Our disclosure and analysis in this report and in our Annual Report to Shareholders contain,contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our long-term strategy for the companycosts and our operating divisions, the benefits of a broad manufacturing footprint and the location of our manufacturing facilities, increased customer and market opportunities for our consumer products business, cost savings programs, net cost savings from synergies associated with the Cellu Tissue Holdings, Inc. acquisition, cost reductions resulting fromclosure of our new wood chippingThomaston, Georgia facility, the acceptance of private label products, pulp costs, our use of internally produced pulp, the cost and timing to complete new facilities, tax rates, scheduled downtime at our facilities, future growth opportunities, future revenues, cash flows, capital expenditures, tax rates, operating costs, including energy costs, chemical costs, transportation costs, wood fiber supplyselling, general and costs, depreciationadministrative expenses, timing of major maintenance and amortization expense, manufacturing output,repairs, liquidity, debt service obligations, the payment of dividends, benefit plan funding levels, the effect of recent accounting standards on our financial condition and results of operationscapitalized interest, interest expenses, and the tax treatment of the alternative fuels and cellulosic biofuels tax credits. Words such as “anticipate,” “expect,” “intend,” “plan,” “target,” “project,” “believe,” “schedule,” “estimate,” “may,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are based on management’s current expectations, estimates, assumptions and projections that are subject to change. Our actual results of operations may differ materially from those expressed or implied by the forward-looking statements contained in this report. Important factors that could cause or contribute to such differences in operating results include those risks discussed in Item 1A of this report, as well as the following:

Clearwater Paper Corporation is a leading North American producer of private label tissue and paperboard products. We manufacture quality consumer tissue, away-from-home tissue, or AFH, parent rolls (non-converted tissue product), machine-glazed tissue, bleached paperboard and pulp at 1514 manufacturing locations in the U.S. and Canada. Our private label consumer tissue products - facial and bath tissue, paper towels and napkins - are used primarily at-home and are principally sold to major retailers and wholesale distributors, which include grocery, drug, mass-merchant and discount stores. Our paperboard is sold primarily in the high-end segment of the packaging industry, which demands high-quality construction and print surfaces for graphics. Our products are made primarily from wood fiber pulp.

Complementary, long-standing customer relationships. Our consumer products business supplies private label tissue products to several of the largest national grocery chains. Since our December 2010 acquisition of Cellu Tissue, ourOur top 10 consumer products customers on average havein 2013 accounted for approximately 55%58% of our total consumer products net sales. Our largest customer in 2013 was the Kroger Company, which accounted for 10.8% of our total company net sales. The average tenure of our top 10 tissuethese customers in 2012 was approximately 2012 years. In addition to these long-standing customer relationships, with our top 10 tissue customers, we have a diverse base of over 200110 customers across a broad geographic area. We also have long-standing customer

Our long-term strategy is to grow the size and scope of our consumer products business and optimize the profitability of that business as well as that of our paperboard business and continue to build a high performance culture.business. In the near-term, our focus isremains on maximizing the strategic and financial benefits from the integration of our existing facilities and our recently constructed TAD paper machine and converting lines in North Carolina. We also plancontinue to optimizework on optimizing the operating efficiencies and cost effectiveness of our premium bleached paperboard production.

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 2010-2012,2011-2013, as well as geographic information regarding our net sales, is set forth in Note 17 to our consolidated financial statements included in under Part II, Item 8 of this report.

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 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 sell tissue products to 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 and forest products industry due to its steady demand growth and the absence of severe supply imbalances that occur in a number of other paper segments. In addition to economic and demographic drivers, tissue demand is affected by product innovations and shifts in distribution channels.

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.

Tissue parent rolls that we manufacture to requested specifications but do not convert are sold to third-party converters or brokers after being manufactured to their requested specifications, for conversion into various end products, including at-home tissue products and absorbent products used to produce liners for diapers, feminine care products, surgical waddings and other medical and sanitary disposable products.

We also manufacture and sell machine-glazed tissue products, including wax paper products for retail food wrappers and machine-glazed tissue parent rolls for third-party converters.

Our consumer products are manufactured on 21 paper machines in our facilities located throughout the U.S. and in Ontario, Canada. Parent rolls from these paper machines are then converted and packaged at our converting facilities located across the U.S. Three of our paper machines, located in Nevada, Ontario,North Carolina and our recently completed paper machine in North Carolina,Ontario produce TAD tissue that we convert into national brand comparable, ultra quality towels and/or bath tissue.

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. Branded producers generally manufacture their private label products at a quality grade or two below their branded products so as not to impair sales of the branded products. Because we do not 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 are committed to maintaining a high level of quality for our products that matches the quality of the leading national brands, and we utilize independent companies to routinely test our product quality.

We sell private label tissue products through our own sales force 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.

SBS paperboard is a premium paperboard grade that is most frequently used to produce folding cartons, liquid packaging, cups and plates as well as commercial printing items. SBS paperboard is used to make these products because it is manufactured using virgin fiber produced in acombined with the kraft bleaching process, which results in superior cleanliness, brightness and consistency. SBS paperboard

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 shipment to customers for converting to final end uses. 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.

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.

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.

Unions represent hourly employees at eight of our manufacturing sites. There were threewas one hourly union labor contractscontract that expired in 2012, all of2013, which werewas renegotiated during the year. One union contract has an expiration dateFour collective bargaining agreements expire in 2013:

Gordon L. JonesLinda K. Massman (age 63)47), has served as Chief Executive Officer of the company from December 2008 until his retirement on December 31, 2012. Mr. Jones has servedand as a director since December 2008 and was Chairman of the Board from May 2010 to December 31, 2012. From December 2008 to November 2011, Mr. Jones served as President of the company. From July 2008 to December 2008, Mr. Jones served as a Vice President of Potlatch Corporation, pending completion of the spin-off of Clearwater Paper Corporation. From 2001 to 2010, Mr. Jones served as the President and Managing Member of Jones Investment Group LLC, an investment company. Prior to that, Mr. Jones served from May 1999 to November 2000 as President, Chief Executive Officer, and Director of Blue Ridge Paper Products, Inc., a manufacturer of paperboard and packaging products. From 1983 to 1999, Mr. Jones served in a variety of executive positions with Smurfit-Stone Container Corporation and predecessor companies. Prior to 1983, Mr. Jones served in several management roles at Procter & Gamble.

John D. Hertz (age 46)47) 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. Before joining our company, Mr. Hertz was the Vice President and Chief Financial Officer, of Novellus Systems, Inc., a position he held from June 2010 to June 2012. 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.

Thomas A. Colgrove (age 61)62), has served as Senior Vice President and President of Consumer Products since January 2013, and served as Senior Vice President and President of Pulp and Paperboard from May 2011 until December 31, 2012. Effective January 1, 2013, he began serving as Senior Vice President and President of Consumer Products. Mr. Colgrove served as Vice President of Pulp and Paperboard from May 2009 to May 2011. Prior to May 2009, heHe was employed by Kimberly-Clark Corporation from 1984 to 2009, in various manufacturing management positions. From September 2006 to April 2009, Mr. Colgrove was thepositions, including as Senior Director-North America Product Supply at Kimberly-Clark and was responsiblewith responsibility for seven North American tissue facilities. Priorfacilities from September 2006 to that, Mr. Colgrove held a series of Plant Manager positions at five facilities across the U.S.April 2009.

Subsequent to December 31, 2012, Danny G. Johansen (age 62) became the63) has served as Senior Vice President and President of Pulp and Paperboard effectivesince January 1, 2013. From December 2008 through December 2012, he served as Vice President, Sales and Marketing, for Pulp and Paperboard. Prior to December 2008, Mr. Johansen was employed by Potlatch Corporation for nearly 36 years. From 2002 to December 2008, he served as the Director of Sales, Idaho Pulp and Paperboard division, for Potlatch.

In connection with our long-term growth strategy, we recently built a new TAD paper machine and installed fourfive converting lines at our facility in Shelby, North Carolina and upgraded our TAD manufacturing capabilities at our Las Vegas, Nevada facility. As these are recently completed projects, we are still in the process of optimizing the operation of the newmix and upgraded equipment, the quality of the TAD products being produced at these facilities, the converting and distribution of our TAD and existing tissue products and the sales mix of our new TAD product offerings with existing product lines. We are also workingcontinue to work with existing customers as well as new customers to develop marketing and sales programs in connection with the new TAD products. These ongoing efforts entail numerous risks, including potential mechanical and other operational problems in the start-up phase of operations of this complex manufacturing equipment, difficulties in integrating the new TAD products with existing products, difficulties in integrating the new operations and personnel with our other tissue operations and market acceptance of and demand for the new TAD products. 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.

Additionally, over the past few years, several new or refurbished TAD paper machines have been completed or announced by our competitors, including private label competitors, that will result in a substantial increase in the supply of TAD tissue in the North American market. This increase in supply of TAD products, as well as the effects of that increased supply in displacing existing conventional tissue product sales, could have a material adverse effect on the price of TAD tissue products and on the market demand for conventional tissue products, which will continue to represent a majority of our total production for the foreseeable future.

In 2012,2013, our Consumer Products segment derived approximately 32%33% of its net sales and we derived approximately 19%20% of our total net sales from three customers. 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 business, results of operations and financial condition. We have experienced increased price and promotion competition for our consumer products customers, particularly in regards to TAD products, which can decrease our gross margins and adversely affect our financial condition. Some of our customers have the capability to produce the parent rolls or products themselves that they purchase from us. Our Pulp and Paperboard segment sells its products to a large number of customers, although certain customers have historically purchased a significant amount of our pulp or paperboard products.

We do not have long-term contracts with any of our customers, including our largest customers, that ensure a continuing level of business from them. In addition, our agreements with our customers are not exclusive and generally do not contain minimum volume purchase commitments. Our relationship with our large 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 addition, our focus on these large accounts could affect our ability to serve our smaller accounts, particularly when product supply is tight and we are not able to fully satisfy orders for these smaller accounts.

In 2010, ourOur Consumer Products segment sources a significant portion of its wood pulp requirements from external suppliers. In 2013, it sourced approximately 65% of its annual pulp supply from our Pulp and Paperboard segment, while the Cellu Tissue operations we acquired historically relied entirely on external suppliers for wood pulp. Consequently, due to the integration of the Cellu Tissue operations at the end of 2010, our Consumer Products segment sourced approximately 71%70% of its pulp requirements externally during 2012. The increasedexternally. Approximately 17.6% of our cost of sales in 2013 consisted of purchased pulp costs. Our dependence on external sources of wood pulp increases our exposure to fluctuations in prices for wood pulp, which in turn could have a material adverse effect on our financial results, operations and cash flows.

Pulp prices can, and have, changed significantly from one period to the next. For example, our external pulp costs decreased 17% from 2011 to 2012. 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. We have not hedged these risks.

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 are uncertain and could result in a reduction in the supply of wood fiber available for our pulp and paperboard manufacturing operations. If we and our pulp suppliers are unable to obtain wood fiber at favorable prices or at all, our costs will increase and financial results, operations and cash flows may be materially adversely affected.

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 business, financial condition, results of operations and cash flows. 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.

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 much greater 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.

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 International Paper, MeadWestvaco, Georgia-Pacific, RockTenn 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 new, large paperboard manufacturing facilities in China have recently been, or soon will be, completed, the output of which is expected to increase paperboard supplies on the international market. In addition, 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 business, financial condition, results of operations and cash flows.

The consolidation of paperboard converting businesses, including through the acquisition and integration of such converting business by larger competitors of ours, could result in a loss of customers and sales on the part of our Pulp and Paperboard business, which does not include paperboard converting facilities or capabilities. 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 ability to compete successfully depends on our ability to adjust to increases and decreases in demand. If we are unable to respond to increases in demand, we may need to limit deliveries of some orders for existing customers, which could harm our reputation and our long-term relationships with these customers. Currently, we are unable to meet all of the demand from existing and potential customers for bathroom tissue due to very high demand. Alternatively, if we experience a decrease in demand for certain products, we may incur significant costs in revising our manufacturing plan. If we are not able to respond to changes in demand for our products in a timely manner, our financial position, results of operations and cash flows may be adversely affected.

Our consumer products compete with well-known, branded products, as well as other private label products. Inherent risks in our competitive strategy include whether our products will receive direct and retail customer acceptance, 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. We have only recently completed new, or upgraded existing, TAD facilities that allow us to produce TAD bathroom tissue. If we are unable to offer our existing customers, or new customers, tissue products comparable to branded products or private label competitive TAD products and in sufficient quantities,terms of quality 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.

We have company-sponsored pension plans covering certain of our salaried and hourly employees. The significant decline in the securities markets beginning in 2008 and resulting substantial decline in the value of equity and fixed income investments held by these plans, coupled with alternative fuels or cellulosic biofuelsa low interest rate environment resulting in higher liability valuations, caused these plans to be underfunded so that the projected benefit obligation exceeded the aggregate fair value of plan assets. At December 31, 2013, and 2012, our company sponsored pension plans were underfunded in the tax treatment associated with receiptaggregate by approximately $6.8 million and $78.7 million, respectively. As a result of such creditsunderfunding, we are uncertain.required to make contributions to our qualified pension plans. In 2013, we contributed $15.1 million to these pension plans. We may be required to make increased annual contributions to our pension plans in future years, which would reduce the cash available for business and other needs.

One of the tax creditmultiemployer pension plans to which we contribute, the PACE Industry Union-Management Pension Fund, or PIUMPF, was certified to be in 2009, as well as“critical status” for the plan year beginning January 1, 2010, and continued to whetherbe in critical status for the plan year beginning January 1, 2013. In 2013, two large employers withdrew from PIUMPF. Further withdrawals by other contributing employers could cause a “mass withdrawal” from, or effectively a termination of, PIUMPF or alternatively we will be entitledcould elect to retain the amounts we received upon further review by the Internal Revenue Service, or IRS. In addition, while it is our position that payments received or credits taken in relation to the AFMTC should not be subject to corporate income tax, there can be no assurance as to whether or not the amountswithdraw. Although we have received will be subjectno current intention to taxation. Aswithdraw from PIUMPF, if we were to withdraw, either completely or partially, we would incur a withdrawal liability based on our share of PIUMPF’s unfunded vested benefits. Based on information as of December 31, 2012 provided by PIUMPF and reviewed by our actuarial consultant, we have recorded accrued taxesestimate that, as of December 31, 2013, the payments that we would be required to make to PIUMPF in the event of our complete withdrawal would be approximately $5.7 million per year on uncertain tax positions relateda pre-tax basis. These payments would continue for 20 years, unless we were deemed to be included in a “mass withdrawal” from PIUMPF, in which case these payments would continue in perpetuity. However, we are not able to determine the exact amount of our withdrawal liability because the amount could be higher or lower depending on the nature and timing of any triggering event, the funded status of the plan and our level of contributions to the AFMTCplan prior to the triggering event. These withdrawal liability payments would be in addition to pension contributions to any new pension plan adopted or contributed to by us to replace PIUMPF, all of $68.3 million. In 2012,which would reduce the IRS began conducting an auditcash available for business and other needs. Adverse changes to pension laws and regulations could increase the likelihood and amount of our 2008 to 2011 tax years, which is further discussed in Note 8, "Income Taxes," in the notes to the consolidated financial statements.liabilities arising under PIUMPF.

In addition to our pension plans, we provide health care benefits to certain of our current and former U.S. salaried and hourly employees. There is a risk of higher enrollment and claims in our health care plans and likely increased costs due to the Affordable Care Act’s individual mandate and required coverage. Our health care costs vary with the IRS as a cellulosic biofuel producer, which enables us to claim the $1.01 per gallon Cellulosic Biofuel Producer Credit, or CBPC, in regards to black liquor produced and used as a fuel by us at our pulp mills in 2009. We have changed, and may in the future make additional 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 and expected rates of return on plan assets could also increase pension costs. Significant changes in any of these factors may adversely impact our position as to some or allcash flows, financial condition and results of the credits we claimed under the AFMTC on our 2009 federal income tax form, provided we believe we will have sufficient future federal taxable earnings to enable us to carry forward the credits potentially available under the CBPC. There can be no assurance that we will be able to fully utilize the CBPC. Congress has identified the elimination or modification of the CBPC in connection with black liquor as a possible revenue source. Such legislative action could limit or eliminate our ability to convert AFMTC gallons to CBPC gallons and/or CBPC gallons to AFMTC gallons and, accordingly, limit or eliminate our ability to claim carry forward credits.operations.

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.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.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.

In 2012, we were notified that the U.S. Environmental Protection Agency, or EPA, submitted a civil referral to the U.S. Department of Justice, or DOJ, alleging violations of the Clean Air Act stemming from an EPA investigation at our Lewiston, Idaho pulp facility. Prior to the filing of any formal action, we and the DOJ agreed to discuss the resolution of the allegations, and the parties entered into an agreement to toll the statute of limitations. The tolling agreement expires on March 29, 2013,July 31, 2014, unless further extended by the parties. Discussions with the DOJ and EPA are ongoing. However, this matter could result in civil 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.

We own properties, conduct or have conducted operations at properties, and have assumed indemnity obligations in connection with our spin-off in 2008 from Potlatch Corporation, 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. 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 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. Additionally, with the acquisition of Cellu Tissue, we have different legacy IT systems which we are continuing to integrate.integrate, including the implementation of a single company-wide ERP system. If one of these systems or the ERP implementation 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 results of operations and financial condition. In addition, we may underestimate the costs and expenses of developing and implementing new systems.

U.S. and global economic conditions have negatively affected and may continue to negatively affect our business and financial results. For example, the away-from-home consumer paper products market has experienced a decline because of the slowdown in the travel and restaurant industries as a result of the ongoing economic downturn. Recessed economic conditions affect our business in a number of ways, including causing: (i) increased pressure for price concessions from customers; (ii) declines in domestic and global demand for paperboard; (iii) shifts in customer purchases that affect the mix of our product sales; (iv) decreased or low housing starts, which increase production costs due to lower wood fiber supplies; and (v) financial distress or insolvency for certain customers which could affect our sales volumes or our ability to collect accounts receivable on a timely basis from those customers.

Our Pulp and Paperboard business is particularly 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.

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.

In addition to the acquisition of Cellu Tissue and construction of our North Carolina facility, in the future we may build other converting and papermaking facilities, pursue acquisitions of existing facilities, or both. We may be unable to identify future suitable building locations or acquisition targets. 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.

The indentures governing our outstanding notes that we issued in 2010 and 2013, and the credit agreement governing our senior secured revolving credit facility, contain various provisions that limit our discretion in the operation of our business by restricting our ability to:

These restrictions on our ability to operate our business inat 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. In addition, our senior secured revolving credit facility requires, among other things, that we maintain a minimum fixed charge coverage ratio of at least 1.0-to-1.0 when availability falls below $50 million or an event of default exists. Events beyond our control could affect our ability to meet this financial test, and we cannot assure you that we will meet it.

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 facility 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 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.

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 in the future. This, to a certain 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 facility in an amount sufficient to enable us to pay our indebtedness, including the 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 facility and our existing notes, on commercially reasonable terms or at all.

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:

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.

In addition to the matters discussed above, we may from time to time be involved in claims, proceedings and litigation arising from our business and property ownership. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition.

Our common stock is traded on the New York Stock Exchange. The following table sets forth, for each period indicated, the high and low sales prices of our common stock during our two most recent years. Prices have been retroactively adjusted to reflect our two-for-one stock split effected in the form of a stock dividend, effective August 26, 2011.

Please see Part III, Item 12 of this report for information relating to our equity compensation plans.

Prior to our spin-off from Potlatch Corporation, or Potlatch, on December 16, 2008, we were a wholly-owned subsidiary of Potlatch. On December 16, 2008, Potlatch distributed 100%All of the issued and outstanding shares of our common stock to the holders of Potlatch common stock.

Earnings per share and common shares outstanding data have been retroactively adjusted to reflect our two-for-one stock split that was effected in the form of a stock dividend distributed on August 26, 2011 to shareholders of record on August 12, 2011.

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.

Consumer Products Expansion

In December 2012, we announced the start-up of our new through-air-dried, or TAD, paper machine and the completion of two additional converting lines that became operational in Shelby, North Carolina during the fourth quarter of 2012. TheWith the completion of the TAD paper machine and a total of fourtwo additional converting lines at that facility in Shelby, North Carolina, along with another converting line2013, bringing the total to six, and upgrades to our TAD tissue manufacturing facility in Las Vegas, Nevada, we expect to install in 2013, is expected to increase our ultra and premium offerings to existing and new customers. Also in the fourth quarter, we completed upgrades to our TAD tissue manufacturing facility in Las Vegas, Nevada.

Overall, our TAD tissue expansion project, or TAD project, will allow us to supply a full range of TAD products, including paper towels and bath tissue, to customers across the U.S., while reducing transportation costs. We believe this project, along with our existing manufacturing capabilities, establishes us as the only private label tissue products company in the U.S. to offer a full line of tissue products to customers.

Our business is organized into two reporting segments:

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 and the absence of severe supply imbalances that occur in a number of other paper segments. In recent years the industry has seen an increase in TAD tissue products as industry participants have added or improved TAD production facilities. 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.

The markets for our products are highly competitive and companies that have substantially greater financial resources than we do compete with us in each of our markets. In addition, our businesses are capital intensive, which leads to high fixed costs, 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 and greater buying power and, as a result, may be less adversely affected than we are by price decreases.

Net sales consist of sales of consumer tissue and pulp and paperboard, net of discounts, returns and allowances and any sales taxes collected.

Major equipment maintenance and repairs in our Pulp and Paperboard segment also require maintenance shutdowns annually at our Idaho facility, historically, and approximately every 18 to 24 months, at our Arkansas facility, which increasesincrease costs and may reduce net sales in the quarters in which the major maintenance shutdowns occur. We have optimized theOur next planned major maintenance process at our Idaho facility and expect that facility to also be on an 18 month schedule going forward. Inoutage is scheduled for the spring of 2015. During the first quarter of 2012,2013, we had 17 combinedfour days of scheduled machine downtime costing $5.0 million, excluding labor, at our Arkansas facility. During the third quarter of 2013, we incurred 11 days of paper machine downtime, costing $17.5 million, for the two paperboard machinesplanned major maintenance at our Idaho pulp and paperboard mill and incurred approximately $15.5 million in major maintenance costs, excluding labor, compared to major maintenance costs of $11.4 million and $3.1 million, respectively, at the same mill in the first and third quarters of 2011.facility. There was no major maintenance in the second and thirdfourth quarters of 2012. As a result of a decision to defer a portion of our expected major maintenance costs at our Arkansas facility of $4.3 million originally planned for the fourth quarter of 2012 we spent $2.0 million in the fourth quarter of 2012, and expect to incur the remainder in the first quarter of 2013. In 2013, we expect to spend a total of approximately $14 million for planned major maintenance, which consists of an estimated $3 million at our Arkansas facility during the first quarter and an estimated $11 million at our Idaho facility, which is largely expected to be incurred during the third quarter.

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 in reported earnings and taxable income using current law and enacted tax rates. The annual rates,rate, including discrete items, for the yearsyear ended December 31, 2013, was a benefit of 179.7%, compared to expense of 42.5% and 44.1% for 2012 2011 and 2010 were 42.5%, 44.1% and 3.1%,2011, respectively. The reasons for the change in the tax rate from 20122013 compared to 2012 and 2011 waswere primarily due to fourthree items. The first was a decrease in the rate attributable to statethe release of uncertain tax credits.positions, resulting in a benefit to the rate of 180.9%. The second was a decrease due to the additional Cellulosic Biofuel Producer Credits, or CBPC, identified as part of an Internal Revenue Service audit that were previously unclaimed, as well as a remeasurement of state deferred tax assets and liabilities using anticipated future tax rates that will be in effect when the underlying assets and liabilities reverse.  The third was a reduction of the valuation allowance relating to foreign tax credits. Lastly, the decision in the first quarter of 2012 to convert certain gallons of alternative fuel originally claimed in 2009 underconversion from the Alternative Fuel Mixture Tax Credit, or AFMTC, to CBPC, which had been converted by usresulted in 2010benefits to the Cellulosic Biofuel Producer Credit, or CBPC, back to gallons underrate of 26.7%. Finally, a decrease in the AFMTC and associated uncertain tax position. The low annual rate in 2010 was primarily due to benefits from the CBPC and reductionsstate tax credits resulted in our provision for uncertain tax positions relatinga benefit to the AFMTC. rate of 5.9%.

The estimated annual effective tax rate for 20132014 is expected to be approximately 40%38%.

The following table sets forth data included in our Consolidated Statements of Operations as a percentage of net sales.

Operating income, which more than doubled during 2012 with an increase of $50.5 million, outpaced the growth of net sales due to lower purchased pulp and energy costs, as well as lower overall transportation and packaging costs primarily attributable to net cost saving synergies from the integration of Cellu Tissue. These improvements were partially offset by increased staffing, training and startup costs associated with our North Carolina paper making and converting facilities, higher incentive compensation expense, increased commission expense and a loss on the sale of legacy Cellu Tissue foam manufacturing assets.

Operating income in 2012 increased by 11.9% compared to 2011, primarily due to lower costs of energy and purchased pulp, as well as benefits from the sale of our Lewiston, Idaho sawmill. These favorable comparisons were partially offset by higher chemical, wage and benefit and transportation costs compared to 2011. Operating income for 2012 was also negatively impacted by $0.9 million related to deferred revenue as part of our tax planning strategy.