loss of $173.9 million in 2018, which included the $195.1 million non-cash goodwill
impairment charge and a gain of $24.0 million on the sale of the Ladysmith facility. Excluding the goodwill impairment
charge and the gain on the sale of the Ladysmith facility, the segment had an operating loss of $2.8 million compared
to operating income of $29.0 million in 2017. The loss was due primarily to the decreased sales, higher pulp and
transportation costs, as well as higher wage and benefit costs associated with an increase in employees related to
the expansion of our Shelby facility project and the effect of annual wage increases. Operating income for 2017 also
included $14.7 million of costs associated with the closure of our former Oklahoma City facility, which included expenses
associated with the execution of a sublease for that facility.
Pulp and Paperboard
(Dollars in thousands - except per ton amounts)
Net sales
Operating income1
Percent of net sales
Paperboard shipments (short tons)
Paperboard sales price (per short ton)
Years Ended December 31,
2018
$ 839,406
130,426
2017
$ 788,501
97,360
15.5%
12.3%
859,348
975
$
828,201
952
$
1
In 2018, the Company adopted a new accounting standard, ASU 2017-07, which resulted in a change in the presentation of pension and
postretirement benefit (costs) income other than service costs on a line outside of “Income from operations.” The corresponding prior period
amounts have been reclassified to conform with the current period presentation.
Net sales for our Pulp and Paperboard segment increased by $50.9 million, or 6.5%, in 2018 compared to 2017. The
increase was due primarily to strong production and sales volume increases in addition to paperboard net price
increases.
30
Operating income for the segment increased $33.1 million, or 34.0%, during 2018 compared to 2017, due primarily to
increased sales and lower maintenance costs due to no planned major maintenance in 2018. These favorable impacts
were partially offset by higher chip, sawdust and log costs, as well as higher chemical and transportation costs and
increased depreciation expense.
YEAR ENDED DECEMBER 31, 2017 COMPARED TO YEAR ENDED DECEMBER 31, 2016
The following table sets forth data included in our Consolidated Statements of Operations as a percentage of net sales.
(Dollars in thousands)
Net sales
Costs and expenses:
Cost of sales1
Selling, general and administrative expenses1
Gain on divested assets, net
Total operating costs and expenses
Income from operations
Interest expense, net
Non-operating pension and other postretirement benefit
(costs) income1
Earnings before income taxes
Income tax benefit (provision)
Net earnings
Years Ended December 31,
2017
2016
$ 1,730,408
100.0% $ 1,734,763
100.0%
(1,530,341)
(128,882)
—
(1,659,223)
71,185
(31,374)
1,143
40,954
56,385
97,339
$
88.4
7.4
—
95.9
4.1
1.8
(1,493,559)
(128,195)
1,755
(1,619,999)
114,764
(30,651)
0.1
2.4
3.3
5.6% $
(3,447)
80,666
(31,112)
49,554
86.1
7.4
0.1
93.4
6.6
1.8
0.2
4.6
1.8
2.9%
1
In the first quarter of 2018, the Company adopted a new accounting standard, ASU 2017-07, which resulted in a change in the presentation
of pension and postretirement benefit (costs) income other than service costs on a line outside of “Income from operations.” The corresponding
prior period amounts above have been reclassified to conform with the 2018 presentation.
Net sales—Net sales for 2017 decreased by $4.4 million, or less than 1.0%, compared to 2016, primarily due to
decreased shipments during 2017 in our Consumer Products segment largely offset by increased shipments in our
Pulp and Paperboard segment, as a result of the inclusion of Manchester Industries, which was acquired in December
2016, and a favorable sales mix in both segments. These items are further discussed below under “Discussion of
Business Segments."
Cost of sales—Cost of sales was 88.4% of net sales for 2017 compared to 86.1% of net sales for 2016. Cost of sales
was $36.8 million higher in 2017 due primarily to increased transportation costs caused by major weather related
events, additional internal case shipments as a result of the closure of our Oklahoma City facility, and higher
transportation rates. Furthermore, this increase in cost of sales was impacted by higher pulp pricing, higher depreciation
expense, higher costs associated with the inclusion of Manchester Industries, and higher inventory costs in the fourth
quarter of 2016 that flowed through cost of sales in first quarter of 2017. These cost increases were partially offset by
lower wage and benefit costs resulting from the implementation of our warehouse automation project at several of our
Consumer Products segment facilities, the shutdown of two paper machines at our Neenah facility in the fourth quarter
of 2016 and the closure of our Oklahoma City facility in March 2017.
Selling, general and administrative expenses—Selling, general and administrative expenses increased $0.7
million during 2017 compared to 2016. The higher expense was primarily a result of $4.3 million of asset write-downs
to their held for sale value on certain Oklahoma City assets, $3.2 million of expenses associated with the execution
of a sublease for the Oklahoma City facility, $3.0 million of increased amortization of intangibles resulting from our
acquisition of Manchester Industries and $2.3 million of reorganization related expenses associated with cost control
measures. These cost increases were partially offset by $2.8 million of mark-to-market benefit in 2017 related to our
directors' common stock units, which will ultimately be settled in cash, compared to $4.8 million of mark-to-market
expense in 2016, lower profit dependent accruals, and a $1.6 million pension settlement charge in 2016.
Gain on divested assets—During 2016, we recognized a net gain of $1.8 million as a result of the release to us of $2.3
million from an indemnity escrow account related to the December 2014 sale of our former specialty business and
mills, less $0.5 million of other related settlement costs.
31
Interest expense—Interest expense increased $0.7 million during 2017, compared to 2016. The increase was driven
by a larger average balance on our revolving credit facilities during 2017 compared to 2016, partially offset by capitalized
interest of $4.6 million in 2017 compared to $2.3 million in 2016.
Income tax provision—We recorded an income tax benefit of $56.4 million in 2017, compared to income tax expense
of $31.1 million in 2016. The benefit in 2017 was primarily the result of a $70 million tax benefit resulting from the
remeasurement of our net deferred tax liabilities following the passage of the Tax Cuts and Jobs Act. During 2017 and
2016, there were a number of items that were included in the calculation of our income tax benefit and expense that
we do not believe were indicative of our core operating performance. Excluding these items, the tax rates for 2017
and 2016 would have been approximately 34% and 38%, respectively. See the section entitled "Non-GAAP Measures"
on pages 34-36 of this report for a reconciliation of these adjusted income tax benefit and provision amounts to the
comparable income tax provision amounts.
32
DISCUSSION OF BUSINESS SEGMENTS
Consumer Products
(Dollars in thousands - except per ton amounts)
Net sales
Operating income1
Percent of net sales
Shipments (short tons)
Retail
Non-retail
Total tissue tons
Converted products cases (in thousands)
Sales price (per short ton)
Retail
Non-retail
Total tissue
Years Ended December 31,
2017
$ 941,907
28,973
2016
$ 988,380
67,919
3.1%
6.9%
309,067
55,562
364,629
51,221
314,042
81,952
395,994
52,875
$
$
2,775
1,440
2,572
$
$
2,757
1,480
2,493
1
In 2018, the Company adopted a new accounting standard, ASU 2017-07, which resulted in a change in the presentation of pension and
postretirement benefit (costs) income other than service costs on a line outside of “Income from operations.” The corresponding prior period
amounts above have been reclassified to conform with the 2018 presentation.
Net sales for our Consumer Products segment decreased by $46.5 million, or 4.7%, in 2017 compared to 2016, due
to lower overall sales volume in both finished goods cases and parent rolls. The decreased parent roll sales were
primarily the result of the shutdown of two paper machines at our Neenah facility in the fourth quarter of 2016. This
decrease in volume was partially offset by a favorable sales mix as increased TAD bathroom tissue and household
towel sales, combined with reduced parent roll sales, resulted in a 3.2% average price increase.
Segment operating income decreased $38.9 million, or 57.3%, in 2017 compared to 2016 due primarily to increased
costs for transportation, pulp and packaging, higher depreciation expense, costs associated with the closure of our
Oklahoma City facility, and higher inventory costs in the fourth quarter of 2016 that flowed through cost of sales in the
first quarter of 2017. These cost increases were partially offset by reduced wage and benefit costs resulting from the
implementation of our warehouse automation project, the shutdown of the two paper machines at our Neenah facility
in the fourth quarter 2016 and the closure of our Oklahoma City facility in the first quarter of 2017, which also resulted
in favorable maintenance cost comparisons in 2017.
Pulp and Paperboard
(Dollars in thousands - except per ton amounts)
Net sales
Operating income1
Percent of net sales
Paperboard shipments (short tons)
Paperboard sales price (per short ton)
Years Ended December 31,
2017
$ 788,501
97,360
2016
$ 746,383
112,700
12.3%
15.1%
828,201
952
$
796,158
937
$
1
In 2018, the Company adopted a new accounting standard, ASU 2017-07, which resulted in a change in the presentation of pension and
postretirement benefit (costs) income other than service costs on a line outside of “Income from operations.” The corresponding prior period
amounts have been reclassified to conform with the current period presentation.
Net sales for our Pulp and Paperboard segment increased by $42.1 million, or 5.6%, in 2017 compared to 2016. The
increase was primarily due to the inclusion of Manchester and incremental volumes with a higher net selling price
resulting from a favorable sales mix.
33
Operating income for the segment decreased $15.3 million, or 13.6%, during 2017 compared to 2016, due primarily
to increased costs for purchased pulp, higher natural gas prices and increased electrical usage due to extended turbine
generator outages at our Arkansas and Idaho facilities. Additionally, depreciation and amortization costs increased as
a result of the acquisition of Manchester Industries and the installation of the continuous pulp digester at our Idaho
facility. These cost increases were partially offset by improved pulp yields and reduced wood fiber prices at our Arkansas
facility.
NON-GAAP MEASURES
We use earnings before interest (including debt retirement costs), taxes, depreciation and amortization, or EBITDA,
and EBITDA adjusted for certain items, or Adjusted EBITDA, and Adjusted income tax provision 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.
EBITDA and Adjusted EBITDA have important limitations as analytical tools, and should not be considered in isolation,
or as a substitute for any of our results as reported under GAAP. Some of these limitations are:
EBITDA and Adjusted EBITDA do not reflect our cash expenditures for capital assets;
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital
requirements;
EBITDA and Adjusted EBITDA do not include cash pension payments;
EBITDA and Adjusted EBITDA exclude certain tax payments that may represent a reduction in cash available
to us;
EBITDA and Adjusted EBITDA do not reflect interest expense, or the cash requirements necessary to service
interest or principal payments on our debt;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized
will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements
for such replacements; and
other companies, including other companies in our industry, may calculate these measures differently than
we do, limiting their usefulness as a comparative measure.
We present EBITDA, Adjusted EBITDA and Adjusted income tax provisions 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 indenture governing the 2013
Notes uses metrics similar to EBITDA to measure our compliance with certain covenants.
34
The following table provides our EBITDA and Adjusted EBITDA for the periods presented, as well as a reconciliation
to net earnings:
Years Ended December 31,
(In thousands)
Net (loss) earnings
Interest expense, net 1
Income tax provision (benefit)
Depreciation and amortization expense2
EBITDA
Directors' equity-based compensation (benefit) expense
Goodwill impairment3
Gain associated with the sale of the Ladysmith facility, net
Reorganization related expenses associated with SG&A cost control
measures
Consumer products reorganization related expenses
Other
Costs associated with Oklahoma City facility closure4
Costs associated with Long Island facility closure
Manchester Industries acquisition related expenses
Write-off of assets as a result of Warehouse Automation project
Gain associated with the sale of the specialty mills, net
Pension settlement expense
Costs associated with Neenah paper machines shutdown
Adjusted EBITDA
2018
2016
30,620
10,305
101,953
31,374
(56,385)
104,990
2017
$ (143,767) $ 97,339 $ 49,554
30,651
31,112
91,090
(889) $ 177,318 $ 202,407
4,779
(2,833)
—
—
—
—
(2,340)
195,079
(23,952)
$
6,935
1,048
844
—
—
—
—
—
—
2,263
—
—
11,055
1,443
220
41
—
—
—
—
—
318
1,891
2,665
—
(1,755)
3,482
—
1,049
$ 176,725 $ 189,507 $ 214,836
—
1
2
3
4
Interest expense, net for the year ended December 31, 2016 includes debt retirement costs of $0.4 million.
Depreciation and amortization expense for the years ended December 31, 2017 and 2016 includes $3.7 million and $1.3 million, respectively,
of accelerated depreciation associated with the Oklahoma City facility closure.
During the fourth quarter of 2018, we recognized non-cash goodwill impairment of $195.1 million associated with our Consumer Products
segment. See Item 8, Financial Statements and Supplementary Data under Note 7 "Goodwill and Intangibles Assets" for more information.
Costs associated with the Oklahoma City facility closure for the twelve months ended December 31, 2017 include $4.3 million of loss on the
write-down of assets to their held for sale value and $3.2 million of expenses associated with the execution of a sublease for the facility.
35
The following table provides our Adjusted income tax provisions for the years ended December 31, 2018, 2017 and
2016, as well as a reconciliation to income tax benefit (provision):
(In thousands)
GAAP income tax (provision) benefit1
Adjustments, tax impact:
Directors' equity-based compensation
Gain associated with the sale of the Ladysmith facility, net
Reorganization related expenses associated with SG&A cost
control measures
Impact of state tax reform
Consumer products reorganization related expenses
Other
Federal tax rate change1
Costs associated with Oklahoma City facility closure
Costs associated with Long Island facility closure
Accelerated depreciation of assets as a result of warehouse
automation project
Manchester Industries acquisition related expenses
Write-off of assets as a result of warehouse automation project
Gain associated with the sale of the specialty mills, net
Costs associated with Neenah paper machines shutdown
Years Ended December 31,
2018
(10,305) $
2017
56,385 $
2016
(31,112)
$
523
10,444
952
—
(1,721)
(757)
(676)
(274)
(151)
—
—
—
—
—
—
—
—
—
—
(70,055)
(4,977)
(686)
(121)
(74)
(14)
—
—
(1,693)
—
—
—
—
—
—
(589)
(672)
—
(465)
—
626
(371)
(1,242)
Pension settlement expense
Adjusted income tax provision
—
(2,160) $
$
(19,347) $
(35,518)
1
The benefit in 2017 is primarily due to the remeasurement of deferred tax liabilities as a result of the Act signed into law on December 22,
2017. The resulting net tax benefit is excluded from our adjusted non-GAAP earnings.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents information regarding our cash flows for the years ended December 31, 2018, 2017 and
2016.
Cash Flows Summary
(In thousands)
Net cash flows from operating activities1
Net cash flows from investing activities
Net cash flows from financing activities
Years Ended December 31,
$
2018
168,899 $
(223,971)
63,281
2017
178,670 $
(198,797)
13,864
2016
172,751
(222,506)
67,146
1
In 2018, we adopted a new accounting standard, ASU 2016-18, which required a change in the presentation of cash, cash equivalents, and
restricted cash in the statement of cash flows. As a result of adopting this standard, the net cash flows from operating activities increased by
$1.0 million for 2017. There were no changes to the 2016 presentation as previously reported.
Operating Activities—Net cash flows from operating activities for 2018 decreased by $9.8 million compared to 2017.
The decrease in operating cash flows was driven by a $27.7 million decrease in earnings, after adjusting for non cash
related items, as well as a decrease of $5.6 million in cash flows generated from changes in working capital in 2018
compared to the same period in 2017. This decrease in net cash flows from operating activities was partially offset by
a net $14.0 million decrease in taxes receivable in 2018, as a result of cash received from income tax refunds, compared
to a $10.6 million increase in taxes receivable in 2017.
Net cash flows from operating activities for 2017 increased by $5.9 million compared to 2016. The increase in operating
cash flows was driven by $21.8 million of positive cash flows generated from changes in working capital in 2017, largely
36
due to an increase in accounts payable and accrued liabilities, compared to $3.5 million of negative cash flows for
changes in working capital in 2016. This increase in net cash flows from operating activities was partially offset by a
net $10.6 million increase in taxes receivable in 2017, compared to a $5.1 million decrease in taxes receivable in 2016.
The change in the taxes receivable balance for 2017 was due to increased tax depreciation relating to our strategic
capital projects, which lessened our tax burden and increased the amount of refund we expected to receive.
Investing Activities—Net cash flows used for investing activities increased $25.2 million in 2018 compared to 2017.
This increase was largely driven by a $96.0 million increase in cash paid for plant and equipment in 2018, driven largely
by spending on our new tissue machine and related converting equipment in Shelby, North Carolina. That increase
in cash used for investing activities was partially offset by $70.9 million of net cash proceeds from divested assets,
which resulted from the sale of our Ladysmith facility in the third quarter of 2018. In addition to cash paid for plant and
equipment, we also incurred $42.2 million of non-cash additions related to accrued payables for plant and equipment
in 2018, which is also largely associated with our Shelby expansion project.
Net cash flows used for investing activities decreased $23.7 million in 2017 compared to 2016. This decrease was
largely driven by the acquisition of Manchester Industries in 2016 for $67.4 million, net of cash acquired, partially offset
by a $44.4 million increase in cash spent for plant and equipment in 2017, which increased due to our investments in
strategic capital projects, including a continuous pulp digester project at our Lewiston, Idaho facility and our Shelby
expansion project.
Financing Activities—Net cash flows from financing activities were $63.3 million for 2018, and were largely driven by
net borrowings on short-term debt of $65.8 million primarily used to fund the expansion of our Shelby, North Carolina
facility.
Net cash flows from financing activities were $13.9 million for 2017, and were largely driven by net borrowings on our
revolving credit facilities of $20.0 million, partially offset by $4.9 million in repurchases of our outstanding common
stock pursuant to our stock repurchase program.
Capital Resources
Due to the competitive and cyclical nature of the markets in which we operate, 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 our borrowing capacity under our senior secured revolving credit facilities will be adequate to
fund debt service requirements and provide cash required to support our ongoing operations, capital expenditures 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.
At December 31, 2018 and 2017, our financial position included gross debt of $795.8 million and $730.0 million,
respectively. Stockholders’ equity at December 31, 2018 was $426.4 million, compared to $575.4 million at the end of
2017. Our total debt to total capitalization, excluding accumulated other comprehensive loss, was 61.6% at
December 31, 2018, compared to 53.9% at December 31, 2017.
Capital Expenditures
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. In 2018, we incurred $328.9 million
in capital expenditures, excluding capitalized interest of $9.0 million, which included $311.1 million of capital spending
on strategic projects and other projects designed to reduce future manufacturing costs and provide a positive return
on investment. These strategic projects in 2018 and 2017 consist primarily of the expansion of our Shelby, North
Carolina facility and the continuous pulp digester at our Idaho pulp and paperboard facility. During 2017, excluding
capitalized interest of $4.6 million, we spent $194.0 million on capital expenditures, which included $152.6 million of
strategic capital spending. In 2019, we expect cash paid for capital expenditures to be approximately $130 to $140
million.
Debt Arrangements
$300 Million Senior Notes Due 2025
On July 29, 2014, we issued $300 million aggregate principal amount of Senior Notes due 2025, which we refer to as
the 2014 Notes, that mature on February 1, 2025, have an interest rate of 5.375% and were issued at their face value.
Our 2019 expected debt service obligation related to the 2014 Notes, consisting of cash payments for interest, is $16.1
million.
37
$275 Million Senior Notes Due 2023
On February 22, 2013, we issued $275 million aggregate principal amount of 4.5% senior notes due 2023, which we
refer to as the 2013 Notes.
Our 2019 expected debt service obligation related to the 2013 Notes, consisting of cash payments for interest, is $12.4
million.
Revolving Credit Facilities
After giving effect to a revolving commitment increase described below, our senior secured revolving credit facilities
provide in the aggregate, on a combined basis, for the extension of up to $400 million in revolving loans under: (i) a
$200 million credit agreement with Wells Fargo Bank, National Association, as administrative agent, and the lenders
party thereto (the “Commercial Credit Agreement”); and (ii) a $200 million credit agreement with Northwest Farm Credit
Services, PCA, as administrative agent, and the lenders party thereto (the “Farm Credit Agreement”). These revolving
credit facilities were initially entered into on October 31, 2016 and we refer to them collectively as the “Credit
Agreements.” In August, 2018, we entered into an agreement with a lender to the Farm Credit Agreement to provide
an incremental revolving loan commitment, which increased the size of the Farm Credit Agreement from $100 million
to $200 million. The revolving credit facilities provided under the Credit Agreements mature on October 31, 2021.
We may separately request incremental commitments under either Credit Agreement to increase the amount of
revolving loans or to provide term loans under such Credit Agreement. After obtaining the $100 million incremental
revolving commitment to the Farm Credit Agreement in August 2018, the aggregate amount of incremental commitments
we may request may not exceed $100 million (on a combined basis under both Credit Agreements), plus an additional
amount, not to exceed $100 million (also on a combined basis under both Credit Agreements), such that our first lien
leverage ratio on a pro forma basis, as defined, does not exceed 3.00 to 1.00, subject to certain customary conditions
and receipt of commitments by existing or additional lenders. In addition, after giving effect to the amount of any
incremental borrowing under the Farm Credit Agreement, the principal amount of all unfunded revolving loan
commitments and the outstanding amount of any term loans provided under the Farm Credit Agreement (if any) cannot
exceed 50% of the sum of the outstanding principal amount of the loans and unfunded commitments under the Farm
Credit Agreement and the Commercial Credit Agreement on a combined basis.
Revolving Loans borrowed under the Credit Agreements bear interest, at our option, at a LIBOR rate, a base rate, or,
in the case of the Farm Credit Agreement, a one-, two-, three-, four-, or five-year fixed rate, plus, in each case, an
applicable margin. Prior to an amendment to each Credit Agreement in November 2018, the per annum margin
applicable to LIBOR rate loans could range from 1.25% to 2.00% under the Commercial Credit Agreement, and from
1.50% to 2.25% under the Farm Credit Agreement, in each case, depending on changes to our consolidated leverage
ratio. Following the amendment in November 2018, the per annum margin applicable to LIBOR rate loans can now
range from 1.25% to 2.50% under the Commercial Credit Agreement, and from 1.50% to 3.50% under the Farm Credit
Agreement. The margin applicable to fixed rate loans under the Farm Credit Agreement is the same as the margin
applicable to LIBOR rate loans under the Farm Credit Agreement. The margin applicable to base rate loans under
both Credit Agreements is always 1.00% per annum less than the corresponding margin for LIBOR rate loans. We
also pay commitment fees on the unused portion of the revolving loan commitments under the Credit Agreements,
which range from 0.20% per annum to 0.40% per annum, depending on changes to our consolidated leverage ratio.
Prior to the November 2018 amendment, this commitment fee could not exceed 0.35% per annum.
The Credit Agreements are secured by substantially all of the personal property of the Company and its domestic
subsidiaries through separate liens granted under each Credit Agreement for the benefit of each secured party
thereunder on an equal and ratable basis. The Company’s obligations under the Credit Agreements are guaranteed
by the Company’s domestic subsidiaries.
The Credit Agreements contain various loan covenants that restrict the ability of the Company and its subsidiaries to
take certain actions, including, incurrence of indebtedness, creation of liens, mergers or consolidations, dispositions
of assets, repurchase or redemption of capital stock, making certain investments, entering into certain transactions
with affiliates or changing the nature of their business. In addition, the Credit Agreements contain financial covenants
that require the Company to maintain a consolidated secured leverage ratio in an amount not to exceed 2.00 to 1.00
in 2019, and 1.50 to 1.00 thereafter, a consolidated interest coverage ratio in an amount not less than 1.25 to 1.00,
and a consolidated asset coverage ratio of not less than 1.00 to 1.00.
Each Credit Agreement also contains customary events of default, including failure to make payments under such
Credit Agreement, breach of any representation or warranty or covenant under such Credit Agreement, default under
or acceleration of other indebtedness for borrowed money in excess of an agreed amount, any change in control of
the Company based upon a third party acquiring more than 35% of the equity interests of the Company, bankruptcy
events, invalidity of such credit agreement, the incurrence of certain liabilities, termination events or withdrawals from
specified benefit plans, and unpaid or uninsured judgments in excess of an agreed amount.
38
We are members of the Northwest Farm Credit Services, PCA system which entitles us to patronage refunds and other
distributions on account of our equity interests in the Northwest Farm Credit Services, PCA, as well as our patronage
with Northwest Farm Credit Services. Patronage refunds are distributions of profits from member banks in the United
States Farm Credit System, like Northwest Farm Credit Services, which are cooperatives (member owned) that
distribute profits to their members in the form of patronage dividends, which are accrued as earned and recorded as
offsets to interest expense under the Farm Credit Agreement.
As of December 31, 2018, there was an aggregate of $200 million of borrowings outstanding under the Credit
Agreements and we were in compliance with the covenants contained in the Credit Agreements. In addition, $7.6
million of the credit facilities was being used to support outstanding standby letters of credit. The borrowings outstanding
under the Credit Agreements as of December 31, 2018, consisted of a combination of short-term base and LIBOR
rate loans which are classified as current liabilities in our Consolidated Balance Sheet, and a $100.0 million fixed rate,
three-year borrowing under the Farm Credit Agreement that is included in "Long-term debt," in our Consolidated
Balance Sheet. As of December 31, 2018, we would have been permitted to draw an additional $192.4 million of
revolving loans under the Credit Agreements.
Please see Part II, Note 10, "Debt" of this report for information relating to our senior notes and revolving credit
facilities.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of December 31, 2018. Portions of the amounts shown
are reflected in our financial statements and accompanying notes, as required by GAAP. See the footnotes following
the table for information regarding the amounts presented and for references to relevant financial statement notes that
include a detailed discussion of the item.
(In thousands)
Short-term debt
Long-term debt1
Interest on long-term debt1
Capital leases2
Operating leases2
Purchase obligations3
Other obligations4,5
Total
Payments Due by Period
$
Total
120,833 $
675,000
187,663
36,785
74,811
391,532
226,615
$ 1,713,239 $
2019
120,833 $
—
33,230
3,093
12,038
358,368
160,659
688,221 $
2020-2021
2022-2023
Thereafter
— $
100,000
63,307
6,174
21,845
20,745
13,114
225,185 $
— $
—
50,813
5,808
16,652
8,311
10,398
91,982 $
—
575,000
40,313
21,710
24,276
4,108
42,444
707,851
1
2
3
4
5
Included above are the principal and interest payments that were due, as of December 31, 2018, on our 2013 and 2014 Notes and our fixed-
rate, three-year borrowings under our credit facilities. For more information regarding specific terms of our long-term debt, see Note 10, “Debt,”
in the notes to the consolidated financial statements.
These amounts represent our minimum capital lease payments, including amounts representing interest, and our minimum operating lease
payments. See Note 17, “Commitments and Contingencies,” in the notes to the consolidated financial statements.
Purchase obligations consist primarily of contracts for the purchase of raw materials (primarily pulp) from third parties, trade accounts payable
as of December 31, 2018, contracts for outside wood chipping and contracts with natural gas and electricity providers.
Included in other obligations are accrued liabilities and accounts payable (other than certain trade accounts payable balances included as
"purchase obligations" above) as of December 31, 2018, liabilities associated with supplemental pension and deferred compensation
arrangements, and estimated payments on postretirement employee benefit plans.
Total excludes $2.8 million of unrecognized tax benefits due to the uncertainty of timing of payment. See Note 8, “Income Taxes,” in the notes
to the consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or
future effect on our financial conditions or consolidated financial statements.
ENVIRONMENTAL
Our operating facilities are subject to rigorous federal and state environmental regulation governing air emissions,
wastewater discharges, and solid and hazardous waste management. Our goal is continuous compliance with all
39
environmental regulations and we regularly monitor our activities to ensure compliance with all pertinent rules and
requirements. Compliance with environmental regulations is a significant factor in our business and requires periodic
capital expenditures as well as additional operating costs as rules change.
Concern over climate change, including the impact of global warming, may lead to future regulations. We believe there
are no U.S. rules currently proposed that would have a material impact on our operations.
Our facilities are currently in substantial compliance with applicable environmental laws and regulations. We cannot
be certain, however, that situations that may give rise to material environmental liabilities will not be discovered or that
the enactment of new environmental laws or regulations or changes in existing laws or regulations will not require
significant expenditures by us.
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 the 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.
See Note 3, “Recently Adopted and New Accounting Standards” to the consolidated financial statements included in
Item 8 of this Annual Report on Form 10-K for additional information regarding recently adopted and new accounting
pronouncements.
Goodwill.
As of December 31, 2018 and December 31, 2017, we had $35.1 million and $244.2 million, respectively, of goodwill
included on our Consolidated Balance Sheet. Goodwill is not amortized but tested for impairment annually as of each
November 1st and at any time when events suggest impairment may have occurred, such as a significant adverse
change in the business climate or a sustained drop in the company’s market capitalization. If the carrying amount of
a reporting unit exceeds the estimated fair value of that reporting unit, a goodwill impairment loss is recognized equal
to the excess of the reporting unit’s carrying amount over its estimated fair value.
In late April 2018, we experienced a significant decrease in our market capitalization after announcing lower first quarter
financial results and a reduced second quarter sales outlook for our Consumer Products reporting unit. We identified
this as a triggering event and tested the goodwill allocated to this reporting unit for impairment as of May 31, 2018. To
determine the fair value of the Consumer Products reporting unit, we used a discounted cash flow methodology utilizing
our most recent financial projections that take into account a variety of factors including industry and market conditions.
Compared to the previous projections utilized during the November 1, 2017 impairment test, our estimates as of May
31, 2018 did not show significant adverse changes to the reporting unit’s projected operating results for future periods.
As a result, we determined that the fair value of the reporting unit exceeded its carrying value as of that testing date.
In August 2018, we sold our Ladysmith, Wisconsin tissue manufacturing facility for net cash proceeds of approximately
$71 million. In connection with the sale, we recorded a $14.0 million write-off of goodwill of the Consumer Products
reporting unit. Consistent with authoritative guidance, the goodwill was allocated to our divested assets by estimating
the fair value of the Ladysmith facility compared to the estimated fair value of the Consumer Products reporting unit,
which was then used to estimate the amount of goodwill to allocate to the sold business.
We conducted our annual impairment test as of the November 1, 2018 measurement date and concluded, in connection
with the preparation of our 2018 financial statements, that the estimated fair value of the Consumer Products reporting
unit was below the carrying value of the reporting unit, resulting in a non-cash impairment charge of $195.1 million.
This amount represents the remaining goodwill associated with our Consumer Products reporting unit that was originally
recorded as the result of our acquisition of Cellu Tissue Holdings, Inc. in 2010.
To determine the fair value of the Consumer Products reporting unit, we used the same discounted cash flow
methodology utilized in the May 2018 and November 2017 goodwill impairment tests. Our most recent estimates for
2019 and future years were based on market data obtained in the fall of 2018 indicating that in 2019 and future years,
we expect lower pricing for certain tissue products, lower converted case sales volumes, a higher mix of parent roll
sales, and increased transportation and pulp costs compared to the financial projections used in May 2018. In light of
the weakened market outlook, our forecast yielded a fair value less than the carrying value of the Consumer Products
reporting unit, resulting in the impairment of goodwill. We also performed an overall reconciliation to corroborate the
40
estimated fair value from the income approach to our overall market capitalization as of the November 1, 2018
measurement date.
As of the November 1, 2018 measurement date, the fair value of our Pulp and Paperboard reporting unit was clearly
in excess of its carrying value, so no goodwill associated with this reporting unit has been written down. Refer to Note
7, “Goodwill and Intangible Assets” to the consolidated financial statements included in Item 8 of this Annual Report
on Form 10-K for additional information.
Pension and postretirement employee benefits. The determination of pension plan expense and the requirements
for funding our pension plans are based on a number of actuarial assumptions. Note 13, "Savings, Pension and Other
Postretirement Employee Benefit Plans," in the notes to the consolidated financial statements includes information for
the three years ended December 31, 2018, 2017 and 2016, on the components of pension expense and other
postretirement employee benefit, or OPEB, expense and income and the underlying actuarial assumptions used to
calculate periodic expense, as well as the funded status for our pension and OPEB plans as of December 31, 2018
and 2017.
The assumption that has the largest impact on the determination of plan expense and the funded status of our pension
and OPEB plans is the discount rate. The discount rate used in the determination of pension benefit obligations and
pension expense is determined based on a review of long-term high-grade bonds and management’s expectations.
At December 31, 2018, we calculated obligations using a 4.40% discount rate. The discount rates used at December 31,
2017 and 2016 were 3.90% and 4.45%, respectively. An increase in the discount rate, all other assumptions remaining
the same, would decrease pension plan expense, and conversely, a decrease would increase plan expense. As an
indication of the sensitivity that pension expense has to the discount rate assumption, a 25 basis point change in the
discount rate would affect annual plan expense by approximately $0.5 million. Additionally, a 25 basis point decrease
in the discount rate would increase the pension benefit obligation by approximately $8.0 million.
The discount rates used to calculate OPEB obligations, which were determined using the same methodology we used
for our pension plans, were 4.55%, 3.95% and 4.30% at December 31, 2018, 2017 and 2016, respectively. As an
indication of the sensitivity that OPEB income has to the discount rate assumption, a 25 basis point change in the
discount rate would affect plan income by approximately $0.1 million. Additionally, a 25 basis point decrease in the
discount rate would increase the OPEB benefit obligation by approximately $1.4 million.
Our company-sponsored pension plans were underfunded by a net $25.3 million at December 31, 2018 and $6.8
million at December 31, 2017. Our OPEB plans are unfunded and represent a liability of $60.3 million and $65.1 million
as of December 31, 2018 and 2017, respectively.
41
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risks
Interest Rate Risk
Our exposure to market risks on financial instruments includes interest rate risk on our secured revolving credit facilities.
As of December 31, 2018, there were $200.0 million in borrowings outstanding under our revolving credit facilities.
The interest rates applied to borrowings under the credit facilities 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 facilities' borrowings of $200.0 million, would have a $2.0 million
annual effect on interest expense. During 2018, we reduced our short-term interest rate risk through the use of a short-
term LIBOR Rate option for $100.0 million and negotiated a fixed, long-term rate on the remaining $100 million, of our
total outstanding credit facilities' borrowings balance of $200.0 million, reducing the Company's exposure to variable
rate debt.
We currently do not attempt to alleviate the effects of short-term interest rate fluctuations on our credit facilities'
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 partially mitigate through the
use of firm price contracts for a portion of the natural gas requirements of our manufacturing facilities. As of December 31,
2018, these contracts covered approximately 14% of our expected average monthly requirements for 2019, including
approximately 12% of the expected average monthly requirements for the first quarter of 2019.
Foreign Currency Risk
We have minimal foreign currency exchange risk. Nearly all of our international sales are denominated in U.S. dollars.
Quantitative Information about Market Risks
(Dollars in thousands)
Long-term debt:
Fixed rate
Revolving credit facility
Average interest rate
Fair value at December 31,
2018
2019
2020
2021
2022
2023
Thereafter
Total
Expected Maturity Date
$ — $ — $
—
—%
—
—%
— $ — $ — $ 575,000
—
—
—
100,000
$ 575,000
100,000
4.730%
—%
—%
4.957%
4.923%
$ 612,546
42
ITEM 8.
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018,
2017 and 2016
Consolidated Balance Sheets at December 31, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017
and 2016
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Financial Statement Schedules:
All schedules have been omitted because the required information is not present or is not present in
amounts sufficient to require submission of the schedule, or because the information required is included
in the consolidated financial statements, including the notes thereto.
PAGE
NUMBER
44
45
46
47
48
49-87
88-90
43
CLEARWATER PAPER CORPORATION
Consolidated Statements of Operations
(Dollars in thousands – except per-share amounts)
For The Years Ended December 31,
Net sales
Costs and expenses:
Cost of sales
Selling, general and administrative expenses
Goodwill impairment
Gain on divested assets, net
Total operating costs and expenses
(Loss) income from operations
Interest expense, net
Non-operating pension and other post employment benefit
(costs) income
(Loss) earnings before income taxes
Income tax (provision) benefit
Net (loss) earnings
Net (loss) earnings per common share:
Basic
Diluted
2018
2017
$ 1,724,218 $ 1,730,408 $ 1,734,763
2016
(1,538,012)
(1,530,341)
(1,493,559)
(112,988)
(195,079)
23,952
(128,882)
(128,195)
—
—
—
1,755
(1,822,127)
(1,659,223)
(1,619,999)
(97,909)
(30,620)
(4,933)
(133,462)
(10,305)
(143,767) $
71,185
(31,374)
1,143
40,954
56,385
114,764
(30,651)
(3,447)
80,666
(31,112)
97,339 $
49,554
(8.72) $
(8.72)
5.91 $
5.88
2.91
2.90
$
$
The accompanying notes are an integral part of these consolidated financial statements.
44
CLEARWATER PAPER CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Net (loss) earnings
Other comprehensive (loss) income, net of tax:
Defined benefit pension and other postretirement employee benefits:
Net (loss) gain arising during the period, net of tax
of $(5,717), $2,409, and $248
Amortization of actuarial loss included in net periodic cost,
net of tax of $2,397, $1,305, and $1,576
Amortization of prior service credit included in net
periodic cost, net of tax of $(440), $(601), and $(669)
Settlement, net of tax of $-, $-, and $1,366
Other comprehensive (loss) income, net of tax
Comprehensive (loss) income
The accompanying notes are an integral part of these consolidated financial statements.
For The Years Ended December 31,
2018
$ (143,767) $
2017
97,339 $
2016
49,554
(16,036)
6,745
379
6,759
1,951
2,321
(1,236)
—
(10,513)
$ (154,280) $
(926)
—
7,770
(1,021)
2,116
3,795
105,109 $
53,349
45
CLEARWATER PAPER CORPORATION
Consolidated Balance Sheets
(Dollars in thousands – except share data)
ASSETS
Current assets:
Cash and cash equivalents
Receivables, net
Taxes receivable
Inventories
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Other assets, net
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt
Accounts payable and accrued liabilities
Current liability for pensions and other postretirement employee benefits
Total current liabilities
Long-term debt
Liability for pensions and other postretirement employee benefits
Other long-term obligations
Accrued taxes
Deferred tax liabilities
TOTAL LIABILITIES
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 -16,482,345 and 16,447,898 shares issued
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of tax
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
46
At December 31,
2018
2017
$
22,484 $
15,738
142,065
20,282
266,043
8,661
452,789
1,050,982
244,161
32,542
21,778
$ 1,788,118 $ 1,802,252
145,519
6,301
266,244
3,399
443,947
1,269,271
35,074
24,080
15,746
$
120,833 $
321,032
7,430
449,295
671,292
78,191
38,977
2,785
121,182
1,361,722
155,000
256,621
7,631
419,252
570,524
72,469
43,275
2,770
118,528
1,226,818
—
—
2
6,403
487,339
(67,348)
426,396
2
1,161
618,254
(43,983)
575,434
$ 1,788,118 $ 1,802,252
CLEARWATER PAPER CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) earnings
Adjustments to reconcile net (loss) earnings to net cash flows from
operating activities:
Goodwill impairment
Depreciation and amortization
Equity-based compensation expense
Deferred taxes
Employee benefit plans
Deferred issuance costs on debt
Gain on divested assets, net
Disposal of plant and equipment, net
Other non-cash activity
Changes in working capital, net of acquisition
Change in taxes receivable, net
Other, net
Net cash flows from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment
Acquisition of Manchester Industries, net of cash acquired
Net proceeds from divested assets
Other, net
Net cash flows from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock
Borrowings on short-term debt
Repayments of borrowings on short-term debt
Payments for debt issuance costs
Payment of tax withholdings on equity-based payment arrangements
Other, net
Net cash flows from financing activities
Increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized
Cash paid for income taxes
Cash received from income tax refunds
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
For The Years Ended December 31,
2018
2017
2016
$ (143,767) $
97,339 $
49,554
195,079
101,953
3,314
7,084
(116)
1,356
(25,510)
726
146
16,200
13,980
(1,546)
168,899
—
104,990
3,620
(40,589)
(4,371)
1,199
—
4,053
1,750
21,761
(10,573)
(509)
178,670
—
91,090
12,385
18,327
(1,979)
1,242
—
1,381
758
(3,462)
5,142
(1,687)
172,751
(295,708)
—
70,930
807
(223,971)
(199,748)
—
—
951
(198,797)
(155,349)
(67,443)
—
286
(222,506)
—
630,848
(565,015)
(2,139)
(413)
—
63,281
8,209
16,738
24,947 $
(4,875)
298,308
(278,308)
(134)
(1,127)
—
13,864
(6,263)
23,001
16,738 $
(65,327)
1,273,959
(1,138,959)
(1,906)
(933)
312
67,146
17,391
5,610
23,001
26,134 $
28,085 $
3,736
14,290
2,684
7,638
26,690
17,655
11,289
$
$
Changes in accrued property, plant and equipment
Non-cash reclassification of credit facility borrowings to long-term debt
Other changes to property, plant and equipment, net
$
42,242 $
100,000
1,691
(1,063) $
—
4,241
328
—
—
The accompanying notes are an integral part of these consolidated financial statements.
47
CLEARWATER PAPER CORPORATION
Consolidated Statements of Stockholders’ Equity
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Treasury Stock
Shares
Amount
Accumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity
Balance at December 31,
2015
24,193
$
Net earnings
Performance share,
restricted stock unit,
and stock option
awards
Pension and OPEB, net
of tax of $2,521
Purchase of treasury
stock
Balance at December 31,
2016
Net earnings
Performance share,
restricted stock unit,
and stock option
awards
Pension and OPEB, net
of tax of $3,113
Purchase of treasury
stock
Retirement of treasury
stock
Balance at December 31,
2017
Net loss
Performance share,
restricted stock unit,
and stock option
awards
Reclassification of the
income tax effects of
the Tax Cuts and Jobs
Act
Pension and OPEB,
net of tax of $3,760
Balance at December
31, 2018
—
30
—
—
24,223
$
—
46
—
(7,821)
16,448
$
—
34
—
—
2
—
—
—
—
2
—
—
—
—
2
—
—
—
—
$ 340,095
$
520,307
(6,380) $ (329,990) $
(55,548) $
474,866
—
49,554
6,985
—
—
—
—
—
—
—
—
—
—
—
—
—
3,795
49,554
6,985
3,795
(1,356)
(65,327)
—
(65,327)
$ 347,080
$
569,861
(7,736) $ (395,317) $
(51,753) $
469,873
—
97,339
5,327
—
—
—
—
—
—
—
—
—
(85)
(4,875)
—
—
7,770
97,339
5,327
7,770
(4,875)
(351,246)
(48,946)
7,821
400,192
—
—
$
1,161
$
618,254
—
(143,767)
— $
—
— $
—
5,242
—
—
—
12,852
—
—
—
—
—
—
—
(43,983) $
575,434
—
—
(143,767)
5,242
(12,852)
—
(10,513)
(10,513)
16,482
$
2
$
6,403
$
487,339
— $
— $
(67,348) $
426,396
The accompanying notes are an integral part of these consolidated financial statements.
48
CLEARWATER PAPER CORPORATION
Notes to Consolidated Financial Statements
NOTE 1 Nature of Operations and Basis of Presentation
Clearwater Paper manufactures quality consumer tissue, away-from-home tissue, parent roll tissue, bleached
paperboard and pulp at manufacturing facilities across the nation. The Company is a premier supplier of private label
tissue to major retailers and wholesale distributors, including grocery, drug, mass merchants and discount stores. In
addition, the Company produces bleached paperboard used by quality-conscious printers and packaging converters,
and offers services that include custom sheeting, slitting and cutting. Clearwater Paper's employees build shareholder
value by developing strong customer relationships through quality and service.
Unless the context otherwise requires or unless otherwise indicated, references in this report to “Clearwater Paper
Corporation,” “we,” “our,” “the Company” and “us” refer to Clearwater Paper Corporation and its subsidiaries.
On December 16, 2016, we acquired Manchester Industries, or Manchester, an independently-owned paperboard
sales, sheeting and distribution supplier to the packaging and commercial print industries, for total consideration of
$71.7 million. The acquisition of Manchester's customers extends our reach and service platform to small and mid-
sized folding carton plants, offering a range of converting services that include custom sheeting, slitting and cutting.
Manchester's operations subsequent to the acquisition date are reflected in our financial statements.
On March 31, 2017, we closed our Oklahoma City, Oklahoma converting facility. Notwithstanding the closure, we
remain subject to the terms of a long-term master lease applicable to the facility. In October 2017, we transferred to
a third party substantially all of the remaining fixed assets and supplies inventory located at this facility and subleased
the facility to the third party for the remaining term of the master lease for the facility. In connection with the transfer
of fixed assets, we recorded a loss of $4.3 million in the third quarter of 2017 related primarily to the write-down of the
transferred assets to their held-for-sale value, and a loss of $3.2 million in the fourth quarter of 2017 related to the
execution of the sublease agreement, which is included in “Selling, general and administrative expenses” in our
Consolidated Statement of Operations. The sublease agreement is expected to substantially reduce our cash
requirements under the master lease over the term of the sublease. In addition to the above amounts, we incurred
$7.2 million of closure-related costs associated with the Oklahoma City facility for the twelve months ended December
31, 2017, which is largely included in "Cost of sales" in our Consolidated Statement of Operations.
On August 21, 2018, we sold our Ladysmith, Wisconsin manufacturing facility for net proceeds of approximately $71
million and recorded a related gain on divested assets of $24.0 million in 2018 associated with this sale. See Note 4,
"Asset Divestiture" for further discussion.
These consolidated financial statements include the financial condition and results of operations of Clearwater Paper
Corporation and its wholly-owned subsidiaries. All intercompany transactions and balances between operations within
the company have been eliminated.
NOTE 2 Summary of Significant Accounting Policies
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S., which
we refer to in this report as 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 period. Significant areas requiring the use
of estimates and measurement of uncertainty include determination of valuation for deferred tax assets, uncertain
income tax positions, assessment of impairment of long-lived assets and goodwill, assessment of environmental
matters, allocation of purchase price and fair value estimates for business combinations, equity-based compensation
and pension and postretirement obligation assumptions. Actual results could differ from those estimates and
assumptions.
49
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
We consider all highly liquid instruments with maturities of three months or less to be cash equivalents. Cash that is
held by a third party and has restrictions on its availability to us is classified as restricted cash. The following table
provides a reconciliation of cash, cash equivalents and restricted cash reported on the balance sheet that sum to the
total of those same amounts shown in our Consolidated Statements of Cash Flows.
(In thousands)
Cash and cash equivalents
Restricted cash included in other assets, net
Total cash, cash equivalents and restricted cash shown in the
consolidated statements of cash flows
PROPERTY, PLANT AND EQUIPMENT
December 31,
2018
2017
2016
22,484 $
15,738 $
23,001
2,463
1,000
—
24,947 $
16,738 $
23,001
$
$
Property, plant and equipment are stated at cost, including assets acquired under capital lease obligations and any
interest costs capitalized, less accumulated depreciation. Depreciation of buildings, equipment and other depreciable
assets is determined using the straight-line method. Estimated useful lives generally range from 10 to 40 years for
land improvements; 10 to 40 years for buildings and improvements; 5 to 25 years for machinery and equipment; and
2 to 15 years for office and other equipment. Assets we acquire through business combinations have estimated lives
that are typically shorter than the assets we construct or buy new.
We review the carrying value of our property, plant and equipment for impairment when events or changes in
circumstances indicate that the carrying amount of those assets may not be recoverable. An impairment of property,
plant and equipment exists when the carrying value is not considered to be recoverable through future undiscounted
cash flows from operations and the carrying value of the assets exceeds the estimated fair value.
On August 21, 2018, we simultaneously announced and completed the sale of our Ladysmith, Wisconsin tissue
manufacturing facility (the “Ladysmith Facility”) for net proceeds of approximately $71 million. This sale included $26.8
million of net property, plant and equipment.
On March 31, 2017, we closed our Oklahoma City converting facility. For the twelve months ended December 31,
2017, we incurred $14.7 million of costs associated with this announced closure, which includes $3.7 million in
accelerated depreciation on certain fixed assets. For the twelve months ended December 31, 2016, we incurred $1.7
million of costs associated with this announced closure, which includes $1.3 million in accelerated depreciation on
certain fixed assets.
INTANGIBLE ASSETS
We use estimates in determining and assigning the fair value of the useful lives of intangible assets, the amount and
timing of related future cash flows and fair values of the related operations. Our intangible assets have definite lives
and are amortized over their estimated useful lives. We assess our intangible assets for impairment annually and when
events or changes in circumstances indicate that the carrying amount may not be recoverable.
GOODWILL
Goodwill from an acquisition represents the excess of the cost of a business acquired over the net of the amounts
assigned to assets acquired, including identifiable intangible assets and liabilities assumed. We use estimates in
determining and assigning the fair value of goodwill, including the amount and timing of related future cash flows and
fair values of the related operations. Goodwill is not amortized but is tested for impairment annually as of November 1,
as well as any time when events suggest impairment may have occurred. In the event the carrying value of the reporting
unit in which our goodwill is assigned exceeds the estimated fair value of that reporting unit, an impairment loss would
be recognized to the extent the carrying amount of the reporting unit exceeds its implied fair value.
We recorded $229.5 million of goodwill in connection with our acquisition of Cellu Tissue in December 2010. All of the
recorded goodwill was assigned to our Consumer Products segment and reporting unit. As a result of the December
2014 sale of our Consumer Products segment's specialty business and mills, a portion of goodwill was allocated to
the divested mills and included in our loss on divested assets. As the result of the August 2018 sale of the Ladysmith,
Wisconsin manufacturing facility, a portion of goodwill was allocated to the sale of this business, resulting in a write-
off of $14.0 million of goodwill. We recorded $35.1 million of goodwill in connection with our acquisition of Manchester.
The goodwill from this acquisition is included in our Pulp and Paperboard segment.
50
We concluded that the estimated fair value of the Consumer Products reporting unit was less than its carrying value,
resulting in a non-cash impairment charge of $195.1 million, which represented the remaining goodwill from our
Consumer Products reporting unit. See Note 7, "Goodwill and Intangible Assets" for further discussion.
PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS
The determination of pension plan expense and the requirements for funding our pension plans are based on a number
of actuarial assumptions. Three critical assumptions are the discount rate applied to pension plan obligations, the rate
of return on plan assets and mortality rates. For other postretirement employee benefit, or OPEB, plans, which provide
certain health care and life insurance benefits to qualified retired employees, significant assumptions in determining
OPEB income are the discount rate applied to benefit obligations, and mortality rates. We also participate in
multiemployer defined benefit pension plans. We make contributions to these multiemployer plans, as well as make
contributions to a trust fund established to provide retiree medical benefits for a portion of these employees.
The discount rate used in the determination of pension benefit obligations and pension expense is determined based
on a review of long-term high-grade bonds and management's expectations. To determine the expected long-term
rate of return on pension assets, we employ a process that analyzes historical long-term returns for various investment
categories, as measured by appropriate indices. These indices are weighted based upon the extent to which plan
assets are invested in the particular categories in arriving at our determination of a composite expected return.
An increase in the discount rate or the rate of expected return on plan assets, all other assumptions remaining the
same, would decrease pension plan expense, and conversely, a decrease in either of these measures would increase
plan expense. The actual rates of return on plan assets may vary significantly from the assumptions used because of
unanticipated changes in financial markets.
The estimated net loss and prior service cost (credit) for the defined benefit pension and OPEB plans is amortized
from accumulated other comprehensive loss into net periodic cost (benefit) in accordance with current accounting
guidance.
Net periodic pension and OPEB expenses are included in “Cost of sales” and “Selling, general and administrative
expenses” in the Consolidated Statements of Operations. The expense is allocated to all business segments. In
accordance with current accounting guidance governing defined benefit pension and other postretirement plans, at
December 31, 2018 and 2017, long-term assets are recorded for overfunded single-employer plans and liabilities are
recorded for underfunded single-employer plans. The funded status of a benefit plan is measured as the difference
between plan assets at fair value and the projected benefit obligation. For underfunded single-employer plans, the
estimated liability to be payable in the next twelve months is recorded as a current liability, with the remaining portion
recorded as a long-term liability.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the consolidated financial statement carrying
amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The determination of our provision for income taxes requires significant judgment, the use of estimates, and the
interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts
of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax
positions are recorded in our consolidated financial statements only after determining a more-likely-than-not probability
that the uncertain tax positions will withstand challenge, if any, from tax authorities. When facts and circumstances
change, we reassess these probabilities and record any changes in the consolidated financial statements as
appropriate.
REVENUE RECOGNITION
We enter into contracts that can include various combinations of tissue and paperboard products, which are generally
distinct and accounted for as separate performance obligations.
Revenue is recognized at a point in time upon transfer of control of promised products or services to customers in an
amount that reflects the consideration we expect to receive in exchange for those products or services. Transfer of
control typically occurs when the title and risk of loss passes to the customer. Shipping terms generally indicate when
title and the risk of loss have passed. Revenue is recognized at shipment for sales when shipping terms are free on
board, or FOB, shipping point. For sales where shipping terms are FOB destination, which represents the majority of
51
our shipping terms, revenue is recognized when the goods are received by the customer. Revenue from both domestic
and foreign sales of our products can involve shipping terms of either FOB shipping point or FOB destination or other
shipping terms, depending upon the sales agreement with the customer. We have elected to treat shipping and handling
costs for FOB shipping point contracts as a fulfillment cost, not as a separate performance obligation. No revenue is
recognized over time. We typically expense incremental direct costs of obtaining a contract (sales commissions) when
incurred because the amortization period is generally 12 months or less. We have also elected to use the practical
expedient to not disclose unsatisfied or partially satisfied performance obligations as we have no unsatisfied contracts
where the remaining portions are expected to be satisfied in a period greater than one year.
We provide for trade promotions, customer cash discounts, customer returns and other deductions as reductions to
net sales, which are accounted for as variable consideration when estimating the amount of revenue to recognize.
Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional
information becomes available. Revenue net of returns and credits is only recognized to the extent that it is probable
that a significant reversal of any incremental revenue will not occur. Significant judgment is required to determine the
most probable amount of variable consideration to apply as a reduction to net sales. Revenue is recognized net of
any taxes collected from customers, which are subsequently remitted to governmental authorities.
Payment terms and conditions vary by contract type. Terms generally include a requirement of payment within 30 days,
and do not include a significant financing component.
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 December 31, 2018 and 2017, we
had allowances for doubtful accounts of $1.5 million and $1.4 million, respectively. Bad debt expense, net, charged
to selling, general and administrative expenses during 2018, 2017 and 2016 was $0.4 million, $0.2 million, and $0.7
million, respectively. All other activity impacting the allowance for doubtful accounts was immaterial for all periods.
We had one customer in the Consumer Products segment, the Kroger Company, that accounted for approximately
11.1% of our total company net sales in 2018, approximately 15.3% of our total company net sales in 2017, and
approximately 13.4% of our total company net sales in 2016.
Refer to Note 19, "Segment Information," for further information, including the disaggregation of revenue by segment,
primary geographical market, and major product type.
ACCOUNT PURCHASE AGREEMENT
In June 2018, we entered into an agreement (the “Account Purchase Agreement”) to offer to sell, on a revolving and
discounted basis, certain trade accounts receivable balances to an unrelated third-party financial institution. If the
financial institution purchases receivables thereunder, in its sole discretion, such transfers are accounted for as sales
of receivables resulting in the receivables being de-recognized from our Consolidated Balance Sheet. The Account
Purchase Agreement provides for the continuing sale of certain receivables on a revolving basis until June 2020 and
automatically renews for successive one year terms, unless either party elects to terminate the Account Purchase
Agreement in accordance with its terms. The maximum amount of receivables that may be sold at any time, prior to
the settlement thereof, is $60.0 million
For the second, third and fourth quarters of 2018, $22.0 million, $23.4 million, and $23.4 million of receivables were
sold under the Account Purchase Agreement, respectively. As of December 31, 2018, $14.5 million of accounts
receivable sold under the Asset Purchase Agreement were outstanding. The proceeds from these sales of receivables
are included within the change in receivables in the operating activities section of the Consolidated Statements of
Cash Flows. For the year ended December 31, 2018, we recorded factoring expense on sales of receivables of $0.2
million, which is included in the "Selling, general and administrative expenses" line in the Consolidated Statement of
Operations.
We have no retained interest in the receivables sold under the Account Purchase Agreement, however, we do have
servicing responsibilities for the sold receivables. The fair value of the servicing arrangement was not material to the
financial statements.
SUPPLY-CHAIN FINANCING
The Company has entered into supply-chain financing programs with financial intermediaries, which provide certain
of our vendors the option to be paid by the financial intermediaries on our trade payables earlier than the due date on
the applicable invoice. When a vendor receives an early payment on a trade payable it invoiced us for from a financial
intermediary, we pay that financial intermediary the face amount of the invoice on the regularly scheduled due date.
52
If we reimburse these vendors for certain fees they may incur in connection with receiving an early payment on an
invoice, the amount of such invoice that would have otherwise been included in our trade payables is included in our
short term debt. As of December 31, 2018, and December 31, 2017, $20.8 million and $0 million, respectively, was
included in “Short-term debt” on our Consolidated Balance Sheets related to invoices for which we had reimbursed
our vendors’ fees.
ENVIRONMENTAL
As part of our corporate policy, we have an ongoing process to monitor, report on and comply with environmental
requirements. Based on this ongoing process, accruals for environmental liabilities that are not within the scope of
specific authoritative guidance related to accounting for asset retirement obligations or conditional asset retirement
obligations are established in accordance with guidance related to accounting for contingencies. We estimate our
environmental liabilities based on various assumptions and judgments, the specific nature of which varies in light of
the particular facts and circumstances surrounding each environmental liability. These estimates typically reflect
assumptions and judgments as to the probable nature, magnitude and timing of required investigation, remediation
and monitoring activities and the probable cost of these activities. Currently, we are not aware of any material
environmental liabilities and have accrued only for specific costs related to environmental matters that we have
determined are probable and for which an amount can be reasonably estimated. Fees for professional services
associated with environmental and legal issues are expensed as incurred.
STOCKHOLDERS’ EQUITY
On December 15, 2015, we announced that our Board of Directors had approved a stock repurchase program
authorizing the repurchase of up to $100 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 1,440,696 shares of our outstanding common stock pursuant to
the repurchase program, of which 84,750 shares were repurchased during 2017 at an average price of $57.53 per
share. We did not repurchase shares during 2018. As of December 31, 2018, we had up to $29.8 million of authorization
remaining pursuant to this stock repurchase program.
During 2017, we retired 7,821,005 treasury shares. The impact of this retirement was reflected within the stockholders'
equity line items on our Consolidated Balance Sheet.
DERIVATIVES
We had no activity during the years ended December 31, 2018, 2017 and 2016 that required hedge or derivative
accounting treatment. However, to partially mitigate our exposure to market risk for changes in utility commodity pricing,
we use firm price contracts to supply a portion of the natural gas requirements for our manufacturing facilities. As of
December 31, 2018, these contracts covered approximately 14% of the expected average monthly requirements for
2019, including approximately 12% of the expected average monthly requirements for the first quarter. For the years
ended December 31, 2018, 2017 and 2016, approximately 29%, 28%, and 45%, respectively, of our natural gas
volumes were supplied through firm price contracts. These contracts qualify for treatment as “normal purchases or
normal sales” under authoritative guidance and thus require no mark-to-market adjustment.
NOTE 3 Recently Adopted and New Accounting Standards
Recently Adopted
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects
from Accumulated Other Comprehensive Income to allow for reclassification from accumulated other comprehensive
income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (Act). This ASU also
requires certain disclosures about stranded tax effects. We adopted this standard on January 1, 2018, which resulted
in the reclassification of $12.9 million between retained earnings and accumulated other comprehensive loss (AOCL),
increasing retained earnings and AOCL within the equity section of our Consolidated Balance Sheet.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification
Accounting to clarify when to account for a change to the terms or conditions of a share-based payment award as a
modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions,
or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The
ASU was effective prospectively for annual periods beginning after December 15, 2017, including interim periods within
53
those annual periods. We adopted this standard on January 1, 2018. The adoption of this ASU did not have a material
impact on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard requires that
an employer disaggregate the service cost component, presented within the "Cost of sales" and "Selling, general, and
administrative" line items on our Consolidated Statements of Operations, from the other components of net periodic
cost (benefit), which are now presented within the "Non-operating pension and other postretirement benefit (costs)
income" line item in our Consolidated Statements of Operations. We adopted the standard effective January 1, 2018,
which resulted in the retrospective presentation in the income statement of the disaggregated components and the
prospective changes to the capitalized portion of both service cost and the other components within inventory. The
adoption did not have a material impact on our consolidated financial statements. Refer to Note 13, "Savings, Pension
and Other Postretirement Employee Benefit Plans," for further information, including the amounts associated with the
reclassification of the components of net periodic cost as operating and non-operating.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The
guidance requires entities to show the changes in cash, cash equivalents, and restricted cash in the statement of cash
flows. In addition, transfers between cash, cash equivalents, and restricted cash are no longer reported as cash flow
activities in the statement of cash flows. The ASU was effective for public business entities for fiscal years beginning
after December 15, 2017, and we adopted this standard in 2018. As a result of adopting this standard, "Net cash flows
from operating activities" and "Increase (decrease) in cash, cash equivalents, and restricted cash" line items on our
Consolidated Statements of Cash Flows increased $1.5 million and $1.0 million for the years ended December 31,
2018 and 2017, respectively. There was no impact to our Consolidated Statements of Cash Flows for the year ended
December 31, 2016.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle
of the new standard is for companies to recognize revenue in a manner that depicts 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 requires enhanced disclosures about revenue, including revenue
recognition policies to identify performance obligations to customers and significant judgments in measurement and
recognition. We adopted the new revenue guidance effective January 1, 2018 using the cumulative effect method, and
did not have an adjustment to retained earnings upon adoption. The standard was applied to open contracts at the
date of initial application. Aside from expanded disclosures, the adoption of Topic 606 did not have a material impact
on our consolidated financial statement line items, processes, or internal controls. Refer to Note 2, "Summary of
Significant Accounting Policies," for information about the basis of revenue recognition, and Note 19, "Segment
Information," for further information including the disaggregation of revenue by segment, primary geographical market,
and major product type.
New Accounting Standards
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic
350-40). This ASU requires capitalization of certain implementation costs incurred in a cloud computing arrangement
that is a service contract. Amendments in this ASU are effective for fiscal years beginning after December 15, 2019
and for interim periods therein, with early adoption permitted. We are currently assessing the timing of our adoption
of this ASU and do not believe it will have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General
(Subtopic 715-20), which modifies the disclosure requirements for defined benefit and other postretirement plans. This
ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related
parties, and the effects of interest rate basis point changes on assumed health care costs, with other disclosures being
added to address significant gains and losses related to changes in benefit obligations. This ASU also clarifies disclosure
requirements for projected benefit and accumulated benefit obligations. The amendments in this ASU are effective for
fiscal years ending after December 15, 2020, with early adoption permitted and adoption on a retrospective basis for
all periods presented required. We are currently assessing the timing of our adoption of this ASU and do not believe
it will have a material impact on our consolidated financial statements beyond updating footnote disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), and subsequent ASUs related to Topic 842,
which requires substantially all leases be recognized on the balance sheet as a right-of-use (ROU) asset and a
corresponding lease liability. Leases will be classified as operating or finance. The new guidance requires additional
disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty
of cash flows arising from leases. We adopted this standard on January 1, 2019 using the modified retrospective
transition approach at the January 1, 2019 effective date. Consequently, financial information in prior periods was not
54
restated. We elected the ‘package of practical expedients’ which permits us to not reassess our prior conclusions
related to lease identification, lease classification, and initial direct costs. We did not elect the use of hindsight. As an
accounting policy election, we will exclude short-term leases (term of 12 months or less) from the balance sheet
presentation and will account for non-lease and lease components as a single lease component for most asset classes.
We are finalizing the evaluation of the January 1, 2019 impact and estimate a material increase of lease-related assets
and liabilities ranging from approximately $80 million to $90 million in the Consolidated Balance Sheets. The impact
to our Consolidated Statements of Operations and Cash Flows is not expected to be material.
We reviewed all other new accounting pronouncements issued in the period and concluded that they are not applicable
to our business.
NOTE 4 Asset Divestiture
On August 21, 2018, we simultaneously announced and completed the sale of our Ladysmith Facility for net cash
proceeds of approximately $71 million. We assessed the sale of this location under the relevant authoritative accounting
guidance related to discontinued operations reporting and concluded that this divestiture of assets does not qualify
for discontinued operations reporting as the Ladysmith Facility does not represent either a strategic shift in the Consumer
Products segment, nor does it represent a major impact on our operations and financial results.
In total, $24.0 million was recorded as "Gain on divested assets" and included as a component of operating income
within our Consolidated Statement of Operations for the year ended December 31, 2018, as well as a component of
our Consumer Products segment's operating income as disclosed in Note 19, “Segment Information.” Among other
offsets, the net gain on divested assets included a $14.0 million write-off of goodwill. Consistent with authoritative
guidance, the goodwill was allocated to our divested assets by estimating the fair value of the Ladysmith Facility
compared to the estimated fair value of the Consumer Products reporting unit, which was then used to estimate the
percentage of goodwill to allocate to the sale of this business. In addition, "Gain on divested assets" within our
Consolidated Statement of Operations included a $0.9 million intangible asset write-off related to certain identifiable
customer relationship intangibles associated with the divested mill. Both the goodwill and intangible asset charges are
discussed further in Note 7, “Goodwill and Intangible Assets."
In total, $34.0 million of book value of assets were sold, consisting primarily of $26.8 million of property, plant and
equipment and $3.4 million of inventory. As a result of this sale, we recorded working capital and indemnity contingencies
of $1.1 million and $1.4 million, respectively, in the third quarter of 2018. In the fourth quarter of 2018, the working
capital contingency was settled, and we received $1.2 million as a result of the settlement, which is included in the
"Gain on divested assets" amount discussed above. As of December 31, 2018, $1.4 million of restricted cash associated
with the indemnity contingency is included in "Other assets, net" on our December 31, 2018 Consolidated Balance
Sheet.
NOTE 5 Inventories
(In thousands)
Pulp, paperboard and tissue products
Materials and supplies
Logs, pulpwood, chips and sawdust
December 31,
2018
159,499 $
$
86,892
19,853
$
266,244 $
2017
165,281
85,987
14,775
266,043
At December 31, 2018, our inventories are stated at the lower of net realizable value or current average cost using
the average cost method.
55
NOTE 6 Property, Plant and Equipment
(In thousands)
Machinery and equipment
Buildings and improvements
Land improvements
Office and other equipment
Land
Construction in progress
Less accumulated depreciation and amortization
December 31,
2018
2017
381,071
84,525
49,980
10,756
273,291
$ 2,161,306 $ 2,124,701
340,042
49,908
46,467
11,726
114,424
$ 2,960,929 $ 2,687,268
(1,636,286)
$ 1,269,271 $ 1,050,982
(1,691,658)
The December 31, 2018 and 2017 buildings and improvements and machinery and equipment combined balances
include $26.1 million and $24.4 million, respectively, associated with capital leases.
Depreciation expense, including amounts associated with capital leases, totaled $94.4 million, $97.0 million and $86.1
million in 2018, 2017 and 2016, respectively. Depreciation expense for the twelve months ended December 31, 2017
includes accelerated depreciation of $3.7 million associated with the Oklahoma City facility closure. For 2018, 2017,
and 2016, we capitalized $9.0 million, $4.6 million and $2.3 million, respectively, of interest expense associated with
the construction of a paper machine at our Shelby, North Carolina consumer products facility and the continuous pulp
digester at our Lewiston, Idaho pulp and paperboard mill.
NOTE 7 Goodwill and Intangible Assets
As of December 31, 2018 and December 31, 2017, we had $35.1 million and $244.2 million, respectively, of goodwill
included on our Consolidated Balance Sheets. Goodwill is not amortized but tested for impairment annually as of each
November 1st and at any time when events suggest impairment may have occurred, such as a significant adverse
change in the business climate or a sustained drop in the company’s market capitalization. If the carrying amount of
a reporting unit exceeds the estimated fair value of that reporting unit, a goodwill impairment loss is recognized equal
to the excess of the reporting unit’s carrying amount of over its estimated fair value.
In late April 2018, we experienced a significant decrease in our market capitalization after announcing lower first quarter
financial results and a reduced second quarter sales outlook for our Consumer Products reporting unit. We identified
this as a triggering event and tested the goodwill allocated to this reporting unit for impairment as of May 31, 2018. To
determine the fair value of the Consumer Products reporting unit, we used a discounted cash flow methodology utilizing
our most recent financial projections that take into account a variety of factors including industry and market conditions.
Compared to the previous projections utilized during the November 1, 2017 impairment test, our estimates as of May
31, 2018 did not show significant adverse changes to the reporting unit’s projected operating results for future periods.
As a result, we determined that the fair value of the reporting unit exceeded its carrying value as of that testing date.
In August 2018, we sold our Ladysmith, Wisconsin tissue manufacturing facility for net cash proceeds of approximately
$71 million. In connection with the sale, we recorded a $14.0 million write-off of goodwill of the Consumer Products
reporting unit. Consistent with authoritative guidance, the goodwill was allocated to our divested assets by estimating
the fair value of the Ladysmith facility compared to the estimated fair value of the Consumer Products reporting unit,
which was then used to estimate the amount of goodwill to allocate to the sold business.
We conducted our annual impairment test as of the November 1, 2018 measurement date and concluded, in connection
with the preparation of our 2018 financial statements, that the estimated fair value of the Consumer Products reporting
unit was below the carrying value of the reporting unit, resulting in a non-cash impairment charge of $195.1 million.
This amount represents the remaining goodwill associated with our Consumer Products reporting unit that was originally
recorded as the result of our acquisition of Cellu Tissue Holdings, Inc. in 2010.
To determine the fair value of the Consumer Products reporting unit, we used the same discounted cash flow
methodology utilized in the May 2018 and November 2017 goodwill impairment tests. Our most recent estimates for
56
2019 and future years were based on market data obtained in the fall of 2018 indicating that in 2019 and future years,
we expect lower pricing for certain tissue products, lower converted case sales volumes, a higher mix of parent roll
sales, and increased transportation and pulp costs compared to the financial projections used in May 2018. In light of
the weakened market outlook, our forecast yielded a fair value less than the carrying value of the Consumer Products
reporting unit, resulting in the impairment of goodwill. We also performed an overall reconciliation to corroborate the
estimated fair value from the income approach to our overall market capitalization as of the November 1, 2018
measurement date.
As of the November 1, 2018 measurement date, the fair value of our Pulp and Paperboard reporting unit was clearly
in excess of its carrying value, so no goodwill associated with this reporting unit has been written down.
In prior years, we performed our annual goodwill impairment tests at November 1, 2017 and 2016 and determined
that the estimated fair value of the Consumer Products and Pulp and Paperboard reporting units exceeded their
respective carrying amounts. As a result, no impairment charges were recorded during 2017 and 2016.
Changes in the carrying value of goodwill are as follows:
(Dollars in thousands)
Balance at beginning of year
Impairment of goodwill
Write-down of goodwill due to Ladysmith sale
Acquisition accounting adjustment
Balance at end of year
Goodwill by segment
Consumer products
Pulp and paperboard
Total goodwill
December 31, 2018
December 31, 2017
$
$
$
$
244,161 $
(195,079)
(14,008)
—
35,074 $
— $
35,074
35,074 $
244,283
—
—
(122)
244,161
209,087
35,074
244,161
Intangible asset amounts represent the acquisition date fair values of identifiable intangible assets acquired. The fair
values of the intangible assets were determined by using the income approach, discounting projected future cash
flows based on management’s expectations of the current and future operating environment. The rates used to discount
projected future cash flows reflected a weighted average cost of capital based on our industry, capital structure and
risk premiums including those reflected in the current market capitalization. Definite-lived intangible assets are
amortized over their useful lives, which have historically ranged from 5 to 10 years. Authoritative guidance under ASC
360, Property, Plant and Equipment, requires that the carrying amount of a long-lived asset with a definite life that is
held-for-use be evaluated for recoverability whenever events or changes in circumstances indicate that the entity may
be unable to recover the asset’s carrying amount.
We assessed our definite-lived intangible assets for impairment in 2018 and 2017 and concluded that their carrying
amounts were recoverable and that no further testing was necessary. We do not have any indefinite-lived intangible
assets recorded from acquisitions.
Intangible assets at the balance sheet dates are comprised of the following:
(Dollars in thousands, lives in years)
Customer relationships
Trade names and trademarks
Other intangibles
Total intangible assets
Weighted Average
Useful Life
Historical
Cost
Accumulated
Amortization
Net
Balance
December 31, 2018
9.4 $
56,453 $
7.4
6.0
6,786
572
$
63,811 $
(35,469) $
(4,029)
(233)
(39,731) $
20,984
2,757
339
24,080
57
(Dollars in thousands, lives in years)
Customer relationships
Trade names and trademarks
Non-compete agreements
Other Intangibles
Total intangible assets
Weighted Average
Useful Life
Historical
Cost
Accumulated
Amortization
Net
Balance
December 31, 2017
9.3 $
7.4
5.0
6.0
$
62,401 $
6,786
574
572
70,333 $
(34,061) $
(3,000)
(574)
(156)
(37,791) $
28,340
3,786
—
416
32,542
As of December 31, 2018, estimated future amortization expense related to intangible assets is as follows (in thousands):
Years ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total
Amount
7,140
3,246
2,917
2,217
2,140
6,420
24,080
$
$
NOTE 8 Income Taxes
(Loss) earnings before income taxes is comprised of the following amounts:
(In thousands)
United States
The income tax provision (benefit) is comprised of the following:
(In thousands)
Current
Federal
State
Total current
Deferred
Federal
State
Total deferred
Income tax provision (benefit)
For The Years Ended December 31,
2018
(133,462) $
$
2017
2016
40,954 $
80,666
For The Years Ended December 31,
2018
2017
2016
$
1,073 $
2,148
3,221
(16,729) $
933
(15,796)
3,569
3,515
7,084
$
10,305 $
(36,810)
(3,779)
(40,589)
(56,385) $
7,434
5,351
12,785
15,573
2,754
18,327
31,112
The income tax provision or benefit differs from the amount computed by applying the statutory federal income tax
rate of 21.0% in 2018 and 35.0% in 2017 and 2016 to earnings before income taxes due to the following:
58
(In thousands)
Tax at the statutory rate
Goodwill impairment
Federal rate change
State and local taxes, net of federal income tax impact
Federal credits and net operating losses
Stock compensation
Other, net1
Income tax provision (benefit)
For The Years Ended December 31,
2018
$
(28,027)
$
40,966
—
4,433
(10,889)
712
3,110
2017
14,334
—
(70,055)
(1,201)
(3,158)
2,207
1,488
2016
28,233
$
—
3,046
(2,850)
—
2,683
$
10,305
$ (56,385)
$
31,112
1
Includes $2.9 million of expense associated with the write-off of goodwill as part of our divestiture discussed in Note 4, "Asset Divestiture" for
the year ended December 31, 2018.
During 2018, the valuation allowance for deferred tax assets remained comparable to the prior year. In 2017, the
valuation allowance for deferred tax assets decreased by $0.7 million compared to 2016.
In March 2016 the FASB issued ASU 2016-09, Improvements to Employee Share Based Payment Accounting. We
adopted the standard during the first quarter of 2017. The standard requires all excess tax benefits and deficiencies
to be recognized as income tax expense or benefit discretely in the reporting period in which they occur. During 2018
and 2017, we recognized tax expense of $0.7 million and $2.2 million, respectively, for stock based compensation.
59
We use the flow-through method to account for investment tax credits earned on eligible expenditures. Under this
method, the investment tax credits are recognized as a reduction to income tax expense in the year they are earned.
During 2018 and 2017, we recognized a benefit of $10.0 million and $2.4 million, respectively, related to energy
investment tax credits.
The tax effects of significant temporary differences creating deferred tax assets and liabilities at December 31 were:
(In thousands)
Deferred tax assets:
Employee benefits
Postretirement employee benefits
Incentive compensation
Inventories
Pensions
State credit carryforwards
State net operating losses
Other
Total deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Plant and equipment
Intangible assets
Total deferred tax liabilities
Net deferred tax liabilities
Net deferred tax assets (liabilities) consist of:
(In thousands)
Non-current deferred tax assets1
Non-current deferred tax liabilities
Net non-current deferred tax liabilities
Net deferred tax liabilities
2018
2017
$
4,202 $
15,850
4,338
6,227
7,380
10,705
1,987
5,562
56,251 $
(3,764)
52,487 $
3,940
17,132
5,194
7,959
2,516
11,752
3,088
1,949
53,530
(3,733)
49,797
(161,832) $
(5,643)
(167,475)
(114,988) $
(153,885)
(7,577)
(161,462)
(111,665)
2018
2017
6,194 $
6,863
(121,182)
(114,988)
(114,988) $
(118,528)
(111,665)
(111,665)
$
$
$
$
$
$
1
Included in "Other assets, net" on our accompanying December 31, 2018 and 2017 Consolidated Balance Sheets.
Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the
future. On December 22, 2017, the United States government enacted the Tax Cuts and Jobs Act which significantly
impacted our financial statements. For the year ended December 31, 2017, we recorded a tax benefit for the impact
of the Act of approximately $70 million which represents the remeasurement of our net deferred tax liabilities.
We have net investment tax credits associated with state jurisdictions totaling $8.9 million, which expire between 2019
and 2037.
60
The following presents a roll forward of our unrecognized tax benefits and associated interest and penalties, $2.8
million of which is included in the "Accrued taxes" line item in non-current liabilities in our Consolidated Balance Sheets.
The remaining $0.6 million consists of certain tax attributes that are uncertain.
(In thousands)
Balance at December 31, 2016
Change in prior year tax positions
Change in current year tax positions
Balance at December 31, 2017
Change in prior year tax positions
Reductions as a result of a lapse of the applicable statute of limitations
Change in current year tax positions
Balance at December 31, 2018
Gross
Unrecognized
Tax Benefits,
Excluding
Interest and
Penalties
$
$
4,903 $
(1,149)
320
4,074 $
(560)
(645)
280
Interest
and
Penalties
Total Gross
Unrecognized
Tax Benefits
5,140
(1,101)
320
237 $
48
—
285 $
4,359
61
(56)
—
(499)
(701)
280
$
3,149 $
290 $
3,439
Unrecognized tax benefits net of related deferred tax assets at December 31, 2018, if recognized, would favorably
impact our effective tax rate by decreasing our tax provision by $2.8 million. For each of the years ended December
31, 2017 and 2016, if recognized, the balance of unrecognized tax benefits would favorably impact our effective tax
rate by $3.6 million and $4.1 million, respectively. We reflect accrued interest related to tax obligations, as well as
penalties, in our provision for income taxes. For each of the years ended December 31, 2018, 2017, and 2016, we
accrued interest of less than $0.1 million each year in our income tax provision. We recorded no penalties in the years
ended December 31, 2018, 2017, and 2016.
The company has certain state benefits related to filing positions taken which have not been recognized on the balance
sheet. Although the uncertain tax position was not reflected in the balance sheet as a recorded liability, it is disclosed
in the tabular roll forward for unrecognized tax benefits.
We have operations in many states within the U.S. and are subject, at times, to tax audits in these jurisdictions. With
a few exceptions, we are no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax
authorities for years prior to 2015. We expect that the outcome of any examination will not have a material effect on
our consolidated financial statements. Although the timing of resolution of audits is not certain, we evaluate all audit
issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimate that it is reasonably
possible the total gross unrecognized tax benefits could decrease by approximately $0.7 million within the next 12
months.
NOTE 9 Accounts Payable and Accrued Liabilities
(In thousands)
Trade accounts payable
Accrued wages, salaries and employee benefits
Accrued interest
Accrued discounts and allowances
Accrued taxes other than income taxes payable
Accrued utilities
Other
December 31,
2018
228,059 $
2017
169,293
$
41,426
14,672
8,143
6,243
6,934
41,979
12,723
7,283
6,907
6,759
15,555
11,677
$
321,032 $
256,621
61
NOTE 10 Debt
$300 MILLION SENIOR NOTES DUE 2025
On July 29, 2014 we issued $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.
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 facilities, which are 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
We issued $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 all of our 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 facilities, which are 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.
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 FACILITIES
After giving effect to a revolving commitment increase described below, our senior secured revolving credit facilities
provide in the aggregate, on a combined basis, for the extension of up to $400 million in revolving loans under: (i) a
$200 million credit agreement with Wells Fargo Bank, National Association, as administrative agent, and the lenders
party thereto (the “Commercial Credit Agreement”); and (ii) a $200 million credit agreement with Northwest Farm Credit
Services, PCA, as administrative agent, and the lenders party thereto (the “Farm Credit Agreement”). These revolving
credit facilities were initially entered into on October 31, 2016 and we refer to them collectively as the “Credit
Agreements.” In August 2018, we entered into an agreement with a lender to the Farm Credit Agreement to provide
an incremental revolving loan commitment, which increased the size of the Farm Credit Agreement from $100 million
to $200 million. The revolving credit facilities provided under the Credit Agreements mature on October 31, 2021.
62
We may separately request incremental commitments under either Credit Agreement to increase the amount of
revolving loans or to provide term loans under such Credit Agreement. After obtaining the $100 million incremental
revolving commitment to the Farm Credit Agreement in August 2018, the aggregate amount of incremental commitments
we may request may not exceed $100 million (on a combined basis under both Credit Agreements), plus an additional
amount, not to exceed $100 million (also on a combined basis under both Credit Agreements), such that our first lien
leverage ratio on a pro forma basis, as defined, does not exceed 3.00 to 1.00, subject to certain customary conditions
and receipt of commitments by existing or additional lenders. In addition, after giving effect to the amount of any
incremental borrowing under the Farm Credit Agreement, the principal amount of all unfunded revolving loan
commitments and the outstanding amount of any term loans provided under the Farm Credit Agreement (if any) cannot
exceed 50% of the sum of the outstanding principal amount of the loans and unfunded commitments under the Farm
Credit Agreement and the Commercial Credit Agreement on a combined basis.
Revolving Loans borrowed under the Credit Agreements bear interest, at our option, at a LIBOR rate, a base rate, or,
in the case of the Farm Credit Agreement, a one-, two-, three-, four-, or five-year fixed rate, plus, in each case, an
applicable margin. Prior to an amendment to each Credit Agreement in November 2018, the per annum margin
applicable to LIBOR rate loans could range from 1.25% to 2.00% under the Commercial Credit Agreement, and from
1.50% to 2.25% under the Farm Credit Agreement, in each case, depending on changes to our consolidated leverage
ratio. Following the amendment in November 2018, the per annum margin applicable to LIBOR rate loans can now
range from 1.25% to 2.50% under the Commercial Credit Agreement, and from 1.50% to 3.50% under the Farm Credit
Agreement. The margin applicable to fixed rate loans under the Farm Credit Agreement is the same as the margin
applicable to LIBOR rate loans under the Farm Credit Agreement. The margin applicable to base rate loans under
both Credit Agreements is always 1.00% per annum less than the corresponding margin for LIBOR rate loans. We
also pay commitment fees on the unused portion of the revolving loan commitments under the Credit Agreements,
which range from 0.20% per annum to 0.40% per annum, depending on changes to our consolidated leverage ratio.
Prior to the November 2018 amendment, this commitment fee could not exceed 0.35% per annum.
The Credit Agreements are secured by substantially all of the personal property of the Company and its domestic
subsidiaries through separate liens granted under each Credit Agreement for the benefit of each secured party
thereunder on an equal and ratable basis. The Company’s obligations under the Credit Agreements are guaranteed
by the Company’s domestic subsidiaries.
The Credit Agreements contain various loan covenants that restrict the ability of the Company and its subsidiaries to
take certain actions, including, incurrence of indebtedness, creation of liens, mergers or consolidations, dispositions
of assets, repurchase or redemption of capital stock, making certain investments, entering into certain transactions
with affiliates or changing the nature of their business. In addition, the Credit Agreements contain financial covenants
that require the Company to maintain a consolidated secured leverage ratio in an amount not to exceed 2.00 to 1.00
in 2019, and 1.50 to 1.00 thereafter, a consolidated interest coverage ratio in an amount not less than 1.25 to 1.00,
and a consolidated asset coverage ratio of not less than 1.00 to 1.00.
Each Credit Agreement also contains customary events of default, including failure to make payments under such
Credit Agreement, breach of any representation or warranty or covenant under such Credit Agreement, default under
or acceleration of other indebtedness for borrowed money in excess of an agreed amount, any change in control of
the Company based upon a third party acquiring more than 35% of the equity interests of the Company, bankruptcy
events, invalidity of such credit agreement, the incurrence of certain liabilities, termination events or withdrawals from
specified benefit plans, and unpaid or uninsured judgments in excess of an agreed amount.
We are members of the Northwest Farm Credit Services, PCA system which entitles us to patronage refunds and other
distributions on account of our equity interests in the Northwest Farm Credit Services, PCA, as well as our patronage
with Northwest Farm Credit Services. Patronage refunds are distributions of profits from member banks in the United
States Farm Credit System, like Northwest Farm Credit Services, which are cooperatives (member owned) that
distribute profits to their members in the form of patronage dividends, which are accrued as earned and recorded as
offsets to interest expense under the Farm Credit Agreement.
63
As of December 31, 2018, there was an aggregate of $200.0 million of borrowings outstanding under the Credit
Agreements and we were in compliance with the covenants contained in the Credit Agreements. In addition, $7.6
million of the credit facilities was being used to support outstanding standby letters of credit. The borrowings outstanding
under the Credit Agreements as of December 31, 2018, consisted of a combination of short-term base and LIBOR
rate loans, which are classified as current liabilities in our Consolidated Balance Sheet, and a $100.0 million three-
year borrowing under the Farm Credit Agreement that is included in "Long-term debt," in our Consolidated Balance
Sheet. As of December 31, 2018, we would have been permitted to draw an additional $192.4 million of revolving
loans under the Credit Agreements.
NOTE 11 Other Long-Term Obligations
(In thousands)
Long-term lease obligations, net of current portion
Deferred proceeds
Deferred compensation
Other
December 31,
2018
27,419 $
$
4,511
2,585
4,462
$
38,977 $
2017
26,460
5,576
5,023
6,216
43,275
NOTE 12 Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss at the balance sheet dates is comprised of the following:
(In thousands)
Balance at December 31, 20162
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive loss
Other comprehensive income, net of tax1
Balance at December 31, 2017
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive loss
Other comprehensive loss, net of tax1
Reclassification of the income tax effects of the Tax Cuts and Jobs Act
Balance at December 31, 2018
Pension and Other Post
Retirement Employee
Benefit Plan
Adjustments
$
$
$
(51,753)
6,745
1,025
7,770
(43,983)
(16,036)
5,523
(10,513)
(12,852)
(67,348)
1
2
For the year ended December 31, 2018, net periodic costs associated with our pension and other postretirement employee benefit, or OPEB,
plans included in other comprehensive loss and reclassified from accumulated other comprehensive loss, or AOCL, included $21.8 million of
net loss on plan assets, $9.2 million of actuarial loss amortization, and $1.7 million of prior service credit amortization, less total tax of $3.8
million. For the year ended December 31, 2017, net periodic costs associated with our pension and OPEB plans included in other comprehensive
income and reclassified from AOCL included $9.2 million of net gain on plan assets, $3.3 million of actuarial loss amortization, and $1.5 million
of prior service credit amortization, less total tax of $3.1 million. These accumulated other comprehensive loss components are included in
the computation of net periodic pension and OPEB costs in Note 13, “Savings, Pension and Other Postretirement Employee Benefit Plans.”
Included in the balance at December 31, 2016 is settlement expense of $3.5 million associated with the remeasurement of our salaried pension
plan, which is discussed further in Note 13, “Savings, Pension and Other Postretirement Employee Benefit Plans.” The settlement expense
is net of tax totaling $1.4 million.
64
NOTE 13 Savings, Pension and Other Postretirement Employee Benefit Plans
Certain of our employees are eligible to participate in defined contribution savings and defined benefit postretirement
plans. These include 401(k) savings plans, defined benefit pension plans including company-sponsored and
multiemployer plans, and other postretirement employee benefit, or OPEB, plans, each of which is discussed below.
401(k) Savings Plans
Substantially all of our employees are eligible to participate in 401(k) savings plans, which include a company match
component. In 2018, 2017 and 2016 we made 401(k) contributions on behalf of employees of $17.2 million, $16.6
million, and $16.9 million, respectively.
Company-Sponsored Defined Benefit Pension Plans
A majority of our salaried employees and a portion of our hourly employees are covered by company-sponsored
noncontributory defined benefit pension plans. During 2016, we announced a voluntary, limited-time opportunity for
former employees who are vested participants in certain of our qualified pension plans to request early payment of
their entire pension plan benefit in the form of a single lump sum payment. The amount of total payments under this
program totaled approximately $10.6 million for salaried employees and $4.8 million for hourly employees and were
made from the applicable plan's trust assets during the third quarter of 2016. Based on the level of payments made,
settlement accounting rules applied to our salaried pension plan and resulted in a remeasurement of that plan as of
August 31, 2016 and the recognition of $3.5 million in settlement expense in 2016.
Company-Sponsored OPEB Plans
We also provide retiree health care and life insurance plans, which cover certain salaried and hourly employees.
Retiree health care benefits for Medicare eligible participants over the age of 65 are provided through Health
Reimbursement Accounts, or HRA's. Benefits for retirees under the age of 65 are provided under our company-
sponsored health care plans, which require retiree contributions and contain other cost-sharing features. The retiree
life insurance plans are primarily noncontributory.
Funded Status of Company-Sponsored Plans
As required by current standards governing the accounting for defined benefit pension and other postretirement benefit
plans, we recognized the funded status of our company-sponsored plans on our Consolidated Balance Sheets at
December 31, 2018 and 2017. The funded status is measured as the difference between plan assets at fair value (with
limited exceptions) and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation;
for any other postretirement employee benefit plan, such as a retiree health care plan, the benefit obligation is the
accumulated postretirement employee benefit obligation. We use a December 31 measurement date for our benefit
plans.
The changes in benefit obligation, plan assets and funded status for company-sponsored benefit plans as of
December 31 are as follows:
(In thousands)
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gains) losses
Benefits paid
Benefit obligation at end of year
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Benefits paid
Fair value of plan assets at end of year
Funded status at end of year
Pension Benefit Plans
Other Postretirement
Employee Benefit Plans
2018
317,814 $
1,789
12,020
(16,356)
(21,101)
294,166
310,966
(21,474)
466
(21,101)
268,857
(25,309) $
2017
304,388 $
2,069
13,149
19,130
(20,922)
317,814
285,638
45,796
454
(20,922)
310,966
(6,848) $
$
$
2018
65,128 $
136
2,435
(367)
(7,000)
60,332
20
—
7,000
(7,000)
20
(60,312) $
2017
69,163
163
2,745
(1,254)
(5,689)
65,128
20
—
5,689
(5,689)
20
(65,108)
65
The December 31, 2018 pension funded status was affected by unfavorable asset returns, partially offset by an increase
in the discount rate. The December 31, 2018 OPEB benefit obligation decreased as of December 31, 2018 due to an
increase in the discount rate and the continued payment of benefits.
Amounts recognized in the Consolidated Balance Sheets:
(In thousands)
Non-current assets
Current liabilities
Non-current liabilities
Net amount recognized
Pension Benefit Plans
Other Postretirement
Employee Benefit Plans
2018
2017
2018
2017
$
$
— $
(441)
(24,868)
(25,309) $
8,144 $
(441)
(14,551)
(6,848) $
— $
(6,989)
(53,323)
(60,312) $
—
(7,190)
(57,918)
(65,108)
Pre-tax amounts recognized in Accumulated Other Comprehensive Loss as of December 31 consist of:
(In thousands)
Net loss (gain)
Prior service cost (credit)
Net amount recognized
Pension Benefit Plans
Other Postretirement
Employee Benefit Plans
2018
111,927 $
—
111,927 $
2017
99,865 $
—
99,865 $
2018
(15,006) $
—
(15,006) $
2017
(15,541)
(1,676)
(17,217)
$
$
Information as of December 31 for certain pension plans included above with accumulated benefit obligations in excess
of plan assets were as follows:
(In thousands)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2018
2017
$ 294,166 $ 178,452
178,452
163,460
294,166
268,857
The primary reason for the large increase in the accumulated benefit obligation in 2018 was due to the hourly pension
plan changing from an overfunded status at December 31, 2017 to an underfunded status at December 31, 2018.
Pre-tax components of net periodic cost and other amounts recognized in Other Comprehensive Income (Loss) for
the years ended December 31 were as follows:
Net Periodic Cost:
(In thousands)
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost (credit)
Amortization of actuarial loss (gain)
Settlement
Net periodic cost (income)
Pension Benefit Plans
Other Postretirement
Employee Benefit Plans
2018
1,789 $
2017
2,069 $
2016
1,562 $
$
2018
2017
2016
136 $
163 $
249
12,020
13,149
14,072
(17,002)
—
10,058
—
6,865 $
$
(18,765)
(19,389)
8
9,874
—
22
11,463
3,482
6,335 $ 11,212 $
2,435
—
(1,676)
(902)
2,745
3,075
(1)
(1,535)
(6,618)
(1)
(1,712)
(7,566)
—
—
—
(7) $ (5,246) $ (5,955)
66
Other amounts recognized in Other Comprehensive Income (Loss) before tax:
(In thousands)
Net loss (gain)
Curtailments
Prior service credit
Amortization of prior service (cost) credit
Amortization of actuarial (loss) gain
Settlement
Total recognized in other comprehensive
loss (income)
Total recognized in net periodic cost and
other comprehensive (income) loss
Pension Benefit Plans
Other Postretirement
Employee Benefit Plans
2018
2017
2016
2018
2017
2016
$ 22,120 $ (7,901) $ (1,445) $
(367) $ (1,253) $
818
—
—
—
—
—
(8)
—
—
—
—
(22)
1,676
(10,058)
—
(9,874)
(11,463)
—
(3,482)
902
—
—
—
1,535
6,618
—
—
—
1,712
7,566
—
$ 12,062 $ (17,783) $ (16,412) $
2,211 $
6,900 $ 10,096
$ 18,927 $ (11,448) $ (5,200) $
2,203 $
1,654 $
4,141
The estimated net loss for the defined benefit pension plans that will be amortized from accumulated other
comprehensive loss into net periodic cost (benefit) over the next fiscal year is $7.6 million. The estimated net gain for
the OPEB plans that will be amortized from accumulated other comprehensive loss into net periodic cost (benefit) over
the next fiscal year is $0.9 million.
During 2018, $1.2 million of net periodic pension and OPEB costs were charged to "Cost of sales," $0.8 million were
charged to "Selling, general and administrative expenses," and $4.9 million of costs were charged to "Non-operating
pension and other postretirement benefit (costs) income" in the accompanying Consolidated Statements of Operations,
as compared to costs of $1.3 million, $0.9 million, and income of $1.1 million, respectively, during 2017 and costs of
$1.1 million, $0.7 million, and $3.5 million, respectively, during 2016.
Weighted average assumptions used to determine the benefit obligation as of December 31 were:
Discount rate
Pension Benefit Plans
Other Postretirement
Employee Benefit Plans
2018
4.40%
2017
3.90%
2016
4.45%
2018
4.55%
2017
3.95%
2016
4.30%
Weighted average assumptions used to determine the net periodic cost for the years ended December 31 were:
Discount rate
Expected return on plan assets
Pension Benefit Plans
Other Postretirement
Employee Benefit Plans
2018
3.90%
6.00
2017
4.45%
6.75
2016
4.70%
6.75
2018
3.95%
—
2017
4.30%
—
2016
4.50%
—
The discount rate used in the determination of pension benefit obligations and pension expense was determined based
on a review of long-term high-grade bonds as well as management’s expectations. The discount rate used to calculate
OPEB obligations was determined using the same methodology we used for our pension plans.
The expected return on plan assets assumption is based upon an analysis of historical long-term returns for various
investment categories, as measured by appropriate indices. These indices are weighted based upon the extent to
which plan assets are invested in the particular categories in arriving at our determination of a composite expected
return.
67
The assumed health care cost trend rate used to calculate 2018 OPEB income was 6.90% in 2018, grading to 4.00%
over approximately 70 years, for participants whose benefits are not provided through Health Reimbursement Accounts
(HRAs), and 2.50% annually for participants whose benefits are provided through HRAs. The health care cost trend
rate used to calculate December 31, 2018 OPEB obligations was 6.00% in 2019, grading to 4.00% over approximately
70 years, for participants whose benefits are not provided through HRAs, and 2.50% annually for participants whose
benefits are provided through HRAs. This assumption has a significant effect on the amounts reported. A one percentage
point change in the health care cost trend rates would have the following effects:
(In thousands)
Effect on total of service and interest cost components
Effect on postretirement employee benefit obligation
1% Increase
$
172 $
3,749
1% Decrease
(149)
(3,279)
The investments of our defined benefit pension plans are held in a Master Trust. The assets of our OPEB plans are
held within an Internal Revenue Code section 401(h) account for the payment of retiree medical benefits within the
Master Trust.
Current accounting rules governing fair value measurement establish a framework for measuring fair value, which
provides a fair value 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 (level 1
measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair
value hierarchy are described below:
Level 1
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or
liabilities in active markets that the plans have the ability to access.
Level 2
Inputs to the valuation methodology include:
Quoted prices for similar assets or liabilities in active markets;
Quoted prices for identical or similar assets or liabilities in inactive markets;
Inputs other than quoted prices that are observable for the asset or liability; and
Inputs that are derived principally from or corroborated by observable market data by
correlation or other means
If the asset or liability has a specified (contractual) term, the Level 2 input must be
observable for substantially the full term of the asset or liability.
Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
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 need to maximize the use of observable
inputs and minimize the use of unobservable inputs.
There have been no changes in the methodologies used during 2018 and 2017. Investments in common and collective
trust funds are generally valued based on their respective net asset value, or NAV, (or its equivalent), as a practical
expedient to estimate fair value due to the absence of a readily determinable fair value. Investments that may be fully
redeemed at NAV in the near-term are disclosed in the table below as "Investments measured at net asset value" in
accordance with Accounting Standards Codification 820 - Fair Value Measurements and Disclosures.
68
The methods described above may produce a fair value calculation that may not be indicative of net realizable value
or reflective of future fair values. Furthermore, while management believes the valuation methods are appropriate and
consistent with other market participants, the use of different methodologies or assumptions to determine the fair value
of certain financial instruments could result in a different fair value measurement at the reporting date.
The following tables set forth by level, within the fair value hierarchy, the investments at fair value for our company-
sponsored pension benefit plans:
(In thousands)
Cash and cash equivalents
Common and collective trust:
Collective investment funds
Total investments at fair value
(In thousands)
Cash and cash equivalents
Common and collective trusts:
Collective investment funds
Total investments at fair value
December 31, 2018
Investments
measured at net
asset value
Total
Level 1
2,004 $
— $
2,004
—
2,004 $
266,853
266,853 $
266,853
268,857
December 31, 2017
Investments
measured at net
asset value
Total
Level 1
2,010 $
— $
2,010
—
2,010 $
308,956
308,956 $
308,956
310,966
$
$
$
$
Our OPEB plan had approximately $20,000 held in cash and cash equivalents at December 31, 2018 and 2017, which
were categorized as level 1.
We have formal investment policy guidelines for our company-sponsored plans. These guidelines were set by our
Benefits Committee, which is comprised of members of our management and has been assigned its fiduciary authority
over management of the plan assets by our Board of Directors. The Committee’s duties include periodically reviewing
and modifying those investment policy guidelines as necessary and ensuring that the policy is adhered to and the
investment objectives are met.
The investment policy includes guidelines for specific categories of equity and fixed income securities. Assets are
managed by professional investment managers who are expected to achieve a reasonable rate of return over a market
cycle. Long-term performance is a fundamental tenet of the policy.
The general policy states that plan assets would be invested to seek the greatest return consistent with the fiduciary
character of the pension funds and to allow the plans to meet the need for timely pension benefit payments. The
specific investment guidelines stipulate that management is to maintain adequate liquidity for meeting expected benefit
payments by reviewing, on a timely basis, contribution and benefit payment levels and appropriately revising long-
term and short-term asset allocations. Management takes reasonable and prudent steps to preserve the value of
pension fund assets, avoid the risk of large losses and also attempt to preserve the funded status of the plans. Major
steps taken to provide this protection included:
Assets are diversified among various asset classes, such as domestic equities, international equities, fixed
income and cash. The long-term asset allocation ranges are as follows:
Domestic equities
International equities, including emerging markets
Corporate/Government bonds
Liquid reserves
10%-18%
10%-18%
68%-78%
0%-5%
69
Periodically, reviews of allocations within these ranges are made to determine what adjustments should be made
based on changing economic and market conditions and specific liquidity requirements.
• Assets were managed by professional investment managers and could be invested in separately managed
accounts or commingled funds.
Assets were not invested in securities rated below BBB- by S&P or Baa3 by Moody’s.
The investment guidelines also require that the individual investment managers are expected to achieve a reasonable
rate of return over a market cycle. Emphasis is placed on long-term performance versus short-term market aberrations.
Factors considered in determining reasonable rates of return include performance achieved by a diverse cross section
of other investment managers, performance of commonly used benchmarks (e.g., Russell 3000 Index, MSCI World
ex-U.S. Index, Barclays Capital Long Credit Index), actuarial assumptions for return on plan investments and specific
performance guidelines given to individual investment managers.
As of December 31, 2018, nine active investment managers managed substantially all of the pension funds, each of
whom had responsibility for managing a specific portion of these assets. Plan assets were diversified among the
various asset classes within the allocation ranges approved by the Benefits Committee.
In 2018, we did not make any contributions to our qualified pension plans, and we currently do not anticipate making
any cash contributions to those plans in 2019. We contributed $0.5 million to our non-qualified pension plan in 2018.
We do not anticipate funding our OPEB plans in 2019 except to pay benefit costs as incurred during the year by plan
participants.
Estimated future benefit payments are as follows for the years indicated:
(In thousands)
2019
2020
2021
2022
2023
2024-2028
Pension Benefit
Plans
20,700
20,580
20,427
20,341
20,312
98,651
Other
Postretirement
Employee
Benefit Plans
7,010
6,501
5,409
4,849
4,496
18,685
Multiemployer Defined Benefit Pension Plans
Hourly employees at two of our manufacturing facilities participate in multiemployer defined benefit pension plans:
the PACE Industry Union-Management Pension Fund, or PIUMPF, which is managed by United Steelworkers, or
USW, Benefits; and the International Association of Machinist & Aerospace Workers National Pension Fund, or IAM
NPF. We make contributions to these plans, as well as make contributions to a trust fund established to provide
retiree medical benefits for a portion of these employees, which is also managed by USW Benefits. The risks of
participating in these multiemployer plans are different from single-employer plans in the following respects:
• Assets contributed to the multiemployer plan by one employer may be used to provide benefits to
employees of other participating employers.
•
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne
by the remaining participating employers. The number of employers participating in PIUMPF fell from 135
during 2012 to 78 during 2017. We believe that we are now the employer making the largest proportion of
total contributions.
• Under applicable federal law, any employer contributing to a multiemployer pension plan that completely
ceases participating in the plan while it is underfunded is subject to an assessment of such employer's allocable
share of the aggregate unfunded vested benefits of the plan, except when that plan is in "critical" or "critical
and declining" status. In certain circumstances, an employer can also be assessed a statutory withdrawal
liability for a partial withdrawal from a multiemployer pension plan. Based on information available to us as of
December 31, 2018, as well as information provided by PIUMPF and reviewed by our actuarial consultant,
we estimate the aggregate pre-tax liability that we would have incurred if we had completely withdrawn from
PIUMPF in 2018 would have been in excess of $78 million. However, the exact amount of potential exposure
could be higher or lower than the estimate, depending on, among other things, the nature and timing of any
70
triggering events and the funded status of PIUMPF at that time. A withdrawal liability is recorded for accounting
purposes when withdrawal is probable and the amount of the withdrawal obligation is reasonably estimable.
Our participation in these plans for the annual period ended December 31, 2018, is outlined in the table below. The
“EIN" and "Plan Number” columns provide the Employee Identification Number, or EIN, and the three-digit plan number.
The most recent Pension Protection Act, or PPA, zone status available in 2018 and 2017 is for a plan’s year-end as
of December 31, 2018 and December 31, 2017, respectively. The zone status is set under the provisions of the
Multiemployer Pension Plan Reform Act of 2014 and is based on information we received from the plans and is certified
by each plan's actuary. Among other factors, plans in the red zone are generally less than 65 percent funded, plans
in the yellow zone are less than 80 percent but more than 65 percent funded, and plans in the green zone are at least
80 percent funded. The “FIP/RP Status Pending/Implemented” column indicates plans for which a Funding Improvement
Plan, or FIP, or a Rehabilitation Plan, or RP, is either pending or has been implemented as required by the PPA as a
measure to correct its underfunded status. The last column lists the expiration date(s) of the collective-bargaining
agreement(s) to which the plans are subject.
In 2018, the contribution rates for the IAM NPF plan was $4.00 per hour. In 2018, the contribution rates for PIUMPF
was $2.79 per hour. In 2015, contribution rates for PIUMPF were increased as part of the RP in lieu of the legally
required surcharge, paid by the employers, to assist the fund’s financial status. We were listed in PIUMPF’s Form 5500
report as providing more than five percent of the total contributions for the years 2017and 2016. At the date of issuance
of our consolidated financial statements, Form 5500 reports for these plans were not available for the 2018 plan year.
PPA Zone
Status1
Contributions
(in thousands)
Pension
Fund
IAM NPF
PIUMPF
EIN
Plan
Number
2018
2017
FIP/
RP Status Pending/
Implemented
2018
2017
2016
51-6031295
11-6166763
002
001
Green Green
N/A
$
316
$
333
$
335
Red
Red
Implemented
5,386
5,815
5,679
Total Contributions:
$ 5,702
$ 6,148
$ 6,014
Expiration
Date
of Collective
Bargaining
Agreement
5/31/2018
8/31/2017
Surcharge
Imposed
No
No
1
PIUMPF has been certified as in "Critical and Declining Status" for 2018 and 2017, under the provisions of the Multiemployer Pension Plan
Reform Act of 2014.
71
NOTE 14 Earnings Per Share
Basic earnings (loss) 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. This method requires that the effect of potentially dilutive common stock equivalents
be excluded from the calculation of diluted earnings per share for the periods in which net losses are reported because
the effect is anti-dilutive.
The following table reconciles the number of common shares used in calculating the basic and diluted net earnings
per share:
Basic average common shares outstanding1
Incremental shares due to:
Restricted stock units
Performance shares
Stock options
Diluted average common shares outstanding
Basic net (loss) earnings per common share
Diluted net (loss) earnings per common share
Anti-dilutive shares excluded from calculation
2018
16,486,807
December 31,
2017
16,464,286
2016
17,000,599
—
—
—
16,486,807
$
21,522
45,252
24,866
16,555,926
(8.72) $
(8.72)
929,399
5.91 $
5.88
499,348
21,668
76,525
7,648
17,106,440
2.91
2.90
220,037
1
Basic average common shares outstanding include restricted stock awards that are fully vested, but are deferred for future issuance. See
Note 15, "Equity-Based Compensation Plans" for further discussion.
NOTE 15 Equity-Based Compensation Plans
At December 31, 2018, we have two stock incentive plans in place: the Clearwater Paper Corporation Amended and
Restated 2008 Stock Incentive Plan which became effective on December 16, 2008, and was amended and restated
effective as of February 27, 2015, and the Clearwater Paper Corporation 2017 Stock Incentive Plan, which became
effective February 28, 2017, collectively referred to as, the Stock Plans. Our Stock Plans have been approved by our
stockholders, and provide for equity-based awards in the form of restricted shares, restricted stock units, or RSUs,
performance shares, stock options or stock appreciation rights to selected employees, outside directors, and
consultants of the company.
Under our Stock Plans we are authorized to issue up to approximately 6.2 million shares, which includes approximately
0.7 million additional shares authorized in connection with our acquisition of Cellu Tissue that are available for issuance
as equity-based awards only to any employees, outside directors, or consultants who were not employed on
December 26, 2010 by Clearwater Paper Corporation or any of its subsidiaries. At December 31, 2018, approximately
3.1 million shares were available for future issuance under the Stock Plans.
We recognize equity-based compensation expense for all equity-based payment awards made to employees and
directors, including RSUs, performance shares and stock options, based on estimated fair values and net of estimates
of future forfeitures. The expense is classified in "Selling, general and administrative expense" in our Consolidated
Statements of Operations and is recognized on a straight-line basis over the requisite service periods of each award.
Based on the terms of the Clearwater Paper Corporation Amended and Restated 2008 Stock Incentive Plan, and for
grants prior to 2017, employees who were retirement-eligible during the service period became fully vested in
outstanding awards on the later of the date they reached retirement eligibility or at the end of the first calendar year
of each respective grant. We account for this feature when determining the service period over which to recognize
expense for each grant of RSUs, performance shares, and stock options. For the Clearwater Paper Corporation 2017
Stock Incentive Plan and for grants beginning in 2017, employees who are retirement-eligible during the service period
become fully vested in outstanding awards on a prorated basis based on the portion of the service period for which
they were employed in alignment with the terms of each respective grant type as outlined in the respective stock plan.
Employees are not eligible to receive shares until the end of the applicable service period for performance shares,
and the applicable vesting period for RSUs and stock options.
72
Employee equity-based compensation expense was recognized as follows:
(In thousands)
Restricted stock units
Performance shares
Stock options
Total employee equity-based compensation
Related tax benefit
RESTRICTED STOCK UNITS
2018
2017
2016
$
$
$
2,141 $
1,125
2,388
5,654 $
1,486 $
1,618 $
2,283
2,552
6,453 $
2,149 $
1,381
3,311
2,913
7,605
2,767
RSUs granted under our Stock Plans are generally subject to a vesting period of one to three years, with generally
the same service period. RSU awards will accrue dividend equivalents based on dividends paid, if any, during the RSU
vesting period. The dividend equivalents will be converted into additional RSUs that will vest in the same manner as
the underlying RSUs to which they relate. RSUs granted under our Stock Plans do not represent common stock, and
therefore the holders do not have voting rights unless and until shares are issued upon settlement.
A summary of the status of outstanding RSU awards as of December 31, 2018, 2017, and 2016, and changes during
those years, is presented below:
Unvested shares outstanding at
January 1
Granted
Vested
Forfeited
Unvested shares outstanding at
December 31
Vested shares outstanding at
December 31
Deferred shares outstanding at
December 31
Total shares outstanding at
December 31
Aggregate intrinsic value of
outstanding shares (in thousands)
2018
2017
2016
Weighted
Average
Grant Date
Fair Value
Shares
Weighted
Average
Grant Date
Fair Value
Shares
Weighted
Average
Grant Date
Fair Value
Shares
94,471 $
111,054
(43,878)
(33,994)
50.22
37.31
46.36
43.30
54,460 $
66,774
(17,531)
(9,232)
47.16
56.45
62.75
53.52
46,029 $
44,627
(29,338)
(6,858)
60.17
39.10
55.16
47.80
127,653
42.09
94,471
50.22
54,460
47.16
—
—
4,226
38.75
10,860
52.71
33,663
7.31
33,663
7.31
35,438
7.21
161,316 $
34.83
132,360 $
38.94
100,758 $
33.71
$
3,931
$
6,009
$
6,605
During 2018, 48,104 RSU shares were settled and distributed in common stock. Of these shares, 28,971 were RSU
shares that were settled and distributed in the fourth quarter of 2018. After adjusting for minimum tax withholdings, a
net 34,447 shares were issued during 2018. The minimum tax withholdings payment made in 2018 in connection with
issued shares was $0.4 million.
During 2017, 25,940 RSU shares were settled and distributed, of which 20,940 shares were settled and distributed in
the fourth quarter. Another 1,775 shares were RSU shares that 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, a net 17,834 shares were issued during 2017.
The minimum tax withholdings payment made in 2017 in connection with issued shares was $1.1 million.
The fair value of each RSU share award granted during 2018 was estimated on the date of grant using the grant date
market price of our common stock. The total fair value of share awards that vested during 2018 was $2.0 million.
As of December 31, 2018, there was $3.5 million of total unrecognized compensation cost related to outstanding RSU
awards. The cost is expected to be recognized over a weighted average period of 1.9 years.
73
PERFORMANCE SHARES
Performance share awards granted under our Stock Plans have a three-year performance period, with generally the
same service period, and shares are issued after the end of the period if the employee provides the requisite service
and the performance measure is met. As provided in the Clearwater Paper Corporation 2008 and 2017 Stock Incentive
Plans, the following performance measures are used to determine the number of performance shares ultimately
issuable:
• For performance shares granted in 2016 and prior years, the performance measure used was a comparison
of the percentile ranking of our total stockholder return (TSR) compared to the TSR performance of a selected
peer group or index.
• For performance shares granted in 2017, the performance measure used for 40% of the grant is a comparison
of the percentile ranking of our TSR, compared to the TSR of a selected index, and for 60% of the performance
share awards granted, a return on invested capital (ROIC) performance measure is being used to determine
the number of performance shares ultimately issuable.
• For performance shares granted in 2018, the performance measure used for 40% of the performance share
awards granted is an ROIC performance measure. For the remaining 60% of the grants, a free cash flow
performance measure is used. The combined performance of these measures is then subject to an adjustment
(increase or decrease) of up to 25% based on our TSR compared to the TSR performance of a selected index.
The TSR performance measure is considered to represent a “market condition” under authoritative accounting
guidance, and thus, the market condition is considered when determining the estimate of the fair value of the
performance share awards. Both the ROIC and the free cash flow measures are considered "performance conditions"
under authoritative accounting guidance and include certain targets and service periods that need to be achieved to
earn the award. These targets are based on internal measures. Throughout the service period we assess the probability
of achieving the performance condition, and expense is recognized based upon the probable outcome.
The number of performance shares actually issued, as a percentage of the amount subject to the performance share
award, could range from 0%-200%.
Performance share awards granted under our Stock Plans do not represent common stock, and therefore the holders
do not have voting rights unless and until shares are issued upon settlement. During the performance period, dividend
equivalents accrue based on dividends paid, if any, and are converted into additional performance shares, which vest
or are forfeited in the same manner as the underlying performance shares to which they relate. Generally, if an employee
terminates prior to completing the requisite service period, all or a portion of their awards are forfeited and the previously
recognized compensation cost is reversed. If an employee provides the requisite service through the end of the
performance period, but the performance measure is not met, following authoritative guidance for awards with a market
condition, previously recognized compensation cost is not reversed.
A summary of the status of outstanding performance share awards as of December 31, 2018, 2017, and 2016, and
changes during those years, is presented below:
Outstanding share awards at
January 1
Granted
Settled
Forfeited
Outstanding share awards at
December 31
Aggregate intrinsic value (in
thousands)
2018
2017
2016
Weighted
Average
Grant Date
Fair Value
Shares
Weighted
Average
Grant Date
Fair Value
Shares
Weighted
Average
Grant Date
Fair Value
Shares
117,252 $
49,040
(73,243)
(14,619)
45.10
37.45
39.70
45.12
175,683 $
33,907
(87,491)
(4,847)
62.26
58.58
84.65
47.61
92,563 $
93,397
—
(10,277)
84.18
39.70
—
54.55
78,430
45.36
117,252
45.10
175,683
62.26
$
1,911
$
5,323
$
11,516
On December 31, 2018, the three-year performance period for 73,243 performance shares granted in 2016 ended.
The requisite market condition performance measure was not met, and as such no shares were paid or issued under
those awards.
74
On December 31, 2017, the service and performance period for 41,538 outstanding shares granted in 2015 ended.
The requisite market condition performance measure was not met, and as such no shares were paid or issued under
those awards.
As of December 31, 2018, there was $1.8 million of unrecognized compensation cost related to outstanding
performance share awards. The cost is expected to be recognized over a weighted average period of 1.6 years.
STOCK OPTIONS
Beginning in 2014, stock options were granted to certain employees under our Stock Plans. The stock options are
generally subject to a vesting period of one to three years, with generally the same service period. Upon vesting, the
holder is entitled to purchase a specified number of shares of Clearwater Paper common stock at a price per share
equal to the closing market price of Clearwater Paper common stock on the date of grant. Once options have vested
they are exercisable. The options are exercisable for 10 years from the date of grant.
Stock options granted under our Stock Plans do not represent common stock, and therefore the holders do not
have voting rights unless and until shares have been issued to the employee.
The fair value of stock option awards was determined using a Black-Scholes option-pricing model. The Black-Scholes
model utilizes a range of assumptions related to dividend yield, volatility, risk-free interest rate and employee exercise
behavior. Expected volatility is based on Clearwater Paper's historical stock prices. The risk-free interest rate is based
on constant maturity treasury rates with maturities matching the options' expected life on the grant date. The expected
life, estimated in accordance with Securities and Exchange Commission Staff Accounting Bulletin 110, is the
approximate mid-point between the expected vesting time and the remaining contractual life.
Volatility
Risk-free interest rate
Expected life-years
35%
2.74%
6.0
A summary of the status of outstanding stock option awards as of December 31, 2018, and changes during the year,
is presented below:
Shares
Weighted
Average
Exercise Price
Weighted
Average Grant
Date Fair Value
Weighted Average
Remaining
Contractual Life
(Years)
Outstanding options at
December 31, 2015
Granted
Forfeited
Outstanding options at
December 31, 2016
Granted
Forfeited
Expired
Outstanding options at
December 31, 2017
Granted
Forfeited
Expired
277,693 $
280,191
(30,830)
527,054 $
158,484
(22,306)
(5,913)
657,319 $
198,426
(69,557)
(24,254)
64.47
38.86 $
47.79
51.83
56.45
50.74
66.97
52.84
37.39
43.18
62.74
14.42
18.82
14.51
Outstanding options at
December 31, 2018
761,934 $
49.38
Outstanding and exercisable
options at December 31, 2018
273,776 $
63.40
75
Aggregate
Intrinsic Value
$
—
8.2 $
7,232
7.4 $
—
6.2 $
5.8 $
—
—
As of December 31, 2018, there was $2.7 million of unrecognized compensation cost related to non-vested stock
options. The cost is expected to be recognized over a weighted average period of 2.3 years.
During 2018, 261,196 stock option awards vested with a weighted average exercise price of $41.62 and total fair value
of $10.9 million. These options are outstanding at December 31, 2018 and became exercisable on January 1, 2019.
The weighted average remaining contractual term of options that vested during the year is 6.3 years.
DIRECTOR AWARDS
In connection with joining our Board of Directors, in January 2009 our outside directors at that time were granted an
award of phantom common stock units, which were credited to an account established on behalf of each director and
vested ratably over a three-year period with the final vesting in January 2012. Subsequent equity awards have been
granted annually in May, or on a pro-rata basis as applicable, to our outside directors in the form of phantom common
stock units as part of their annual compensation, which are credited to their accounts. These awards vest ratably over
a one-year period. These accounts will be credited with additional phantom common stock units equal in value to
dividends paid, if any, on the same amount of common stock. Upon separation from service as a director, the vested
portion of the phantom common stock units held by the director in a stock unit account are converted to cash based
upon the then market price of the common stock and paid to the director.
Due to its cash-settlement feature, we account for these awards as liabilities rather than equity and recognize the
equity-based compensation expense or income at the end of each reporting period based on the portion of the award
that is vested and the increase or decrease in the value of our common stock.
We recorded director equity-based compensation benefit totaling $2.3 million and $2.8 million for the years ended
December 31, 2018 and 2017, respectively, and compensation expense totaling $4.8 million for the year ended
December 31, 2016.
At December 31, 2018, the liability amounts associated with director equity-based compensation included in "Other
long-term obligations" and "Accounts payable and accrued liabilities" on our Consolidated Balance Sheet were $0.8
million and $1.3 million, respectively. At December 31, 2017, the liability amounts associated with director equity-
based compensation in "Other long-term obligations" and "Accounts payable and accrued liabilities" on our
Consolidated Balance Sheet were $3.6 million and $2.4 million, respectively.
NOTE 16 Fair Value Measurements
The estimated fair values of our financial instruments as of our balance sheet dates are presented below:
(In thousands)
Cash, cash equivalents and restricted cash (Level 1)
Short-term borrowings under revolving credit facilities (Level 2)
December 31,
2018
2017
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$ 24,947 $ 24,947 $ 16,738 $ 16,738
154,882
155,000
100,000
99,909
Other short-term debt (Level 1)
Long-term debt (Level 2)
20,833
20,833
—
—
675,000
612,546
575,000
569,250
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 considering the assets' underlying maturities, 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.
Cash and cash equivalents, borrowings under the revolving credit facilities and long-term debt are the only items
measured at fair value on a recurring basis.
76
We do not have any financial assets measured at fair value on a nonrecurring basis. Nonfinancial assets measured
at fair value on a nonrecurring basis include items such as long-lived assets held and used that are measured at fair
value resulting from impairment, if deemed necessary.
NOTE 17 Commitments and Contingencies
LEASE COMMITMENTS
Our operating leases cover manufacturing, office, warehouse and distribution space, paperboard sheeting facilities,
equipment and vehicles, which expire at various dates through 2029. We have capital leases related to our North
Carolina converting and manufacturing facilities as well as various office equipment. As leases expire, it can be expected
that, in the normal course of business, certain leases will be renewed or replaced.
As of December 31, 2018, under current operating and capital lease contracts, we had future minimum lease payments
as follows:
(In thousands)
2019
2020
2021
2022
2023
Thereafter
Total future minimum lease payments
Less interest portion
Present value of future minimum lease payments
Capital
Operating
$
$
$
3,093 $
3,062
3,112
3,019
2,789
21,710
36,785 $
(13,887)
22,898
12,038
11,421
10,424
9,489
7,163
24,276
74,811
Rent expense for operating leases was $11.0 million, $12.6 million and $14.3 million for the years ended December 31,
2018, 2017 and 2016, respectively.
NOTE 18 Business Interruption and Insurance Recovery
On October 24, 2018, our Lewiston, Idaho pulp and paperboard mill had a shaft break, causing an incorrect chemical
mixture in a chip impregnation vessel that resulted in the vessel plugging and subsequently resulted in the shutdown
of the chip pulping operation. We incurred significant incremental pulp replacement costs to keep the paperboard and
tissue machines running at our Lewiston facility during this shutdown, as well as extra costs for overtime labor,
maintenance, energy and repair and clean-up. We maintain property and business interruption insurance and filed a
claim with our insurance provider to recover the incremental costs incurred as a result of the incident. All associated
costs and insurance recoveries were recorded in "Cost of sales" in our Consolidated Statement of Operations and
included in cash flows from operations in our Consolidated Statement of Cash Flows. The insurance claim for this
event totaled $4.4 million.
The claim was settled in December 2018, and, net of the policy deductible of $2.5 million, we received $1.9 million
from our property insurance provider as final payment of the claim.
On January 28, 2017, there was a fire at our Shelby, North Carolina facility warehouse. Although the building sustained
minimal damage, the smoke and water damage to raw material and finished goods inventory was more significant.
Operations were impacted during the clean-up and repair period. We filed a claim with our insurance providers to
recover the cost of repairs to the equipment and estimated lost profits and inventory due to the disruption of the
operations during the repair and cleanup period. Net of policy deductibles, the insurance claim for this event totaled
$2.9 million, and was settled in its entirety in the first quarter of 2017. All associated costs and insurance recoveries
have been recorded in "Cost of sales" in our Consolidated Statements of Operations and included in cash flows from
operations in our Consolidated Statement of Cash Flows.
On November 14, 2016, we experienced a fire at our Las Vegas, Nevada facility. There was minimal disruption to the
converting operations at that facility, however certain paper machine equipment was damaged and we incurred
approximately 17 days of paper machine downtime while repairs were being made. We were unable to produce through-
77
air-dried parent rolls during this period at the Las Vegas facility. We were able to replace a portion of this lost production
capacity by shipping parent rolls from our Shelby, North Carolina facility, in addition to making open market purchases.
We filed a claim with our insurance provider to recover the cost of repairs to the equipment and estimated lost profits
due to the disruption of the operations during the repair period. The insurance claim for this event, net of policy
deductible, was $2.9 million, of which $1.5 million was recorded in the fourth quarter of 2016 and $1.4 million was
recorded in the first quarter of 2017. All associated costs and insurance recoveries have been recorded in "Cost of
sales" in our Consolidated Statements of Operations and included in cash flows from operations in our Consolidated
Statement of Cash Flows
On July 6, 2016, our Lewiston, Idaho facility experienced an electrical incident that caused a complete plant-wide
power outage. Power was restored in approximately 18 hours. However, damage to certain equipment limited pulping
operations throughout the remainder of July. In addition to repair costs, we incurred other various costs, including
incremental pulp replacement costs, incremental natural gas costs, lost electrical generation and increased labor,
chemical and wood costs. We filed a claim with our insurance provider to recover the cost of repairs to the equipment
and estimated lost profits due to the disruption of the operations during the repair period. All associated costs and
insurance recoveries were recorded in "Cost of sales" in our Consolidated Statement of Operations and included in
the "Net earnings" line in our Consolidated Statement of Cash Flows. The insurance claim for this event totaled $8.5
million. The claim was settled in its entirety in September 2016, and, net of the policy deductible and certain exclusions
totaling $3.5 million, we received $5.0 million from our property insurance provider as final payment of the claim.
NOTE 19 Segment Information
Our reportable segments are described below.
Consumer Products
Our Consumer Products segment manufactures and sells a complete line of at-home tissue products, or retail products,
and away-from-home tissue products, or non-retail products, and parent rolls. Retail products include bath, paper
towels, facial and napkin product categories. Non-retail products include conventional one and two-ply bath tissue,
two-ply paper towels, hard wound towels and dispenser napkins sold to customers with commercial and industrial
tissue needs. Each category is further distinguished according to quality segments: ultra, premium, value and economy.
Pulp and Paperboard
Our Pulp and Paperboard segment manufactures and markets solid bleached sulfate paperboard for the high-end
segment of the packaging industry as well as offers custom sheeting, slitting and cutting of paperboard. Our overall
production consists primarily of folding carton, liquid packaging, cup and plate products and commercial printing grades.
The majority of our Pulp and Paperboard customers are packaging converters, folding carton converters, merchants
and commercial printers.
78
The table below presents information about our reportable segments:
(In thousands)
Segment net sales:
Consumer Products
Pulp and Paperboard
Total segment net sales
Operating (loss) income:
Consumer Products1,2,3
Gain on divested assets4
Goodwill impairment
Pulp and Paperboard 2,3
Corporate2,3,5
(Loss) income from operations
Depreciation and amortization:
Consumer Products6
Pulp and Paperboard
Corporate
Total depreciation and amortization
Assets:
Consumer Products
Pulp and Paperboard
Corporate
Total assets
Capital expenditures:
Consumer Products
Pulp and Paperboard
Corporate
Total capital expenditures
2018
2017
2016
$
884,812 $
839,406
988,380
746,383
$ 1,724,218 $ 1,730,408 $ 1,734,763
941,907 $
788,501
$
$
$
$
(2,731) $
23,952
(195,079)
(173,858)
130,426
(43,432)
(54,477)
(97,909) $
28,973 $
—
—
28,973
97,360
126,333
(55,148)
71,185 $
66,164
1,755
—
67,919
112,700
180,619
(65,855)
114,764
57,784 $
37,798
6,371
101,953 $
65,007 $
34,474
5,509
104,990 $
59,375
26,741
4,974
91,090
$ 1,094,120 $ 1,069,876 $ 1,031,563
586,687
1,618,250
66,092
$ 1,788,118 $ 1,802,252 $ 1,684,342
638,772
1,732,892
55,226
645,353
1,715,229
87,023
$
307,794 $
112,597 $
17,943
325,737
12,213
74,616
187,213
11,472
$
337,950 $
198,685 $
47,079
104,113
151,192
4,485
155,677
1
2
3
4
5
Operating income for the Consumer Products segment for the twelve months ended December 31, 2017 include costs associated with the
March 31, 2017 Oklahoma City facility closure. These costs include $4.3 million of loss on the write-down of assets to their held for sale value
and $3.2 million of expenses associated with the execution of a sublease for the facility.
As a result of the adoption of ASU 2017-07, certain pension and OPEB (costs) income have been reclassified from operating to non-operating
income. The service cost component of pension and OPEB costs remains within segment operating income. Refer to Note 3, "Recently Adopted
and New Accounting Standards," and Note 13, "Savings, Pension and Other Postretirement Benefit Plans," for additional detail.
Income (loss) from operations for the Consumer Products, Pulp and Paperboard and Corporate segments for the twelve months ended
December 31, 2018 include $1.9 million, $0.5 million and $4.5 million respectively, of expenses associated with our selling, general and
administrative cost and control measures.
Gain on divested assets for the twelve months ended December 31, 2018 relates to the sale of our Ladysmith, Wisconsin facility. For additional
discussion, see Note 4 "Asset Divestiture."
Corporate expenses for 2016 include $2.7 million of expenses associated with the acquisition of Manchester Industries. Operating results
subsequent to the acquisition of Manchester are included in the Pulp and Paperboard segment. Corporate expenses for 2016 also include a
$3.5 million settlement accounting charge associated with a pension lump sum buyout for term-vested participants.
79
6
Depreciation and amortization expense for the Consumer Products segment for the twelve months ended December 31, 2017 and 2016
includes accelerated depreciation of $3.7 million and $1.3 million, respectively, associated with the Oklahoma City facility closure.
For the twelve months ended December 31, 2018, 2017, and 2016 one customer, the Kroger Company, accounted
for approximately 11.1%, 15.3%, and 13.4%, respectively, of our total company net sales.
Our manufacturing facilities and all other assets are located within the continental United States. We sell and ship our
products to customers in many foreign countries. Net sales, classified by the major geographic areas in which our
customers are located and by major products, were as follows:
(In thousands)
Primary geographical markets:
2018
2017
2016
United States
Other Countries
Total Net Sales
Major products:
Retail tissue
Paperboard
Non-retail tissue
Other
Total net sales
$ 1,648,610 $ 1,650,066 $ 1,663,231
71,532
$ 1,724,218 $ 1,730,408 $ 1,734,763
80,342
75,608
$
794,434 $
837,891
88,214
857,642 $
865,765
788,501
81,044
746,383
121,291
3,679
1,324
$ 1,724,218 $ 1,730,408 $ 1,734,763
3,221
NOTE 20 Financial Results by Quarter (Unaudited)
(In thousands—
except per-share
amounts)
Net sales
Costs and
expenses:
Cost of sales
Selling, general and
administrative
expenses
Gain on divested
assets
Goodwill impairment
Total operating
costs and
expenses
Income (loss) from
operations
Net earnings (loss)
Net earnings (loss)
per common
share1
Basic
Diluted
March 31,
June 30,
September 30,
December 31,
2018
2017
2018
2017
2018
2017
2018
2017
$ 436,952
$ 437,525
$ 432,099
$ 429,663
$ 426,460
$ 426,504
$ 428,707
$ 436,716
Three Months Ended
(392,433)
(387,060)
(387,154)
(381,061)
(376,221)
(386,762)
(382,204)
(375,458)
(32,980)
(29,955)
(26,564)
(29,454)
(26,283)
(34,582)
(27,161)
(34,891)
—
—
—
—
—
—
—
—
22,944
—
1,008
—
— (195,079)
—
—
(425,413)
(417,015)
(413,718)
(410,515)
(379,560)
(421,344)
(603,436)
(410,349)
11,539
20,510
18,381
19,148
46,900
5,160
(174,729)
26,367
$
2,600
$
7,515
$
6,961
$
8,037
$
34,444
$
863
$ (187,772) $
80,924
$
$
0.16
0.16
$
0.46
0.45
$
0.42
0.42
$
0.49
0.48
$
2.09
2.08
0.05
0.05
$
(11.39) $
(11.39)
4.92
4.88
(1) The sum of quarterly amounts, including per share amounts, may not equal amounts reported for year-to-date periods. This is due to
the effects of rounding and changes in the number of weighted-average shares outstanding for each period.
80
NOTE 21 Supplemental Guarantor Financial Information
All of our directly and indirectly owned, domestic subsidiaries guarantee the 2013 Notes on a joint and several basis.
There are no significant restrictions on the ability of the guarantor subsidiaries to make distributions to Clearwater
Paper, the issuer of the 2013 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.
We acquired Manchester Industries on December 16, 2016 and their results of operations, financial position and cash
flows are included below as a guarantor entity.
In the first quarter of 2018, the Company adopted a new accounting standard, ASU 2017-07, which resulted in a change
in the presentation of pension and postretirement benefit (costs) income other than service costs on a line outside of
“Income from operations.” The corresponding prior period amounts included in the Consolidating Statements of
Operations and Comprehensive Income (Loss) have been reclassified to conform with the current period presentation.
Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income (Loss)
Year Ended December 31, 2018
Issuer
Guarantor
Subsidiaries
Eliminations
Total
$ 1,752,343
$
194,914
$ (223,039) $ 1,724,218
(1,583,009)
(172,965)
217,962
(1,538,012)
(92,236)
(195,079)
(20,752)
—
—
23,952
—
—
—
(112,988)
(195,079)
23,952
(1,870,324)
(169,765)
217,962
(1,822,127)
(117,981)
25,149
(5,077)
(505)
—
24,644
(6,343)
—
—
(5,077)
1,278
(97,909)
(30,620)
(4,933)
(133,462)
(10,305)
(30,115)
(4,933)
(153,029)
(5,240)
18,301
—
(18,301)
—
$ (139,968) $
18,301
$
(22,100) $ (143,767)
(10,513)
—
—
(10,513)
$ (150,481) $
18,301
$
(22,100) $ (154,280)
(In thousands)
Net sales
Costs and expenses:
Cost of sales
Selling, general and administrative expenses
Goodwill impairment
Gain on divested assets, net
Total operating costs and expenses
(Loss) income from operations
Interest expense, net
Non-operating pension and other post employment benefit costs
(Loss) earnings before income taxes
Income tax provision
Equity in earnings of subsidiary
Net (loss) earnings
Other comprehensive loss, net of tax
Comprehensive (loss) income
81
Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income (Loss)
Year Ended December 31, 2017
(In thousands)
Net sales
Costs and expenses:
Cost of sales
Issuer
Guarantor
Subsidiaries
Eliminations
Total
$ 1,707,283
$
242,222
$ (219,097) $ 1,730,408
(1,525,645)
(219,931)
215,235
(1,530,341)
Selling, general and administrative expenses
(98,412)
(30,470)
—
(128,882)
Total operating costs and expenses
Income (loss) from operations
Interest expense, net
Non-operating pension and other post employment benefit income
Earnings (loss) before income taxes
Income tax benefit
Equity in earnings of subsidiary
Net earnings
Other comprehensive income, net of tax
Comprehensive income
(1,624,057)
(250,401)
215,235
(1,659,223)
83,226
(30,820)
1,143
53,549
34,250
11,911
(8,179)
(554)
—
(8,733)
20,644
(3,862)
—
—
(3,862)
1,491
—
(11,911)
71,185
(31,374)
1,143
40,954
56,385
—
$
$
99,710
$
11,911
$
(14,282) $
97,339
7,770
—
—
7,770
107,480
$
11,911
$
(14,282) $
105,109
Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income (Loss)
Year Ended December 31, 2016
(In thousands)
Net sales
Costs and expenses:
Cost of sales
Selling, general and administrative expenses
Gain on divested assets, net
Total operating costs and expenses
Income from operations
Interest expense, net
Non-operating pension and other post employment benefit costs
Earnings before income taxes
Income tax provision
Equity in earnings of subsidiary
Net earnings
Other comprehensive income, net of tax
Comprehensive income
Issuer
Guarantor
Subsidiaries
Eliminations
Total
$ 1,685,327
$
287,952
$ (238,516) $ 1,734,763
(1,466,623)
(263,577)
236,641
(1,493,559)
(114,142)
(14,053)
1,755
—
—
—
(128,195)
1,755
(1,579,010)
(277,630)
236,641
(1,619,999)
106,317
(30,462)
(3,447)
72,408
(26,966)
5,331
10,322
(1,875)
114,764
(189)
—
10,133
(4,802)
—
—
—
(1,875)
656
(5,331)
(30,651)
(3,447)
80,666
(31,112)
—
$
$
50,773
$
5,331
$
(6,550) $
49,554
3,795
—
—
3,795
54,568
$
5,331
$
(6,550) $
53,349
82
Clearwater Paper Corporation
Consolidating Balance Sheet
At December 31, 2018
(In thousands)
ASSETS
Current assets:
Issuer
Guarantor
Subsidiaries
Eliminations
Total
Cash and cash equivalents
$
22,484 $
— $
Receivables, net
Taxes receivable
Inventories
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Intercompany (payable) receivable
Investment in subsidiary
Other assets, net
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt
Accounts payable and accrued liabilities
Current liability for pensions and other
postretirement employee benefits
Total current liabilities
Long-term debt
Liability for pensions and other
postretirement employee benefits
Other long-term obligations
Accrued taxes
Deferred tax liabilities
TOTAL LIABILITIES
Accumulated other comprehensive loss, net of tax
Stockholders’ equity excluding
accumulated other comprehensive loss
127,952
16,634
222,960
3,346
393,376
1,192,716
35,074
1,045
(62,846)
175,301
14,839
$1,749,505 $
— $
—
22,484
145,519
41
(10,374)
6,301
48,361
(5,077)
266,244
—
3,399
(15,451)
443,947
— 1,269,271
—
35,074
17,567
53
66,022
76,555
—
23,035
57,769
—
5,077
—
(175,301)
24,080
—
—
2,618
15,746
225,999 $ (187,386) $1,788,118
(1,711)
$ 120,833 $
— $
299,715
31,691
— $ 120,833
321,032
(10,374)
7,430
427,978
671,292
78,191
38,977
1,918
104,753
1,323,109
(67,348)
493,744
—
—
31,691
(10,374)
7,430
449,295
671,292
78,191
38,977
2,785
—
—
—
—
(1,711)
121,182
(12,085)
1,361,722
—
(67,348)
—
—
—
867
18,140
50,698
—
175,301
(175,301)
493,744
225,999 $ (187,386) $1,788,118
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$1,749,505 $
83
Clearwater Paper Corporation
Consolidating Balance Sheet
At December 31, 2017
(In thousands)
ASSETS
Current assets:
Issuer
Guarantor
Subsidiaries
Eliminations
Total
Cash and cash equivalents
$
15,738 $
— $
— $
15,738
Receivables, net
Taxes receivable
Inventories
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Intercompany (payable) receivable
Investment in subsidiary
Other assets, net
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt
Accounts payable and accrued liabilities
Current liability for pensions and
other postretirement employee benefits
Total current liabilities
Long-term debt
Liability for pensions and other
postretirement employee benefits
Other long-term obligations
Accrued taxes
Deferred tax liabilities
TOTAL LIABILITIES
Accumulated other comprehensive loss, net of tax
Stockholders’ equity excluding
accumulated other comprehensive loss
17,064
40
41,594
74
58,772
114,323
—
30,453
(1,055)
125,001
20,242
228,311
8,587
397,879
936,659
244,161
2,089
(2,807)
157,000
21,413
—
—
142,065
20,282
(3,862)
266,043
—
8,661
(3,862)
452,789
— 1,050,982
—
—
3,862
244,161
32,542
—
—
—
(157,000)
2,696
(2,331)
21,778
$1,756,394 $
205,189 $ (159,331) $1,802,252
$ 155,000 $
— $
235,439
21,182
7,631
398,070
570,524
72,469
43,275
1,928
94,694
1,180,960
(43,983)
—
21,182
—
—
—
842
26,165
48,189
—
—
—
—
—
—
—
—
—
155,000
256,621
7,631
419,252
570,524
72,469
43,275
2,770
(2,331)
118,528
(2,331)
1,226,818
—
(43,983)
619,417
157,000
(157,000)
619,417
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$1,756,394 $
205,189 $ (159,331) $1,802,252
84
Clearwater Paper Corporation
Consolidating Statement of Cash Flows
Year Ended December 31, 2018
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) earnings
Adjustments to reconcile net (loss) earnings to
net cash flows from operating activities:
Goodwill impairment
Depreciation and amortization
Equity-based compensation expense
Deferred taxes
Employee benefit plans
Deferred issuance costs on debt
Gain on divested assets, net
Disposal of plant and equipment, net
Other non-cash activity
Changes in working capital, net
Change in taxes receivable, net
Other, net
Net cash flows from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment
Net proceeds from divested assets
Other, net
Net cash flows from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on short-term debt
Repayments of borrowings on short-term debt
Investment (to) from parent
Payment of tax withholdings on equity-
based payment arrangements
Payments for debt issuance costs
Net cash flows from financing activities
Increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at
beginning of period
Cash, cash equivalents and restricted cash at
end of period
Issuer
Guarantor
Subsidiaries
Eliminations
Total
$ (139,968) $
18,301 $
(22,100) $ (143,767)
195,079
81,812
3,314
15,019
(116)
1,356
—
727
146
24,455
3,607
(1,790)
183,641
(293,766)
70,930
793
(222,043)
630,848
(565,015)
(16,670)
(413)
(2,139)
46,611
8,209
16,738
—
20,141
—
(7,935)
—
—
(25,510)
(1)
—
904
(1)
244
6,143
(1,942)
—
14
(1,928)
—
—
(4,215)
—
—
(4,215)
—
—
—
—
—
—
—
—
—
—
(9,159)
10,374
—
(20,885)
—
—
—
—
—
—
20,885
—
—
20,885
—
195,079
101,953
3,314
7,084
(116)
1,356
(25,510)
726
146
16,200
13,980
(1,546)
168,899
(295,708)
70,930
807
(223,971)
630,848
(565,015)
—
(413)
(2,139)
63,281
8,209
—
—
16,738
$
24,947 $
— $
— $
24,947
85
Clearwater Paper Corporation
Consolidating Statement of Cash Flows
Year Ended December 31, 2017
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings
Adjustments to reconcile net earnings to net cash
flows from operating activities:
Depreciation and amortization
Equity-based compensation expense
Deferred taxes
Employee benefit plans
Deferred issuance costs on debt
Disposal of plant and equipment, net
Other non-cash activity
Changes in working capital, net
Change in taxes receivable, net
Other, net
Net cash flows from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment
Other, net
Net cash flows from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock
Borrowings on short-term debt
Repayments of borrowings on short-term debt
Investment from (to) parent
Payment of tax withholdings on
equity-based payment arrangements
Payments for debt issuance costs
Net cash flows from financing activities
Decrease in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at
beginning of period
Cash, cash equivalents and restricted cash at
end of period
Issuer
Guarantor
Subsidiaries
Eliminations
Total
$
99,710 $
11,911 $
(14,282) $
97,339
76,862
3,620
(16,957)
(4,371)
1,199
512
1,750
8,776
(5,099)
2,585
168,587
(193,864)
283
(193,581)
(4,875)
298,308
(278,308)
8,282
(1,127)
(134)
22,146
(2,848)
28,128
—
(23,632)
—
—
3,541
—
5,529
(5)
(3,094)
22,378
(5,884)
668
(5,216)
—
—
—
(20,577)
—
—
(20,577)
(3,415)
—
—
—
—
—
—
—
7,456
(5,469)
—
(12,295)
—
—
—
—
—
—
12,295
—
—
12,295
—
104,990
3,620
(40,589)
(4,371)
1,199
4,053
1,750
21,761
(10,573)
(509)
178,670
(199,748)
951
(198,797)
(4,875)
298,308
(278,308)
—
(1,127)
(134)
13,864
(6,263)
19,586
3,415
—
23,001
$
16,738 $
— $
— $
16,738
86
Clearwater Paper Corporation
Consolidating Statement of Cash Flows
Year Ended December 31, 2016
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Depreciation and amortization
Equity-based compensation expense
Deferred taxes
Employee benefit plans
Deferred issuance costs on debt
Disposal of plant and equipment, net
Other non-cash activities
Changes in working capital, net of acquisition
Change in taxes receivable, net
Other, net
Net cash flows from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment
Acquisition of Manchester Industries, net of cash acquired
Other, net
Net cash flows from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on short-term debt
Repayments of borrowings on short-term debt
Purchase of treasury stock
Investment from (to) parent
Payments for debt issuance costs
Payment of tax withholdings on
equity-based payment arrangements
Other, net
Net cash flows from financing activities
Increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at
beginning of period
Cash, cash equivalents and restricted cash at
end of period
Issuer
Guarantor
Subsidiaries
Eliminations
Total
$
50,773 $
5,331 $
(6,550) $
49,554
68,496
12,385
18,860
(1,979)
1,242
781
740
(642)
1,078
(1,904)
149,830
(145,579)
(67,443)
250
(212,772)
1,273,959
(1,138,959)
(65,327)
9,772
(1,906)
(933)
312
76,918
13,976
22,594
—
605
—
—
600
18
774
(1,405)
(921)
27,596
(9,770)
—
36
(9,734)
—
—
—
(14,447)
—
—
—
(14,447)
3,415
—
—
(1,138)
—
—
—
—
(3,594)
5,469
1,138
(4,675)
91,090
12,385
18,327
(1,979)
1,242
1,381
758
(3,462)
5,142
(1,687)
172,751
—
—
—
—
(155,349)
(67,443)
286
(222,506)
— 1,273,959
— (1,138,959)
(65,327)
—
—
4,675
(1,906)
—
—
—
4,675
—
(933)
312
67,146
17,391
5,610
—
—
5,610
$
19,586 $
3,415 $
— $
23,001
87
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Stockholders and Board of Directors
Clearwater Paper Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Clearwater Paper Corporation and subsidiaries
(the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive
income (loss), stockholders’ equity, and cash flows for each of the years in the three year period ended December 31,
2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and
2017, and the results of its operations and its cash flows for each of the years in the three year period ended
December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission, and our report dated March 18, 2019 expressed an adverse opinion on the effectiveness
of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these consolidated financial statements based on our audits. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks
of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2007.
Seattle, Washington
March 18, 2019
88
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Stockholders and Board of Directors
Clearwater Paper Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Clearwater Paper Corporation and subsidiaries’ (the Company) internal control over financial reporting
as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the
material weaknesses, described below, on the achievement of the objectives of the control criteria, the Company has
not maintained effective internal control over financial reporting as of December 31, 2018, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related
consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each
of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated
financial statements), and our report dated March 18, 2019 expressed an unqualified opinion on those consolidated
financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements
will not be prevented or detected on a timely basis. Material weaknesses have been identified and included in
management’s assessment related to an insufficient complement of knowledgeable and experienced resources and
inadequate risk assessment with respect to events and transactions outside the ordinary course of business, and, as
a result, insufficient controls over the identification and accounting implications of changes to payment arrangements
with vendors. The material weaknesses were considered in determining the nature, timing, and extent of audit tests
applied in our audit of the 2018 consolidated financial statements, and this report does not affect our report on those
consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
89
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ KPMG LLP
Seattle, Washington
March 18, 2019
90
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
ITEM 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities
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.
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 fiscal year covered by this annual report on
Form 10-K. Based on that evaluation, the CEO and CFO have concluded that, due to material weaknesses in our
internal control over financial reporting described below, our disclosure controls and procedures were not effective as
of December 31, 2018 to meet the objective for which they were designed.
The material weaknesses resulted from the following series of events. In 2018, we entered into certain significant
transactions and experienced certain events outside the ordinary course of our business. Among others, in connection
with the expansion of our facility located in Shelby, North Carolina, the payments for certain vendor agreements were
processed through our supply chain financing program. The supply chain financing program allowed our vendors to
finance their receivables directly with third party payors in order to receive payment of the invoices earlier than their
payment terms with us. Following the implementation of our supply chain financing program, we subsequently
discovered that we had been reimbursing some of our vendors for the difference between the amount of their invoice
and the amount they receive from the third party payors. This resulted in certain payables incurred as part of the supply
chain financing program and initially classified as trade payables being reclassified as debt. During 2018, we also
experienced significant staffing changes.
Notwithstanding the identified material weaknesses, management has concluded that the consolidated financial
statements included in this annual report on Form 10-K fairly present in all material respects the Company’s financial
position, results of operations and cash flows at and for the periods presented in accordance with U.S. generally
accepted accounting principles (“GAAP”).
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act). Our internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those
policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the
Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s
management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of
91
unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial
statements.
Under the supervision of and with the participation of our CEO and our CFO and with the oversight of the Audit
Committee of the Board of Directors, our management conducted an assessment of the effectiveness of our internal
control over financial reporting based on the framework and criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“2013
Framework”).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not
be prevented or detected on a timely basis. Based on our evaluation under the 2013 Framework, our management
identified the following material weaknesses as of December 31, 2018:
(i)
(ii)
With respect to events and transactions outside the ordinary course of business:
a. we did not maintain a sufficient complement of personnel with the appropriate
knowledge and experience in generally accepted accounting principles and their
application to our financial reporting processes and related internal controls; and
b. we did not conduct effective risk assessment that adequately identified, assessed
and addressed risks of material misstatement in the financial statements, including
fraud risks and risks from changes in our operations and organizational structure.
As a consequence, we did not design and maintain effective process-level controls over
the identification and accounting implications of changes made to payment arrangements
with vendors.
These material weaknesses resulted in certain immaterial misstatements in accounts payable and accrued liabilities
and short-term debt, and related presentation in the consolidated statement of cash flows in the preliminary consolidated
financial statements as of and for the year ended December 31, 2018 that were corrected prior to the issuance of the
consolidated financial statements. These control deficiencies create a reasonable possibility that a material
misstatement to the consolidated financial statements will not be prevented or detected on a timely basis, and therefore
we have concluded that the deficiencies represent material weaknesses in internal control over financial reporting and
our internal control over financial reporting was not effective as of December 31, 2018.
Our independent registered public accounting firm, KPMG LLP, has expressed an adverse opinion on the effectiveness
of our internal control over financial reporting, as stated in its report which is included on pages 89-90 in Item 8A of
this annual report on Form 10-K.
Remedial Actions
We plan to address the material weaknesses identified by hiring additional accounting personnel, by implementing
enhanced controls governing our risk management committee, our disclosure committee and our sub-certifications,
and by designing additional controls over the documentation and application of technical accounting guidance with
particular emphasis on events outside the ordinary course of business, including changes to payment arrangements
with vendors.
Management believes that the remediation efforts to be undertaken will effectively remediate the material weaknesses.
As we continue to evaluate and work to improve our internal control over financial reporting, management may determine
to take additional measures to address control deficiencies or determine to modify the remediation plan described
above. We cannot assure you, however, when we will remediate such weaknesses, nor can we be certain of whether
additional actions will be required or the costs of any such actions.
Changes in Internal Controls
Other than the identification and assessment of the material weaknesses described above, there was no change in
our internal control over financial reporting during the quarter ended December 31, 2018 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
Other Information
None.
92
Part III
ITEM 10.
Directors, Executive Officers and Corporate Governance
Information regarding our directors is set forth under the heading “Board of Directors” in our definitive proxy statement,
to be filed on or about April 2, 2019, for the 2019 Annual Meeting of Stockholders, referred to in this report as the 2019
Proxy Statement, which information is incorporated herein by reference. Information concerning Executive Officers is
included in Part I of this report in Item 1. Information regarding reporting compliance with Section 16(a) for directors,
officers or other parties is set forth under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in
the 2019 Proxy Statement and is incorporated herein by reference.
We have adopted a Code of Business Conduct and Ethics that applies to all directors and employees and a Code of
Ethics for Senior Financial Officers that applies to our CEO, CFO, the President, the Controller and other Senior
Financial Officers identified by our Board of Directors. You can find each code on our website by going to the following
address: www.clearwaterpaper.com, selecting “Investor Relations” and “Corporate Governance,” then selecting the
link for “Code of Business Conduct and Ethics" or "Code of Ethics for Senior Financial Officers.” We will post any
amendments, as well as any waivers that are required to be disclosed by the rules of either the SEC or the New York
Stock Exchange, on our website. To date, no waivers of the Code of Ethics for Senior Financial Officers have been
considered or granted.
Our Board of Directors has adopted corporate governance guidelines and charters for the Board of Directors’ Audit
Committee, Compensation Committee, and Nominating and Governance Committee. You can find these documents
on our website by going to the following address: www.clearwaterpaper.com, selecting “Investor Relations” and
“Corporate Governance,” then selecting the appropriate link.
The Audit Committee of our Board of Directors is an “audit committee” for purposes of Section 3(a)(58) of the Exchange
Act. As of January 1, 2019, the members of that committee were William D. Larsson (Chair), Kevin J. Hunt, and
Alexander Toeldte. The Board of Directors has determined that Messrs. Larsson, Hunt and Toeldte are “audit committee
financial experts” and that all of the members of the Audit Committee are “independent” as defined under the applicable
rules and regulations of the SEC and the listing standards of the New York Stock Exchange.
ITEM 11.
Executive Compensation
Information required by Item 11 of Part III is included under the heading “Executive Compensation Discussion and
Analysis” in our 2019 Proxy Statement, to be filed on or about April 2, 2019, relating to our 2019 Annual Meeting of
Stockholders and is incorporated herein by reference.
93
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information required by Item 12 of Part III is included in our 2019 Proxy Statement, to be filed on or about April 2, 2019,
relating to our 2019 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
Information required by Item 13 of Part III is included under the heading “Transactions with Related Persons” in our
2019 Proxy Statement, to be filed on or about April 2, 2019, relating to our 2019 Annual Meeting of Stockholders and
is incorporated herein by reference.
ITEM 14.
Principal Accounting Fees and Services
Information required by Item 14 of Part III is included under the heading “Fees Paid to Independent Registered Public
Accounting Firm” in our 2019 Proxy Statement, to be filed on or about April 2, 2019, relating to our 2019 Annual Meeting
of Stockholders and is incorporated herein by reference.
94
PART IV
ITEM 15.
Exhibits, Financial Statement Schedules
FINANCIAL STATEMENTS
Our consolidated financial statements are listed in the Index to Consolidated Financial Statements on page 43 of this
report.
FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the required information is not present or is not present in amounts sufficient
to require submission of the schedule, or because the information required is included in the consolidated financial
statements, including the notes thereto.
EXHIBITS
EXHIBIT
NUMBER
3.1*
3.2*
4.1*
4.2*
4.3*
4.4*
10.1*
10.1(i)*
DESCRIPTION
Restated Certificate of Incorporation of the Company, effective as of December 16, 2008, as
filed with the Secretary of State of the State of Delaware (incorporated by reference to Exhibit
3.1 to the Company’s Current Report on Form 8-K filed with the Commission on December
18, 2008).
Amended and Restated Bylaws of the Company, effective as of December 16, 2008
(incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed
with the Commission on December 18, 2008).
Indenture, dated as of January 23, 2013, by and among Clearwater Paper Corporation (the
“Registrant”), the Guarantors (as defined therein) and U.S. Bank National Association, as
trustee, (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form
8-K filed with the Commission on January 24, 2013).
Form of 4.500% Senior Notes due 2023 (incorporated by reference as Exhibit A to Exhibit
4.1 to the Company's Current Report on Form 8-K filed with the Commission on January 24,
2013).
Indenture, dated as of July 29, 2014, by and among Clearwater Paper Corporation (the
“Registrant”), the Guarantors (as defined therein) and U.S. Bank National Association, as
trustee, (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form
8-K filed with the Commission on July 29, 2014).
Form of 5.375% Senior Notes due 2025 (incorporated by reference as Exhibit A to the
Indenture filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the
Commission on July 29, 2014).
Commercial Bank Agreement, dated as of October 31, 2016, by and among the financial
institutions signatory thereto, Wells Fargo Bank, National Association and Clearwater Paper
Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed with the Commission on November 3, 2016).
Amendment to Commercial Bank Agreement, effective as of December 31, 2017, by and
among the financial institutions signatory thereto, Wells Fargo Bank, National Association
and Clearwater Paper Corporation (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the Commission on January 11, 2018).
95
10.1(ii)*
10.1(iii)*
10.1(iv)
10.2*
10.2(i)*
10.2(ii)*
10.2(iii)*
10.2(iv)
10.3*1
10.4*1
10.4(i)*1
10.5*1
Amendment No. 2 to the Credit Agreement and Amendment to the Collateral Agreement,
effective as of June 27, 2018, by and among the financial institutions signatory thereto, Wells
Fargo Bank, National Association and Clearwater Paper Corporation (incorporated by
reference to Exhibit 10(ii) to the Company’s Quarterly Report on Form 10-Q filed with the
Commission for the quarter ended June 30, 2018).
Amendment No. 3 to the Credit Agreement, effective as of August 21, 2018, by and among
the financial institutions signatory thereto, Wells Fargo Bank, National Association and
Clearwater Paper Corporation (incorporated by reference to Exhibit 10(i) to the Company’s
Quarterly Report on Form 10-Q filed with the Commission for the quarter ended September
30, 2018).
Amendment No. 4 to the Credit Agreement, effective as of November 8, 2018, by and among
the financial institutions signatory thereto, Wells Fargo Bank, National Association and
Clearwater Paper Corporation.
Farm Credit Agreement, dated as of October 31, 2016, by and among the financial institutions
signatory thereto, Northwest Farm Credit Services, PCA, and Clearwater Paper Corporation
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
with the Commission on November 3, 2016).
Amendment to Farm Credit Agreement, effective as of December 31, 2017, by and among
the financial institutions signatory thereto, Northwest Farm Credit Services, PCA, and
Clearwater Paper Corporation (incorporated by reference to Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed with the Commission on January 11, 2018).
Amendment No. 2 to Credit Agreement and Amendment to the Collateral Agreement, effective
as of June 27, 2018, by and among the financial institutions signatory thereto, Northwest
Farm Credit Services, PCA, and Clearwater Paper Corporation (incorporated by reference
to Exhibit 10(iii) to the Company’s Quarterly Report on Form 10-Q filed with the Commission
for the quarter ended June 30, 2018).
Amendment No. 3 to the Credit Agreement, effective as of August 21, 2018, by and among
the financial institutions signatory thereto, Northwest Farm Credit Services, PCA, and
Clearwater Paper Corporation (incorporated by reference to Exhibit 10(ii) to the Company’s
Quarterly Report on Form 10-Q filed with the Commission for the quarter ended September
30, 2018).
Amendment No. 4 to the Credit Agreement, effective as of November 8, 2018, by and among
the financial institutions signatory thereto, Northwest Farm Credit Services, PCA, and
Clearwater Paper Corporation.
Form of Indemnification Agreement entered into between the Company and each of its
directors and executive officers (incorporated by reference to Exhibit 10.15 to Amendment
No. 4 to the Company’s Registration Statement on Form 10 filed with the Commission on
November 19, 2008).
Employment Agreement between Linda K. Massman and the Company, dated effective
January 1, 2016 (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report
on Form 10-K filed with the Commission February 22, 2016).
Amendment to Employment Agreement between Linda K. Massman and the Company, dated
effective January 1, 2018 (incorporated by reference to Exhibit 10(ii) to the Company’s Current
Report on Form 8-K filed with the Commission on March 9, 2018).
Clearwater Paper Corporation Amended and Restated 2008 Stock 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 8, 2015).
96
10.5(i)*1
10.5(ii)*1
10.6*1
10.6(i)*1
10.6(ii)*1
10.7*1
10.7(i)*1
10.7(ii)*1
10.7(iii)*1
10.7(iv)*1
10.8*1
10.8(i)*1
10.8(ii)*1
Amendment to the Clearwater Paper Corporation Amended and Restated 2008 Stock
Incentive Plan, effective January 1, 2017 (incorporated by reference to Exhibit 10.5(i) to the
Company's Annual Report on Form 10-K filed with the Commission on February 22, 2017).
Clearwater Paper Corporation 2017 Stock 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 11,
2017).
Clearwater Paper Corporation Amended and Restated 2008 Stock Incentive Plan—Form of
Performance Share Agreement to be used for annual performance share awards approved
subsequent to December 31, 2015 (incorporated by reference to Exhibit 10.6(iv) to the
Company’s Annual Report on Form 10-K filed with the Commission February 22, 2016).
Clearwater Paper Corporation—Form of Performance Share Agreement, as amended and
restated, to be used for annual performance share awards approved subsequent to December
31, 2016 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form
8-K filed with the Commission on February 10, 2017).
Clearwater Paper Corporation-Form of Performance Share Agreement, as amended and
restated, to be used for annual performance share awards approved subsequent to December
31, 2018 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form
8-K filed with the Commission on February 14, 2019).
Clearwater Paper Corporation 2008 Stock Incentive Plan—Form of Restricted Stock Unit
Agreement, as amended and restated December 1, 2009, to be used for annual restricted
stock unit awards approved subsequent to December 31, 2009, (incorporated by reference
to Exhibit 10.12(ii) to the Company's Current Report on Form 8-K filed with the Commission
on December 4, 2009).
Clearwater Paper Corporation 2008 Stock Incentive Plan—Form of RSU Deferral Agreement
for Founders Grant RSUs (incorporated by reference to Exhibit 10.4 to the Company’s Current
Report on Form 8-K filed with the Commission on December 14, 2011).
Clearwater Paper Corporation Amended and Restated 2008 Stock Incentive Plan—Form of
Restricted Stock Unit Agreement, to be used for restricted stock unit awards approved
subsequent to December 31, 2015 (incorporated by reference to Exhibit 10.7(xii) to the
Company’s Annual Report on Form 10-K filed with the Commission February 22, 2016).
Clearwater Paper Corporation—Form of Restricted Stock Unit Agreement, as amended and
restated, to be used for restricted stock unit awards approved subsequent to December 31,
2016 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form
8-K filed with the Commission on February 10, 2017).
Clearwater Paper Corporation-Form of Restricted Stock Unit Agreement, as amended and
restated, to be used for restricted stock unit awards approved subsequent to December 31,
2017 (incorporated by reference to Exhibit 10.7(x) to the Company’s Annual Report on Form
10-K filed with the Commission on February 21, 2018).
Clearwater Paper Corporation 2008 Stock Incentive Plan—Form of Stock Option Agreement
(incorporated by reference to Exhibit 10.3 to the Company’s current Report on Form 8-K filed
with the Commission on February 18, 2014).
Clearwater Paper Corporation 2008 Stock Incentive Plan—Form of Amendment of Stock
Option Agreement, effective as of January 1, 2015 (incorporated by reference to Exhibit 10.7(i)
to the Company's Annual Report on Form 10-K filed with the Commission on February 26,
2015).
Clearwater Paper Corporation 2008 Stock Incentive Plan—Form of Stock Option Agreement,
to be used for annual restricted stock unit awards approved subsequent to December 31,
2014 (incorporated by reference to Exhibit 10.7(ii) to the Company's Annual Report on Form
10-K filed with the Commission on February 26, 2015).
97
10.8(iii)*1
10.8(iv)*1
10.8(v)*1
10.9*1
10.9(i)*1
10.10*1
10.11*1
10.11(i)*1
10.12*1
10.13*1
10.13(i)*1
10.14*1
10.14(i)*1
10.15*1
Clearwater Paper Corporation Amended and Restated 2008 Stock Incentive Plan—Form of
Stock Option Agreement, to be used for annual restricted stock unit awards approved
subsequent to December 31, 2015 (incorporated by reference to Exhibit 10.8(iii) to the
Company’s Annual Report on Form 10-K filed with the Commission February 22, 2016).
Clearwater Paper Corporation— Form of Stock Option Agreement, as amended and restated,
to be used for annual restricted stock unit awards approved subsequent to December 31,
2016 (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form
8-K filed with the Commission on February 10, 2017).
Clearwater Paper Corporation- Form of Stock Option Agreement, as amended and restated,
to be used for annual restricted stock unit awards approved subsequent to December 31,
2017 Clearwater Paper Corporation- Form of Stock Option Agreement, as amended and
restated, to be used for annual restricted stock unit awards approved subsequent to December
31, 2017 (incorporated by reference to Exhibit 10.8(v) to the Company’s Annual Report on
Form 10-K filed with the Commission on February 21, 2018).
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).
Amendment to the Clearwater Paper Corporation Annual Incentive Plan, effective as of
January 1, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 10-Q filed with the Commission on July 27, 2016).
Amended and Restated Clearwater Paper Corporation Management Deferred Compensation
Plan (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form
10-K filed with the Commission for the year ended December 31, 2016).
Clearwater Paper Executive Severance Plan (incorporated by reference to Exhibit 10.12 to
the Company’s Annual Report on Form 10-K filed with the Commission on February 20, 2014).
Clearwater Paper Amended Executive Severance Plan (incorporated by reference to Exhibit
10(i) to the Company’s Current Report on Form 8-K filed with the Commission on March 9,
2018).
Amended and Restated Clearwater Paper Corporation Salaried Supplemental Benefit Plan
(incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K
filed with the Commission for the year ended December 31, 2016).
Clearwater Paper Corporation Benefits Protection Trust Agreement (incorporated by
reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K filed with the
Commission for the year ended December 31, 2008).
Amendment to the Clearwater Paper Corporation Benefits Protection Trust Agreement, dated
August 8, 2013 (incorporated by reference to Exhibit 10.16(i) to the Company's Quarterly
Report on Form 10-Q filed with the Commission for the quarter ended September 30, 2013).
Amended and Restated Clearwater Paper Corporation Deferred Compensation Plan for
Directors, (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on
Form 8-K filed with the Commission on December 7, 2017).
Amended and Restated Clearwater Paper Corporation Deferred Compensation Plan for
Directors, (incorporated by reference to Exhibit 10(i) to the Company’s Quarterly Report on
Form 10-Q filed with the Commission for the quarter ended June 30, 2018).
Clearwater Paper Change of Control Plan (incorporated by reference to Exhibit 10.16 to the
Company’s Annual Report on Form 10-K filed with the Commission on February 20, 2014).
(21)
Clearwater Paper Corporation Subsidiaries.
98
(23)
(24)
(31)
(32)
101
Consent of Independent Registered Public Accounting Firm.
Powers of Attorney.
Rule 13a-14(a)/15d-14(a) Certifications.
Furnished statements of the Chief Executive Officer and Chief Financial Officer under 18
U.S.C. Section 1350.
Pursuant to Rule 405 of Regulation S-T, the following financial information from the
Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018, is formatted
in XBRL interactive data files: (i) Consolidated Statements of Operations for the years ended
December 31, 2018, 2017 and 2016; (ii) Consolidated Statements of Comprehensive Income
(Loss) for the years ended December 31, 2018, 2017 and 2016; (iii) Consolidated Balance
Sheets at December 31, 2018 and 2017, (iv) Consolidated Statements of Cash Flows for the
years ended December 31, 2018, 2017 and 2016, (v) Consolidated Statements of
Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016 and (vi) Notes
to Consolidated Financial Statements.
* Incorporated by reference.
1 Management contract or compensatory plan, contract or arrangement.
99
ITEM 16.
Form 10-K Summary
Not applicable.
100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CLEARWATER PAPER CORPORATION
(Registrant)
By
/s/ Linda K. Massman
Linda K. Massman
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 18, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
By
By
By
/s/ Linda K. Massman
Linda K. Massman
President, Chief Executive Officer
and Director (Principal Executive
Officer)
/s/ John D. Hertz
John D. Hertz
/s/ Robert N. Dammarell
Robert N. Dammarell
Senior Vice President, Finance
and Chief Financial Officer (Duly
Authorized Officer; Principal
Financial Officer)
Vice President, Corporate
Controller (Duly Authorized
Officer; Principal Accounting
Officer)
Date
March 18, 2019
March 18, 2019
March 18, 2019
*
Alexander Toeldte
*
Kevin J. Hunt
*
William D. Larsson
*
John P. O'Donnell
Director and Chair of the Board
March 18, 2019
Director
Director
Director
March 18, 2019
March 18, 2019
March 18, 2019
*By
/s/ Michael S. Gadd
Michael S. Gadd
(Attorney-in-fact)
101
Performance Graph
The below graph compares the cumulative total stockholder return of our common stock for the period beginning
December 31, 2013 and ending December 31, 2018, with the cumulative total return during such period of the
Russell 2000® Index and the S&P MidCap 400® Index (excluding those companies classified as members of
the GICS® Financials sector). The comparison assumes $100 was invested on December 31, 2013, in our
common stock and in the indices and assumes dividends were reinvested. The stock performance shown on the
below graph represents historical stock performance and is not necessarily indicative of future stock price
performance.
We measure our relative corporate performance for purposes of performance-based equity awards issued to our
executive officers against a specific index. Each year, an index is selected to apply to performance-based
equity awards issued in that year. We currently measure our relative performance, for purposes of performance-
based equity awards, against the S&P MidCap 400® Index (excluding those companies classified as members
of the GICS® Financials sector). The cumulative return for that index is listed below.
Comparison of Cumulative Five Year Total Return*
$200
$150
$100
$50
$0
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
Clearwater Paper Corporation
Russell 2000 Index
S&P MidCap 400® Index (excluding members of the GICS® Financials sector)
*This comparison assumes $100 was invested on December 31, 2013, in our common stock and in the indices
and assumes dividends were reinvested.
Corporate Information
management
linda k. massman
President and Chief Executive Officer
robert g. Hrivnak
Senior Vice President, Finance and Chief Financial Officer
(effective April 8, 2019)
Steve m. Bowden
Senior Vice President, General Manager,
Pulp and Paperboard Division
michael S. gadd
Senior Vice President, General Counsel
and Corporate Secretary
arsen S. kitch
Senior Vice President, General Manager,
Consumer Products Division
kari g. moyes
Senior Vice President, Human Resources
Board oF direCtorS
kevin J. Hunt
Director since 2013
william d. larsson
Director since 2008
linda k. massman
Director Since 2013
President and Chief Executive Officer
John P. o’donnell
Director since 2016
President and CEO, Neenah, Inc.
alexander toeldte
Chair of the Board, Director since 2016
exeCutive oFFiCeS
601 West Riverside Avenue
Suite 1100
Spokane, WA 99201
Phone: 509.344.5900
Forward-looking StatementS
StoCk liSting
Clearwater Paper common stock is listed under the
symbol CLW on the New York Stock Exchange.
annual meeting
The 2019 Annual Meeting of Stockholders will be held on Monday,
May 13, 2019, at 9:00 a.m. (Pacific Time). The meeting will be held at
the Grand Hyatt, 721 Pine Street, Seattle, Washington, 98101.
tranSFer agent
mailing addreSSeS
Shareholder correspondence should be mailed to:
Computershare
P.O. BOX 505000
Louisville, KY 40233
Overnight correspondence should be sent to:
Computershare
462 South 4th Street Suite 1600
Louisville, KY 40202
SHareHolder weBSite
www.computershare.com/investor
Shareholder online inquiries
https://www-us.computershare.com/investor/Contact
Toll Free Number
Outside the U.S.
Hearing Impaired
TDD International
866-205-6799
201-680-6578
800-490-1493
781-575-4592
additional inFormation
Copies of the company’s filings with the Securities and Exchange
Commission, the company’s Corporate Governance Guidelines, Code
of Business Conduct and Ethics, and Charters of the Committees of
the Board of Directors are available free of charge at the company’s
website, www.clearwaterpaper.com.
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 financial benefits of our Lewiston, Idaho continuous digester, market conditions, strategic
investments, cost reductions, new paper machine and other expansion at our Shelby, N.C. facility, tissue production, industry fundamentals, product
quality and shareholder value. 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 discussed in the “Risk Factors”
and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Developments and Trends in Our Business” sections
contained in our Annual Report on Form 10-K for the year ended December 31, 2018, included herein. Forward-looking statements contained in this
report present management’s views only as of the date of this report. We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise.
FSC®-CertiFied PaPer
Clearwater Paper Corporation’s Annual Report was printed by Donnelley Financial Solutions entirely on FSC-certified paper. Chain-of-Custody
certificate TT-COC-005939. The Annual Report was printed on Donnelley Financial Opaque Text manufactured from FSC-recycled content.
Clearwater Paper Corporation
601 West Riverside Avenue, Suite 1100
Spokane, WA 99201
www.clearwaterpaper.com