UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 20182019
or
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¨ | 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)
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Delaware | | 20-3594554 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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601 West Riverside, Suite 1100 Spokane, Washington | | 99201 |
(Address of principal executive offices) | | (Zip Code) |
(509) 344-5900
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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.
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Large accelerated filer | | ý¨
| | Accelerated filer | | ¨ý
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Non-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 Exchange Act). Yes ¨ No ý
Securities registered pursuant to Section 12(b) of the Act: |
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.0001 per share | CLW | New York Stock Exchange |
The number of shares of common stock of the registrant outstanding as of November 5, 20181, 2019 was 16,461,119.16,515,813.
CLEARWATER PAPER CORPORATION
Index to Form 10-Q
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PART I. | | |
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ITEM 1. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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PART II. | | |
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ITEM 1. | | |
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ITEM 1A. | | |
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ITEM 5. | | |
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ITEM 6. | | |
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Part I
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ITEM 1. | |
Consolidated Financial Statements |
Clearwater Paper Corporation
Consolidated Statements of Operations
Unaudited (Dollars in thousands - except per-share amounts)
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | $ | 426,460 |
| | $ | 426,504 |
| | $ | 1,295,511 |
| | $ | 1,293,692 |
| $ | 445,188 |
| | $ | 426,460 |
| | $ | 1,325,960 |
| | $ | 1,295,511 |
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Costs and expenses: | | | | | | | | | | | | | | |
Cost of sales | (376,221 | ) | | (386,762 | ) | | (1,155,808 | ) | | (1,154,883 | ) | (418,704 | ) | | (376,221 | ) | | (1,212,775 | ) | | (1,155,808 | ) |
Selling, general and administrative expenses | (26,283 | ) | | (34,582 | ) | | (85,827 | ) | | (93,991 | ) | (28,944 | ) | | (26,283 | ) | | (85,942 | ) | | (85,827 | ) |
Gain on divested assets | 22,944 |
| | — |
| | 22,944 |
| | — |
| |
Gain on divested assets, net | | — |
| | 22,944 |
| | — |
| | 22,944 |
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Total operating costs and expenses | (379,560 | ) | | (421,344 | ) | | (1,218,691 | ) | | (1,248,874 | ) | (447,648 | ) | | (379,560 | ) | | (1,298,717 | ) | | (1,218,691 | ) |
Income from operations | 46,900 |
| | 5,160 |
| | 76,820 |
| | 44,818 |
| |
(Loss) income from operations | | (2,460 | ) | | 46,900 |
| | 27,243 |
| | 76,820 |
|
Interest expense, net | (7,547 | ) | | (7,683 | ) | | (23,290 | ) | | (23,399 | ) | (13,077 | ) | | (7,547 | ) | | (32,477 | ) | | (23,290 | ) |
Non-operating pension and other postretirement benefit (costs) income | (1,234 | ) | | 291 |
| | (3,700 | ) | | 856 |
| |
Earnings (loss) before income taxes | 38,119 |
| | (2,232 | ) | | 49,830 |
| | 22,275 |
| |
Income tax (provision) benefit | (3,675 | ) | | 3,095 |
| | (5,825 | ) | | (5,860 | ) | |
Net earnings | $ | 34,444 |
| | $ | 863 |
| | $ | 44,005 |
| | $ | 16,415 |
| |
Net earnings per common share: | | | | | | | | |
Debt retirement costs | | (2,725 | ) | | — |
| | (2,725 | ) | | — |
|
Non-operating pension and other postretirement benefit costs | | (1,421 | ) | | (1,234 | ) | | (4,266 | ) | | (3,700 | ) |
(Loss) earnings before income taxes | | (19,683 | ) | | 38,119 |
| | (12,225 | ) | | 49,830 |
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Income tax benefit (provision) | | 8,710 |
| | (3,675 | ) | | 4,665 |
| | (5,825 | ) |
Net (loss) earnings | | $ | (10,973 | ) | | $ | 34,444 |
| | $ | (7,560 | ) | | $ | 44,005 |
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Net (loss) earnings per common share: | | | | | | | | |
Basic | $ | 2.09 |
| | $ | 0.05 |
| | $ | 2.67 |
| | $ | 1.00 |
| $ | (0.66 | ) | | $ | 2.09 |
| | $ | (0.46 | ) | | $ | 2.67 |
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Diluted | 2.08 |
| | 0.05 |
| | 2.66 |
| | 0.99 |
| (0.66 | ) | | 2.08 |
| | (0.46 | ) | | 2.66 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
Clearwater Paper Corporation
Consolidated Statements of Comprehensive Income
Unaudited (Dollars in thousands)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net earnings | $ | 34,444 |
| | $ | 863 |
| | $ | 44,005 |
| | $ | 16,415 |
|
Other comprehensive income: | | | | | | | |
Defined benefit pension and other postretirement employee benefits: | | | | | | | |
Amortization of actuarial loss included in net periodic cost, net of tax of $602, $319, $1,807 and $967 | 1,687 |
| | 487 |
| | 5,059 |
| | 1,475 |
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Amortization of prior service credit included in net periodic cost, net of tax of $(110), $(152), $(331) and $(454) | (309 | ) | | (230 | ) | | (926 | ) | | (691 | ) |
Other comprehensive income, net of tax | 1,378 |
| | 257 |
| | 4,133 |
| | 784 |
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Comprehensive income | $ | 35,822 |
| | $ | 1,120 |
| | $ | 48,138 |
| | $ | 17,199 |
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net (loss) earnings | $ | (10,973 | ) | | $ | 34,444 |
| | $ | (7,560 | ) | | $ | 44,005 |
|
Other comprehensive income: | | | | | | | |
Defined benefit pension and other postretirement employee benefits: | | | | | | | |
Amortization of actuarial loss included in net periodic cost, net of tax of $459, $602, $1,376 and $1,807 | 1,286 |
| | 1,687 |
| | 3,859 |
| | 5,059 |
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Amortization of prior service credit included in net periodic cost, net of tax of $-, $(110), $- and $(331) | — |
| | (309 | ) | | — |
| | (926 | ) |
Other comprehensive income, net of tax | 1,286 |
| | 1,378 |
| | 3,859 |
| | 4,133 |
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Comprehensive (loss) income | $ | (9,687 | ) | | $ | 35,822 |
| | $ | (3,701 | ) | | $ | 48,138 |
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The accompanying condensed notes are an integral part of these consolidated financial statements.
Clearwater Paper Corporation
Consolidated Balance Sheets
Unaudited (Dollars in thousands – except per-share amounts)
| | | September 30, 2018 | | December 31, 2017 | September 30, 2019 | | December 31, 2018 |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 76,150 |
| | $ | 15,738 |
| $ | 7,815 |
| | $ | 22,484 |
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Restricted cash | 1,080 |
| | — |
| 1,440 |
| | — |
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Receivables, net | 139,170 |
| | 142,065 |
| 157,929 |
| | 145,519 |
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Taxes receivable | 6,748 |
| | 20,282 |
| 6,721 |
| | 6,301 |
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Inventories | 263,274 |
| | 266,043 |
| 282,395 |
| | 266,244 |
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Other current assets | 6,105 |
| | 8,661 |
| 7,960 |
| | 3,399 |
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Total current assets | 492,527 |
| | 452,789 |
| 464,260 |
| | 443,947 |
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Property, plant and equipment, net | 1,206,168 |
| | 1,050,982 |
| 1,273,474 |
| | 1,269,271 |
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Operating lease right-of-use assets | | 74,503 |
| | — |
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Goodwill | 230,153 |
| | 244,161 |
| 35,074 |
| | 35,074 |
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Intangible assets, net | 25,865 |
| | 32,542 |
| 18,725 |
| | 24,080 |
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Other assets, net | 25,382 |
| | 21,778 |
| 15,041 |
| | 15,746 |
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TOTAL ASSETS | $ | 1,980,095 |
| | $ | 1,802,252 |
| $ | 1,881,077 |
| | $ | 1,788,118 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Borrowings under revolving credit facilities | $ | 100,000 |
| | $ | 155,000 |
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Short-term debt | | $ | 58,000 |
| | $ | 120,833 |
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Accounts payable and accrued liabilities | 341,075 |
| | 256,621 |
| 229,563 |
| | 321,032 |
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Current liability for pensions and other postretirement employee benefits | 7,631 |
| | 7,631 |
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Current liability for pension and other postretirement employee benefits | | 7,430 |
| | 7,430 |
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Total current liabilities | 448,706 |
| | 419,252 |
| 294,993 |
| | 449,295 |
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Long-term debt | 671,100 |
| | 570,524 |
| 866,702 |
| | 671,292 |
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Liability for pensions and other postretirement employee benefits | 67,759 |
| | 72,469 |
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Operating lease liabilities | | 66,571 |
| | — |
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Liability for pension and other postretirement employee benefits | | 73,738 |
| | 78,191 |
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Other long-term obligations | 37,788 |
| | 43,275 |
| 33,990 |
| | 38,977 |
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Accrued taxes | 2,839 |
| | 2,770 |
| 3,070 |
| | 2,785 |
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Deferred tax liabilities | 123,778 |
| | 118,528 |
| 116,868 |
| | 121,182 |
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TOTAL LIABILITIES | 1,351,970 |
| | 1,226,818 |
| 1,455,932 |
| | 1,361,722 |
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Commitments and contingent liabilities | |
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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-16,461,119 and 16,447,898 shares issued | 2 |
| | 2 |
| |
Common stock, par value $0.0001 per share, 100,000,000 authorized shares, 16,515,337 and 16,482,345 shares issued | | 2 |
| | 2 |
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Additional paid-in capital | 5,714 |
| | 1,161 |
| 8,853 |
| | 6,403 |
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Retained earnings | 675,111 |
| | 618,254 |
| 479,779 |
| | 487,339 |
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Accumulated other comprehensive loss, net of tax | (52,702 | ) | | (43,983 | ) | (63,489 | ) | | (67,348 | ) |
TOTAL STOCKHOLDERS' EQUITY | 628,125 |
| | 575,434 |
| 425,145 |
| | 426,396 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,980,095 |
| | $ | 1,802,252 |
| $ | 1,881,077 |
| | $ | 1,788,118 |
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The accompanying condensed notes are an integral part of these consolidated financial statements.
Clearwater Paper Corporation
Consolidated Statements of Cash Flows
Unaudited (Dollars in thousands)
| | | Nine Months Ended | Nine Months Ended |
| September 30, | September 30, |
| 2018 | | 2017 | 2019 | | 2018 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net earnings | $ | 44,005 |
| | $ | 16,415 |
| |
Adjustments to reconcile net earnings to net cash flows from operating activities: | | | | |
Net (loss) earnings | | $ | (7,560 | ) | | $ | 44,005 |
|
Adjustments to reconcile net (loss) earnings to net cash flows from operating activities: | | | | |
Depreciation and amortization | 75,686 |
| | 79,468 |
| 86,343 |
| | 75,686 |
|
Equity-based compensation expense | 2,845 |
| | 2,523 |
| 2,959 |
| | 2,845 |
|
Deferred taxes | 3,930 |
| | 14,602 |
| (6,023 | ) | | 3,930 |
|
Employee benefit plans | 102 |
| | (2,999 | ) | 1,006 |
| | 102 |
|
Disposal of plant and equipment, net | 128 |
| | 3,755 |
| |
Amortization of deferred issuance costs on debt | | 1,452 |
| | 943 |
|
Loss on retirement of debt | | 2,725 |
| | — |
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Gain on divested assets | (25,510 | ) | | — |
| — |
| | (25,510 | ) |
Other non-cash adjustments, net | 899 |
| | 874 |
| |
Other non-cash activity, net | | 724 |
| | 84 |
|
Changes in working capital, net | 7,402 |
| | 43,846 |
| (98,266 | ) | | 7,402 |
|
Changes in taxes receivable, net | 13,534 |
| | (4,869 | ) | |
Changes in taxes receivable | | (420 | ) | | 13,534 |
|
Other, net | (1,922 | ) | | (1,439 | ) | 825 |
| | (1,922 | ) |
Net cash flows from operating activities | 121,099 |
| | 152,176 |
| (16,235 | ) | | 121,099 |
|
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | |
Additions to property, plant and equipment | (174,034 | ) | | (136,650 | ) | (125,794 | ) | | (174,034 | ) |
Net proceeds from divested assets | 70,930 |
| | — |
| — |
| | 70,930 |
|
Other, net | 807 |
| | 753 |
| 14 |
| | 807 |
|
Net cash flows from investing activities | (102,297 | ) | | (135,897 | ) | (125,780 | ) | | (102,297 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | |
Purchase of treasury stock | — |
| | (4,875 | ) | |
Borrowings on revolving credit facilities | 322,454 |
| | 185,000 |
| |
Repayments of borrowings on revolving credit facilities | (277,454 | ) | | (210,000 | ) | |
Borrowings on long-term debt | | 296,146 |
| | — |
|
Repayments of borrowings on long-term debt | | (101,671 | ) | | — |
|
Borrowings on short-term debt | | 534,877 |
| | 322,454 |
|
Repayments of borrowings on short-term debt | | (598,715 | ) | | (277,454 | ) |
Payments for debt issuance costs | | (1,844 | ) | | — |
|
Other, net | (853 | ) | | (927 | ) | (1,430 | ) | | (853 | ) |
Net cash flows from financing activities | 44,147 |
| | (30,802 | ) | 127,363 |
| | 44,147 |
|
Increase (decrease) in cash, cash equivalents, and restricted cash | 62,949 |
| | (14,523 | ) | |
Cash, cash equivalents, and restricted cash at beginning of period | 16,738 |
| | 23,001 |
| |
Cash, cash equivalents, and restricted cash at end of period | $ | 79,687 |
| | $ | 8,478 |
| |
(Decrease) increase in cash, cash equivalents and restricted cash | | (14,652 | ) | | 62,949 |
|
Cash, cash equivalents and restricted cash at beginning of period | | 24,947 |
| | 16,738 |
|
Cash, cash equivalents and restricted cash at end of period | | $ | 10,295 |
| | $ | 79,687 |
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| | | | | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | | |
Cash paid for interest, net of amounts capitalized | $ | 27,449 |
| | $ | 27,867 |
| $ | 38,789 |
| | $ | 27,449 |
|
Cash paid for income taxes | 1,665 |
| | 2,367 |
| 2,202 |
| | 1,665 |
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Cash received from income tax refunds | 13,483 |
| | 5,988 |
| 238 |
| | 13,483 |
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SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | |
Changes in accrued property, plant and equipment | $ | 78,465 |
| | $ | 2,173 |
| |
Non-cash reclassification of credit facility borrowings to long-term debt | 100,000 |
| | — |
| |
Non-cash additions to property, plant and equipment | — |
| | 4,500 |
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(Decrease) increase in accrued property, plant and equipment | | (46,454 | ) | | 78,465 |
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The accompanying condensed notes are an integral part of these consolidated financial statements.
CLEARWATER PAPER CORPORATION
Consolidated Statements of Stockholders’ Equity
Unaudited (In thousands)
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| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| | Shares | | Amount | |
Balance at December 31, 2017 | | 16,448 |
| | $ | 2 |
| | $ | 1,161 |
| | $ | 618,254 |
| | $ | (43,983 | ) | | $ | 575,434 |
|
Net earnings | | — |
| | — |
| | — |
| | 2,600 |
| | — |
| | 2,600 |
|
Performance share, restricted stock unit, and stock option awards | | 13 |
| | — |
| | 1,267 |
| | — |
| | — |
| | 1,267 |
|
Reclassification of the income tax effects of the Tax Cuts and Jobs Act | | — |
| | — |
| | — |
| | 12,852 |
| | (12,852 | ) | | — |
|
Pension and other postretirement employee benefit plans, net of tax of $507 | | — |
| | — |
| | — |
| | — |
| | 1,419 |
| | 1,419 |
|
Balance at March 31, 2018 | | 16,461 |
| | $ | 2 |
| | $ | 2,428 |
| | $ | 633,706 |
| | $ | (55,416 | ) | | $ | 580,720 |
|
Net earnings | | — |
| | — |
| | — |
| | 6,961 |
| | — |
| | 6,961 |
|
Performance share, restricted stock unit, and stock option awards | | — |
| | — |
| | 1,552 |
| | — |
| | | | 1,552 |
|
Pension and other postretirement employee benefit plans, net of tax of $477 | | — |
| | — |
| | | | — |
| | 1,336 |
| | 1,336 |
|
Balance at June 30, 2018 | | 16,461 |
| | $ | 2 |
| | $ | 3,980 |
| | $ | 640,667 |
| | $ | (54,080 | ) | | $ | 590,569 |
|
Net earnings | | — |
| | — |
| | — |
| | 34,444 |
| | — |
| | 34,444 |
|
Performance share, restricted stock unit, and stock option awards | | — |
| | — |
| | 1,734 |
| | — |
| | | | 1,734 |
|
Pension and other postretirement employee benefit plans, net of tax of $492 | | — |
| | — |
| | | | — |
| | 1,378 |
| | 1,378 |
|
Balance at September 30, 2018 | | 16,461 |
| | $ | 2 |
| | $ | 5,714 |
| | $ | 675,111 |
| | $ | (52,702 | ) | | $ | 628,125 |
|
CLEARWATER PAPER CORPORATION
Consolidated Statements of Stockholders’ Equity
Unaudited (In thousands)
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| | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| | Shares | | Amount | |
Balance at December 31, 2018 | | 16,482 |
| | $ | 2 |
| | $ | 6,403 |
| | $ | 487,339 |
| | $ | (67,348 | ) | | $ | 426,396 |
|
Net earnings | | — |
| | — |
| | — |
| | 3,837 |
| | — |
| | 3,837 |
|
Performance share, restricted stock unit, and stock option awards | | 33 |
| | — |
| | 772 |
| | — |
| | — |
| | 772 |
|
Pension and other postretirement employee benefit plans, net of tax of $442 | | — |
| | — |
| | — |
| | — |
| | 1,239 |
| | 1,239 |
|
Balance at March 31, 2019 | | 16,515 |
| | $ | 2 |
| | $ | 7,175 |
| | $ | 491,176 |
| | $ | (66,109 | ) | | $ | 432,244 |
|
Net loss | | — |
| | — |
| | — |
| | (424 | ) | | — |
| | (424 | ) |
Performance share, restricted stock unit, and stock option awards | | — |
| | — |
| | 1,211 |
| | — |
| | — |
| | 1,211 |
|
Pension and other postretirement employee benefit plans, net of tax of $475 | | — |
| | — |
| | — |
| | — |
| | 1,334 |
| | 1,334 |
|
Balance at June 30, 2019 | | 16,515 |
| | $ | 2 |
| | $ | 8,386 |
| | $ | 490,752 |
| | $ | (64,775 | ) | | $ | 434,365 |
|
Net loss | | — |
| | — |
| | — |
| | (10,973 | ) | | — |
| | (10,973 | ) |
Performance share, restricted stock unit, and stock option awards | | — |
| | — |
| | 467 |
| | — |
| | — |
| | 467 |
|
Pension and other postretirement employee benefit plans, net of tax of $459 | | — |
| | — |
| | — |
| | — |
| | 1,286 |
| | 1,286 |
|
Balance at September 30, 2019 | | 16,515 |
| | $ | 2 |
| | $ | 8,853 |
| | $ | 479,779 |
| | $ | (63,489 | ) | | $ | 425,145 |
|
The accompanying condensed notes are an integral part of these consolidated financial statements.
Clearwater Paper Corporation
Condensed Notes to Consolidated Financial Statements
Unaudited
NOTE 1 Nature of Operations and Basis of Presentation
GENERAL
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.
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 $22.9 million. See Note 4, "Asset Divestiture" for further discussion.
In the second half of 2017, we began a review of our selling, general and administrative 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 reduce selling, general and administrative expenses beginning in 2018. For the nine months ended September 30, 2018, we incurred $6.4 million of expenses associated with these efforts, which consisted primarily of severance and professional services expenses.
On March 31, 2017, we closed our Oklahoma City, Oklahoma 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 writedown of the transferred assets to their held for sale value. This loss 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. For the three and nine months ended September 30, 2017, we also incurred $0.8 million and $6.8 million, respectively, of closure-related costs associated with the Oklahoma City facility, which are included in "Cost of goods sold" in our Consolidated Statement of Operations.
FINANCIAL STATEMENT PREPARATION AND PRESENTATION
The accompanying Consolidated Balance Sheets at September 30, 20182019 and December 31, 2017,2018, and the related Consolidated Statements of Operations, and Comprehensive Income and Stockholders' Equity for the three and nine months ended September 30, 2019 and 2018, and 2017, and Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20182019 and 2017,2018, have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. We believe that all adjustments necessary for a fair presentation of the results of the interim periods presented have been included. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017,2018, as filed with the Securities and Exchange Commission, or SEC, on February 21, 2018.March 18, 2019. Certain 2018 amounts have been reclassified to conform to the 2019 presentation.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods. Significant areas that may require the use of estimates and measurement of uncertainty include determination of net realizable value for deferred tax assets, uncertain income tax positions, assessment of impairment of long-lived assets variable consideration or reductions to revenue, revenue recognition estimates related to allocating the transaction price to various performance obligations,and goodwill, and intangibles, assessment of environmental matters, equity-based compensation and pension and postretirement obligation assumptions. Actual results could differ from those estimates and assumptions.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
We consider all highly liquid instruments with maturities of three months or less at date of purchase 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 reconciliationdetails of cash, cash equivalents and restricted cash reported on the balance sheet that sum to the total of those same amounts shown in ourConsolidated Balance Sheets and Consolidated Statements of Cash Flows.
|
| | | | | | | | | | | |
(In thousands) | September 30, 2019 | | December 31, 2018 | | September 30, 2018 |
Cash and cash equivalents | $ | 7,815 |
| | $ | 22,484 |
| | $ | 76,150 |
|
Restricted cash | 1,440 |
| | — |
| | 1,080 |
|
Restricted cash included in other assets, net | 1,040 |
| | 2,463 |
| | 2,457 |
|
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows | $ | 10,295 |
| | $ | 24,947 |
| | $ | 79,687 |
|
|
| | | | | | | |
(In thousands) | September 30, 2018 | | December 31, 2017 |
Cash and cash equivalents | $ | 76,150 |
| | $ | 15,738 |
|
Restricted cash | 1,080 |
| | — |
|
Restricted cash included in other assets, net | 2,457 |
| | 1,000 |
|
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 79,687 |
| | $ | 16,738 |
|
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, including any interest costs capitalized, less accumulated depreciation. Depreciation of buildings, equipment and other depreciable assets is determined using the straight-line method. Assets we acquire through business combinations have estimated lives that are typically shorter than the assets we construct or buy new. Accumulated depreciation totaled $1,680.2 million and $1,636.3 million at September 30, 2018 and December 31, 2017, respectively.
For the nine months ended September 30, 2018,2019, we capitalized $5.1$4.9 million of interest expense associated with the construction of a paper machine at our Shelby, North Carolina consumer products facility and $0.9$0.8 million of interest expense associated with the construction of a continuous pulp digester at our Lewiston, Idaho pulp and paperboard facility. For the nine months ended September 30, 2017,2018, we capitalized $3.0$5.1 million of interest expense associated with the Shelby paper machine and $0.9 million of interest expense associated with the continuous pulp digester project and $0.5 million associated with the Shelby paper machine.project.
Consistent with authoritative guidance, we assessWe review the carrying amount of long-lived assets with definite lives that are held-for-use and evaluate them for recoverability whenever events or changes in circumstances indicate that we may be unable to recover the carrying amount of the assets.
LEASES
All significant lease arrangements are generally recognized at lease commencement. Operating lease right-of-use, or ROU, assets and lease liabilities are recognized at commencement. An ROU asset and corresponding lease liability are not recorded for leases with an initial term of 12 months or less (short-term leases), and we recognize lease expense for these leases as incurred over the lease term.
ROU assets represent our right to use an underlying asset during the reasonably certain lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We primarily use our incremental borrowing rate, which is updated quarterly, based on the information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments related to initial direct cost and prepayments and excludes lease incentives. Refer to Note 4, "Leases," for additional information.
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, 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.contract. Terms generally include a requirement of payment within 30 days, and do not include a significant financing component.
Trade accounts receivable are reported within Receivables, net, and are stated at the amount we expect to collect. Trade accounts receivable were $156.3 million and $142.8 million at September 30, 2019 and December 31, 2018, respectively. 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 both September 30, 20182019 and December 31, 2017,2018, we had allowances for doubtful accounts of $1.4 million.million and $1.5 million, respectively.
Refer to Note 16,14, "Segment Information," for further information, including the disaggregation of revenue by segment, primary geographical market, and major product type.
ACCOUNTS RECEIVABLE ARRANGEMENTS
ACCOUNT PURCHASE AGREEMENT
In June 2018, we entered intoWe had an agreement (the “AccountAccount Purchase Agreement”Agreement ("APA") to offer to sell, on a revolving and discounted basis, certain trade accounts receivable balances to an unrelated third-party financial institution. IfUnder the APA, the maximum amount of receivables that could be sold and outstanding was $30.0 million. We retained no interest in the receivables sold under the APA, however, we did have servicing responsibilities for the sold receivables, such as collection. The fair value of the servicing arrangement was not material to our financial statements.
As of September 30, 2019, all amounts collected from customers under the APA had been remitted to the third-party financial institution. At December 31, 2018, we had collected $4.9 million of cash from customers that had not yet been remitted to the third-party financial institution.
During the third quarter of 2019, we entered into an uncommitted supply-chain financing program with a global financial institution under which trade accounts receivable with a large customer may be acquired, without recourse, by the financial institution purchases receivables thereunder, in its sole discretion,at a discounted rate. Available capacity under this program is dependent on the level of our trade accounts receivable with this customer and the financial institution’s willingness to purchase such transfersreceivables. We have no servicing responsibilities under this agreement.
Receivables sold 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 saleAs of certainSeptember 30, 2019, we had no sold 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.
outstanding being serviced by us. For the three and nine months ended September 30, 2018, $23.4 million and $45.42019, we sold $159.3 million of receivables were sold under the Account Purchase Agreement, respectively. As of September 30, 2018, $9.0 million of accounts receivable sold under the Asset Purchase Agreement were outstanding.receivables. The proceeds from these sales of receivables are included within the change"Changes in receivables in theworking capital, net" line within operating activities section of the Condensedour Consolidated Statements of Cash Flows. For the nine months ended September 30, 2018, we recorded2019, factoring expense on salesthe sale of receivables of $0.1was $0.7 million, which is included in the "Selling, general and administrative expenses""Interest expense, net" line in the Consolidated Statement of Operations. For the nine months ended September 30, 2018, factoring expense was $0.1 million.
ACCOUNTS PAYABLE ARRANGEMENTS
We have no retained interest inentered into supply-chain financing programs with financial intermediaries, which provide certain of our vendors the receivables sold underoption to be paid by the Account Purchase Agreement, however,financial intermediaries on our trade payables earlier than the due date on the applicable invoice. When a vendor receives an early payment from a financial intermediary on a trade payable for which it invoiced us, we do have servicing responsibilities forpay that financial intermediary the sold receivables. The fair valueface amount of the servicing arrangementinvoice on the regularly scheduled due date. 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, $20.8 million was not materialincluded in “Short-term debt” on our Consolidated Balance Sheets related to the financial statements.
STOCKHOLDERS’ EQUITY
On December 15, 2015,invoices for which we announced thathad reimbursed 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 havevendors’ fees. There were 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 this repurchase program, of which 84,750 shares were repurchased during the first nine months of 2017 at an average price of $57.53 per share. We did not repurchase shares during the first nine months of 2018. Assuch amounts as of September 30, 2018, we had up to $29.8 million of authorization remaining pursuant to this stock repurchase program.2019.
DERIVATIVES
We had no activity during the three and nine months ended September 30, 20182019 and 20172018 that required hedge or derivative accounting treatment. To help 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.facilities, which were reported through "Cost of sales" on our Consolidated Statements of Operations. As of September 30, 2018,2019, these contracts covered approximately 29%47% of our expected average monthly natural gas requirements for the remainder of 2018,2019, and a lesser amount for 2019. Historically, these2020. These contracts have qualifiedqualify for treatment as “normal purchases or normal sales” under authoritative guidance and thus required no mark-to-market adjustment.
NOTE 2 Recently Adopted and New Accounting Standards
Recently AdoptedRECENTLY ADOPTED ACCOUNTING STANDARDS
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 onOn January 1, 2018, which resulted in2019, we adopted ASU 2016-02, Leases (Topic 842), and subsequent ASUs related to Topic 842. The new guidance increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the reclassificationbalance sheet and disclosing key information about leasing arrangements. The adoption of $12.9 million between retained earnings and accumulated other comprehensive loss (AOCL), increasing retained earnings and AOCL within the equity section ofTopic 842 had a material impact on 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 changeSheet due to the terms or conditionsrecognition of a share-based payment awardright-of-use assets of approximately $83 million and lease liabilities of approximately $88 million 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 those annual periods. We adopted this standard on January 1, 2018.2019. The difference between these lease assets and lease liabilities represents deferred rent balances that were reclassified on the balance sheet. The adoption of this ASUTopic 842 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 PresentationConsolidated Statement 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 onOperations or our Consolidated StatementsStatement 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.Cash Flows. We adopted the standard effectivewill continue to report periods prior to January 1, 2018, which resulted2019 under prior guidance as outlined 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.Accounting Standards Codification Topic 840, "Leases". Refer to Note 11, "Pension and Other Postretirement Employee Benefit Plans,"4, "Leases", for further information, including the amounts associated with the reclassification of the components of net periodic cost as operating and non-operating.discussion.
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 1, "Nature of Operations and Basis of Presentation," for information about the basis of revenue recognition, and Note 16, "Segment Information," for further information including the disaggregation of revenue by segment, primary geographical market, and major product type.
New Accounting StandardsNEW 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 thisThis ASU areis effective for fiscal years beginning after December 15, 2019 and for interim periods therein, with early adoption permitted. We do not believe this ASU 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 we do not believe this ASUit 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). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We expect the adoption of this ASU will increase both our assets and liabilities presented on our Consolidated Balance Sheets to reflect the ROU assets and corresponding lease liabilities, as well as increase our leasing disclosures. As of December 31, 2017, the total future minimum lease payments for our operating leases totaled $75.3 million. We plan to adopt this standard on January 1, 2019. We are continuing our assessment and review of existing leases, implementing a leasing software solution, and addressing necessary policy and process changes in preparation for adoption.
We reviewed all other new accounting pronouncements issued in the period and concluded that they are not applicable or not material to our business.
NOTE 3 Inventories & Property, Plant and Equipment
Inventories at the balance sheet dates consist of:
|
| | | | | | | |
(In thousands) | September 30, 2019 | | December 31, 2018 |
Pulp, paperboard and tissue products | $ | 166,063 |
| | $ | 159,499 |
|
Materials and supplies | 93,965 |
| | 86,892 |
|
Logs, pulpwood, chips and sawdust | 22,367 |
| | 19,853 |
|
| $ | 282,395 |
| | $ | 266,244 |
|
Property, Plant and Equipment at the balance sheet dates consist of:
|
| | | | | | | |
(In thousands) | September 30, 2018 | | December 31, 2017 |
Pulp, paperboard and tissue products | $ | 160,645 |
| | $ | 165,281 |
|
Materials and supplies | 85,260 |
| | 85,987 |
|
Logs, pulpwood, chips and sawdust | 17,369 |
| | 14,775 |
|
| $ | 263,274 |
| | $ | 266,043 |
|
NOTE 4 Asset Divestiture
On August 21, 2018, we simultaneously announced and completed the sale of our Ladysmith, Wisconsin tissue manufacturing facility (the “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, $22.9 million was recorded as "Gain on divested assets" and included as a component of operating income within our Consolidated Statement of Operations, as well as a component of our Consumer Products segment's operating income as disclosed in Note 16, “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 5, “Intangible Assets and Goodwill."
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 have recorded restricted cash to reflect certain indemnity and working capital contingencies, of which $1.1 million is recorded in "Restricted cash" and $1.4 million is included in "Other assets, net" on our September 30, 2018 Consolidated Balance Sheet. |
| | | | | | | | |
(In thousands) | | September 30, 2019 | | December 31, 2018 |
Machinery and equipment | | $ | 2,341,596 |
| | $ | 2,161,306 |
|
Buildings and improvements | | 479,359 |
| | 381,071 |
|
Land improvements | | 95,914 |
| | 84,525 |
|
Office and other equipment | | 52,491 |
| | 49,980 |
|
Land | | 10,756 |
| | 10,756 |
|
Construction in progress | | 58,348 |
| | 273,291 |
|
| | $ | 3,038,464 |
| | $ | 2,960,929 |
|
Less accumulated depreciation and amortization | | (1,764,990 | ) | | (1,691,658 | ) |
| | $ | 1,273,474 |
| | $ | 1,269,271 |
|
NOTE 4 Leases
Our adoption of ASU 2016-02, Leases (Topic 842), and subsequent ASUs related to Topic 842, requires us to recognize substantially all leases on the balance sheet as a ROU asset and a corresponding lease liability. The new guidance also requires additional disclosures as detailed below. We adopted this standard on the effective date of January 1, 2019 and used this effective date as the date of initial application. Under this application method, we were not required to restate prior period financial information or provide Topic 842 disclosures for prior periods. We elected the ‘package of practical expedients’ which permitted us to not reassess our prior conclusions related to lease identification, lease classification and initial direct costs, as well as the practical expedient to not reassess certain land easements. We did not elect the use of hindsight. We combine ROU asset amortization and the change in the lease liability in the same line item on the Consolidated Statements of Cash Flows.
We have operating leases for manufacturing, office, warehouse and distribution space, paperboard sheeting and chipping facilities, equipment and vehicles. We also have finance leases related to our North Carolina converting and manufacturing facilities, as well as for certain office and other equipment. We determine if a contract is a lease at the inception of the arrangement. We review all options to extend, terminate or purchase the ROU assets, and when reasonably certain to exercise, we include the option in the determination of the lease term and lease liability. Our leases have remaining lease terms from less than one year to twelve years, and some of our leases include one or more options to renew.
Lease ROU assets and liabilities are recognized at the commencement date of the lease. Lease ROU assets and liabilities are measured based on the present value of lease payments over the lease term and are reduced by any lease incentives received. When readily determinable, we use the implicit rate in determining the present value of lease payments. When leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date, including the lease term.
Short-term leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheet. Lease expense for short-term leases is recognized on a straight-line basis over the lease term. As of September 30, 2019, our short-term leases were not material. Certain of our leases contain lease and non-lease components that are treated as a single lease component. Our variable lease costs consist primarily of taxes, insurance and common area maintenance. For the three and nine months ended September 30, 2019, sublease income was immaterial to the financial statements.
The tables below present financial information associated with our leases. This information is only presented as of, and for the three and six months ended, September 30, 2019. As noted above, we adopted Topic 842 using a transition method that does not require application to periods prior to adoption.
|
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
(In thousands) | September 30, 2019 |
| | | |
Operating lease costs | $ | 4,062 |
| | $ | 11,071 |
|
| | | |
Finance lease costs: | | | |
Amortization of right-of-use assets | 395 |
| | 1,273 |
|
Interest on lease liabilities | 466 |
| | 1,405 |
|
Total finance lease costs | 861 |
| | 2,678 |
|
| | | |
Variable lease costs | 290 |
| | 846 |
|
| | | |
Total lease costs | $ | 5,213 |
| | $ | 14,595 |
|
SUPPLEMENTAL CASH FLOW INFORMATION |
| | | |
| Nine Months Ended |
(In thousands) | September 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 12,635 |
|
Operating cash flows from finance leases | 1,405 |
|
Financing cash flows from finance leases | 1,023 |
|
| |
Non-cash amounts for lease liabilities arising from obtaining right-of-use assets: | |
Operating leases | $ | 973 |
|
Finance leases | 493 |
|
SUPPLEMENTAL BALANCE SHEET INFORMATION
|
| | | | |
(In thousands) | Classification | September 30, 2019 |
Lease ROU Assets | | |
Operating lease assets | Operating lease right-of-use assets | $ | 74,503 |
|
Finance lease assets | Property, plant and equipment, net | 15,837 |
|
Total lease ROU assets | | $ | 90,340 |
|
| | |
Lease Liabilities | | |
Current operating lease liabilities | Accounts payable and accrued liabilities | $ | 13,200 |
|
Current finance lease liabilities | Accounts payable and accrued liabilities | 1,398 |
|
Total current lease liabilities | | 14,598 |
|
| | |
Non-current operating lease liabilities | Operating lease liabilities | 66,571 |
|
Non-current finance lease liabilities | Other long-term obligations | 20,929 |
|
Total non-current lease liabilities | | 87,500 |
|
| |
|
|
Total operating lease liabilities | | 79,771 |
|
Total finance lease liabilities | | 22,327 |
|
Total lease liabilities | | $ | 102,098 |
|
LEASE TERM AND DISCOUNT RATE
|
| | |
| September 30, 2019 |
Weighted average remaining lease term (years) | |
Operating leases | 6.9 |
|
Finance leases | 10.9 |
|
| |
Weighted average discount rate | |
Operating leases | 4.9 | % |
Finance leases | 8.3 | % |
MATURITY OF LEASE LIABILITIES
As of September 30, 2019, our future maturities of lease liabilities were as follows:
|
| | | | | | | |
(In thousands) | Operating | | Finance |
2019 | $ | 3,964 |
| | $ | 774 |
|
2020 | 16,727 |
| | 3,175 |
|
2021 | 16,019 |
| | 3,220 |
|
2022 | 15,081 |
| | 3,128 |
|
2023 | 9,413 |
| | 2,897 |
|
Thereafter | 33,661 |
| | 21,468 |
|
Total lease payments | $ | 94,865 |
| | $ | 34,662 |
|
Less interest portion | (15,094 | ) | | (12,335 | ) |
Total | $ | 79,771 |
| | $ | 22,327 |
|
As of December 31, 2018, as previously disclosed in our 2018 Annual Report on Form 10-K, and under the previous lease accounting standard, we had future minimum lease payments as follows:
|
| | | | | | | |
(In thousands) | Operating | | Capital |
2019 | $ | 12,038 |
| | $ | 3,093 |
|
2020 | 11,421 |
| | 3,062 |
|
2021 | 10,424 |
| | 3,112 |
|
2022 | 9,489 |
| | 3,019 |
|
2023 | 7,163 |
| | 2,789 |
|
Thereafter | 24,276 |
| | 21,710 |
|
Total future minimum lease payments | $ | 74,811 |
| | $ | 36,785 |
|
Less interest portion | | | (13,887 | ) |
Present value of future minimum lease payments | | | $ | 22,898 |
|
NOTE 5 Intangible Assets and Goodwill
Intangible assets at the balance sheet dates are comprised ofcomprise the following:
| | | September 30, 2018 | September 30, 2019 |
(Dollars in thousands, lives in years) | Weighted Average Useful Life | | Historical Cost | | Accumulated Amortization | | Net Balance | Weighted Average Useful Life | | Historical Cost | | Accumulated Amortization | | Net Balance |
Customer relationships | 9.4 | | $ | 56,453 |
| | $ | (33,961 | ) | | $ | 22,492 |
| 9.4 | | $ | 56,453 |
| | $ | (39,995 | ) | | $ | 16,458 |
|
Trade names and trademarks | 7.4 | | 6,786 |
| | (3,772 | ) | | 3,014 |
| 7.4 | | 6,786 |
| | (4,800 | ) | | 1,986 |
|
Other intangibles | 6.0 | | 572 |
| | (213 | ) | | 359 |
| 6.0 | | 572 |
| | (291 | ) | | 281 |
|
| | $ | 63,811 |
| | $ | (37,946 | ) | | $ | 25,865 |
| | $ | 63,811 |
| | $ | (45,086 | ) | | $ | 18,725 |
|
| | | | | | | | | | | | |
| December 31, 2017 | December 31, 2018 |
(Dollars in thousands, lives in years) | Weighted Average Useful Life | | Historical Cost | | Accumulated Amortization | | Net Balance | Weighted Average Useful Life | | Historical Cost | | Accumulated Amortization | | Net Balance |
Customer relationships | 9.3 | | $ | 62,401 |
| | $ | (34,061 | ) | | $ | 28,340 |
| 9.4 | | $ | 56,453 |
| | $ | (35,469 | ) | | $ | 20,984 |
|
Trade names and trademarks | 7.4 | | 6,786 |
| | (3,000 | ) | | 3,786 |
| 7.4 | | 6,786 |
| | (4,029 | ) | | 2,757 |
|
Non compete agreements | 5.0 | | 574 |
| | (574 | ) | | — |
| |
Other intangibles | 6.0 | | 572 |
| | (156 | ) | | 416 |
| 6.0 | | 572 |
| | (233 | ) | | 339 |
|
| | $ | 70,333 |
| | $ | (37,791 | ) | | $ | 32,542 |
| | $ | 63,811 |
| | $ | (39,731 | ) | | $ | 24,080 |
|
As of September 30, 2019, estimated future annual amortization is as follows:
|
| | | | |
(In thousands) | | For the Years Ending December 31, |
2019 | | $ | 1,785 |
|
2020 | | 3,246 |
|
2021 | | 2,917 |
|
2022 | | 2,217 |
|
2023 | | 2,140 |
|
Thereafter | | 6,420 |
|
Total | | $ | 18,725 |
|
For the three months ended September 30, 20182019 and 2017,2018, intangible assets amortization expense was $1.9$1.8 million and $2.0$1.9 million, respectively. For the nine months ended September 30, 20182019 and 2017,2018, intangible assets amortization expense was $5.4 million and $5.8 million, and $6.0 million, respectively.
Goodwill is not amortized but is reviewed for impairment annually as of November 1 and at any time when events indicate impairment may have occurred. On August 21, 2018, we simultaneously announced and completed the sale of our Ladysmith Facility. We concluded that this event did not trigger the need for additional impairment testing. However, consistent with authoritative guidance, we allocated a portion of our goodwill to the facility sold. We also wrote off certain identifiable, customer relationship intangible assets associated with the divested facility. For additional discussion regarding the sale of our Ladysmith Facility, see Note 4, "Asset Divestiture."
NOTE 6 Income Taxes
Consistent with authoritative guidance, our estimated annual effective tax rate is used to allocate expected annual income tax expense to interim periods. The rate is the ratio of estimated annual income tax expense to estimated pre-tax ordinary income, and excludes "discrete items," which are significant, unusual or infrequent items reported separately net of their related tax effect. The estimated annual effective tax rate is applied to the current interim period's ordinary income to determine the income tax expense allocated to the interim period. The income tax effects of discrete items are then determined separately and recognized in the interim period in which the income or expense items arise.
Our estimated annual effective tax rate applied tofor the third quarter of 20182019 is approximately 32%34%, compared with approximately 34%32% for the comparable interim period in 2017.2018. The annual effective tax rate in 2019 is subject to variation due to several factors, including variability in pre-tax income (or loss), forecasted pre-tax income (or loss), changes in business practices, changes in tax credits and tax law developments. The rate reflectsin 2018 reflected the Federal rate reduction enacted by the Tax Cuts and Jobs Act offset by an increase in the rate due to basis differences associated with the goodwill written-off as part of the sale of our Ladysmith facility.
We also recognized a tax benefit in the current quarter for Federal alternative energy production tax credits of $10.0 million related to our Lewiston pulp optimization projects. Approximately $8 million of the credits have been included in our overall net deferred tax liability.
NOTE 7 Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at the balance sheet dates consist of:
| | (In thousands) | September 30, 2018 | | December 31, 2017 | September 30, 2019 | | December 31, 2018 |
Trade accounts payable | $ | 264,811 |
| | $ | 169,293 |
| $ | 141,458 |
| | $ | 228,059 |
|
Accrued wages, salaries and employee benefits | 36,813 |
| | 41,979 |
| 37,395 |
| | 41,426 |
|
Lease liabilities | | 14,598 |
| | — |
|
Accrued taxes other than income taxes payable | | 7,037 |
| | 6,243 |
|
Accrued utilities | | 6,707 |
| | 6,934 |
|
Accrued discounts and allowances | 9,395 |
| | 7,283 |
| 6,502 |
| | 8,143 |
|
Accrued interest | 6,392 |
| | 12,723 |
| 5,322 |
| | 14,672 |
|
Accrued utilities | 6,271 |
| | 6,759 |
| |
Accrued taxes other than income taxes payable | 6,220 |
| | 6,907 |
| |
Accrued account purchase agreement liabilities | | — |
| | 4,885 |
|
Other | 11,173 |
| | 11,677 |
| 10,544 |
| | 10,670 |
|
| $ | 341,075 |
| | $ | 256,621 |
| $ | 229,563 |
| | $ | 321,032 |
|
NOTE 8 Debt
REVOLVING CREDIT FACILITIESAGREEMENTS
On August 21, 2018,July 26, 2019, we entered into credit agreements with several lenders and JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, which included (a) a Lender Commitment Agreement, which we refer to as the Commitment Agreement, in association with the credit facilities agreement we have with Northwest Farm Credit Services, PCA, as agent, and the lenders party thereto, which we refer to as the Farm$300 million Term Loan Credit Agreement to provide us an additional $100.0(the “Term Loan Credit Agreement”) and (b) a $250 million in revolving credit commitmentsasset based lending, or ABL, Credit Agreement (the "Term Loan Credit Agreement" and "ABL Credit Agreement" collectively the "Credit Agreements"). At closing, the Term Loan Credit Agreement was fully advanced and $58.0 million was
drawn under the FarmABL Credit Agreement, increasing the amount of borrowings available under the Farm Credit Agreement from $100.0 million to $200.0 million. Concurrent with the increase to the revolving credit commitments under the Farm Credit Agreement, we drew down $100.0 million under that agreement, allproceeds of which was appliedwere used to reduce the outstanding revolving loan balance we had under ourrefinance and terminate our: (a) $200 million credit facilities agreement dated October 31, 2016, as amended, with Wells Fargo Bank, National Association, ("Wells Fargo") as administrative agent, and the lenders party thereto. The incremental borrowingthereto, of revolving loans underwhich $135.0 million was outstanding and b) the Farm Credit Agreement bears interest based upon a fixed three-year rate, plus the margin applicable to all other revolving loans under the Farm Credit Agreement, which is determined in accordance with our total leverage ratio.
As of September 30, 2018, there was an aggregate of $200.0$200 million in borrowings outstanding under the credit facilities and $7.6 million of the credit facilities was being used to support outstanding standby letters of credit. As of December 31, 2017, there was an aggregate of $155.0 million in borrowings outstanding under the credit facilities. Our borrowings outstanding under the revolving credit facilities as of September 30, 2018, consisted of $100.0 million of short-term base and LIBOR rate loans classified as current liabilities that are included in "Borrowings under revolving credit facilities," and the $100.0 million fixed rate, three-year borrowings discussed above classified as a noncurrent liability that are included in "Long-term debt," in our Consolidated Balance Sheet. As of September 30, 2018, we would have been permitted to draw an additional $192.4 million under the credit facilities.
On November 8, 2018, we entered into separate amendments (the “Amendments”) to our credit agreements, eachagreement dated as of October 31, 2016, one of which isas amended, with Wells Fargo Bank, National Association,Northwest Farm Credit Services, PCA, ("Farm Credit") as administrative agent, and the lenders party thereto, (as amended, the "Commercial Credit Agreement"), and the other of which is with Northwest Farm$200.0 million was outstanding (the "Prior Credit Services, PCA, as agentAgreements"); pay fees and the lenders party thereto (as amended, the "Farm Credit Agreement", and collectivelyexpenses in connection with the CommercialCredit Agreements; and for working capital purposes.
In conjunction with the termination of the Prior Credit Agreements, of which the $200 million credit agreement with Wells Fargo was treated as a modification under Topic 470, "Debt", debt extinguishment costs, consisting of $1.7 million in breakage fees and $1.1 million in unamortized debt issuance costs, were written-off as debt retirement costs during the three months ended September 30, 2019. Unamortized debt issuance costs of $1.6 million, related to the debt modification, are being amortized over the remaining term of the ABL Credit Agreement. We incurred debt issuance costs of $7.1 million, which are allocated and amortized over the respective terms of the Credit Agreements.
As of September 30, 2019, there was $300.0 million outstanding under our Term Loan and $58.0 million outstanding under our ABL Credit Agreement.
The borrowings outstanding under the Prior Credit Agreements as of December 31, 2018 consisted of a combination of short-term floating base rate and LIBOR rate loans, which were classified as current liabilities in our Consolidated Balance Sheet, and $100.0 million of borrowings with a three-year fixed interest rate that was included in “Long-term debt” in our Consolidated Balance Sheet.
The Credit Agreements contain certain customary representations, warranties, and affirmative and negative covenants of us and our subsidiaries that restrict us and our subsidiaries’ ability to take certain actions, including, incurrence of indebtedness, creation of liens, mergers or consolidations, dispositions of assets, repurchase or redemption of capital stock and certain types of indebtedness, making certain investments, entering into certain transactions with affiliates or changing the nature of our business. At September 30, 2019, we were in compliance with the Credit Agreements.
Term Loan Credit Agreement
The Term Loan Credit Agreement matures on July 26, 2026. We are required to repay the “Credit Agreements”). Pursuantaggregate outstanding principal amount in quarterly installments on the last day of each March, June, September and December, commencing March 31, 2020, and ending with the last such day to occur prior to the Amendments,maturity date, in an aggregate amount for each such date equal to the interest rate margin,aggregate principal amount of the initial loan amount (as such amount may be adjusted pursuant to the prepayment provisions of the Term Loan Credit Agreement) multiplied by 0.25%. In addition, we must make mandatory prepayments of principal under the Term Loan Credit Agreement upon the occurrence of certain specified events, including certain asset sales (subject to customary reinvestment rights), debt issuances not permitted under the Term Loan Credit Agreement, and based on a percentage, which may vary from quarter50% to quarter based upon grid pricing0% depending on our secured leverage ratio, of annual excess cash flows in excess of certain threshold amounts, less any voluntary prepayments under the Term Loan Credit Agreements determinedAgreement. Any remaining outstanding principal balance under the Term Loan Credit Agreement is repayable on the maturity date. Amounts repaid or prepaid by us with respect to the loans under the Term Loan Credit Agreement cannot be reborrowed. We may, at our option, prepay any borrowings under the Term Loan Credit Agreement, in accordancewhole or in part, at any time and from time to time without premium or penalty (except in certain circumstances).
We may add one or more incremental term loan facilities to the Term Loan Credit Agreement, subject to obtaining commitments from any participating lenders and certain other conditions in an amount not to exceed (1) $100 million, plus (2) the amount of all voluntary prepayments of the Term Loan Credit Agreement (other than prepayments funded with long-term indebtedness), plus (3) an additional amount, so long as after giving effect to the incurrence of such additional amount, our consolidatedpro forma first lien secured leverage ratio was increasedwould not exceed 2.00 to 1.00. Under the Term Loan Credit Agreement, loans generally may bear interest based on LIBOR or an annual base rate, as applicable, plus, in each case, an applicable margin, when our leverage ratio is (i) less than or equal to 4.25 to 1.00, of 3.00% per annum in the case of the Commercial Credit Agreement, by 0.50%LIBOR loans and of 2.00% per annum in the highest tier,case of annual base rate loans and (ii) greater than 4.25 to 1.00, of 3.25% per annum in the case of LIBOR loans and of 2.25% per annum in the Farmcase of annual base rate loans. At September 30, 2019, our applicable margin on LIBOR loans was 3.25%.
ABL Credit Agreement by 0.50%
The ABL Credit Agreement matures on July 26, 2024 and includes a $250 million revolving loan commitment, subject to borrowing base limitations based on a percentage of applicable eligible receivables and eligible inventory. Up to $15 million of the ABL Credit Agreement is available for the issuance of letters of credit, of which $5.5 million was utilized at September 30, 2019. We may, at our option, prepay any borrowings under the ABL Credit Agreement, in whole or in part, at any time and from time to time without premium or penalty (except in certain circumstances). Borrowings under the ABL Credit Agreement are also subject to mandatory prepayment in certain circumstances, including in the second highest tierevent that borrowings exceed applicable borrowing base limits. We may also increase commitments under the ABL Credit Agreement in an aggregate principal amount of up to $100 million, subject to obtaining commitments from any participating lenders and bycertain other conditions.
Under the ABL Credit Agreement, loans may bear interest based on LIBOR or an annual base rate, as applicable, plus, in each case, an applicable margin that is based on availability (as determined under the ABL Credit Agreement) that may vary from 1.25% per annum to 1.75% per annum in the case of LIBOR loans and 0.25% per annum to 0.75% per annum in the highest tier, and (iii) in the case of theannual base rate loans. In addition, a commitment fee forbased on unused availability under each of the Credit Agreements’ revolving credit facilities, by 0.05%is also payable which may vary from 0.25% per annum in the highest tier. In addition, theto 0.375% per annum. From July 26, 2019 through September 30, 2019, our weighted average interest rate was 3.8%. At September 30, 2019, we were able to borrow with an applicable margin of 1.25% on LIBOR loans and our commitment fee rate was 0.375%.
The ABL Credit Agreement also contains a financial covenants in the Credit Agreements were modified to provide that going forward we will be required to 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, in lieu of being requiredcovenant, which requires us to maintain a maximum consolidated leverage ratio which was in effect prior to the amendments;
minimum consolidated interestfixed charge coverage ratio of 1.25 to 1.00; and
minimum consolidated asset coverage ratio of 1.00not less than 1.10 to 1.00, which was not in effect prior toprovided that the Amendments.financial covenant under the ABL Credit Agreement is only applicable when availability falls below a certain threshold.
NOTE 9 Other Long-Term Obligations
Other long-term obligations at the balance sheet dates consist of:
| | (In thousands) | September 30, 2018 | | December 31, 2017 | September 30, 2019 | | December 31, 2018 |
Long-term lease obligations, net of current portion | $ | 25,330 |
| | $ | 26,460 |
| |
Finance lease obligations, net of current portion | | $ | 20,929 |
| | $ | 21,589 |
|
Deferred compensation | | 4,471 |
| | 2,585 |
|
Deferred proceeds | 4,677 |
| | 5,576 |
| 3,955 |
| | 4,511 |
|
Deferred compensation | 2,867 |
| | 5,023 |
| |
Other | 4,914 |
| | 6,216 |
| 4,635 |
| | 10,292 |
|
| $ | 37,788 |
| | $ | 43,275 |
| $ | 33,990 |
| | $ | 38,977 |
|
NOTE 10 Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net of tax, is comprised of the following:
|
| | | |
(In thousands) | Pension and Other Post Retirement Employee Benefit Plan Adjustments |
Balance at December 31, 2016 | $ | (51,753 | ) |
Other comprehensive income, net of tax1 | 784 |
|
Balance at September 30, 2017 | $ | (50,969 | ) |
| |
Balance at December 31, 2017 | $ | (43,983 | ) |
Other comprehensive income, net of tax1 | 4,133 |
|
Reclassification of the income tax effects of the Tax Cuts and Jobs Act | (12,852 | ) |
Balance at September 30, 2018 | $ | (52,702 | ) |
| |
1
| Included in other comprehensive income are net periodic costs associated with our pension and other postretirement employee benefit (OPEB) plans that were reclassified from accumulated other comprehensive loss. For the nine months ended September 30, 2018 and 2017, actuarial loss amortization of $5.1 million and $1.5 million, respectively, as well as $0.9 million and $0.7 million, respectively, of prior service credit amortization were reclassified. These amounts are net of tax totaling $1.5 million and $0.5 million for each respective period. These accumulated other comprehensive loss components are included in the computation of net periodic pension and OPEB costs in Note 11, “Pension and Other Postretirement Employee Benefit Plans.” |
NOTE 1110 Pension and Other Postretirement Employee Benefit Plans
The following table details the components of net periodic cost of our company-sponsored pension and other postretirement employee benefit, or OPEB, plans for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
(In thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| Pension Benefit Plans | | Other Postretirement Employee Benefit Plans |
Service cost | $ | 609 |
| | $ | 447 |
| | $ | 23 |
| | $ | 34 |
|
Interest cost | 3,110 |
| | 3,005 |
| | 700 |
| | 609 |
|
Expected return on plan assets | (4,134 | ) | | (4,250 | ) | | — |
| | — |
|
Amortization of prior service credit | — |
| | — |
| | — |
| | (419 | ) |
Amortization of actuarial loss (gain) | 1,844 |
| | 2,515 |
| | (99 | ) | | (226 | ) |
Net periodic cost (benefit) | $ | 1,429 |
| | $ | 1,717 |
| | $ | 624 |
| | $ | (2 | ) |
| | | Three Months Ended September 30, | Nine Months Ended September 30, |
(In thousands) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| Pension Benefit Plans | | Other Postretirement Employee Benefit Plans | Pension Benefit Plans | | Other Postretirement Employee Benefit Plans |
Service cost | $ | 447 |
| | $ | 518 |
| | $ | 34 |
| | $ | 41 |
| $ | 1,828 |
| | $ | 1,342 |
| | $ | 68 |
| | $ | 102 |
|
Interest cost | 3,005 |
| | 3,288 |
| | 609 |
| | 688 |
| 9,333 |
| | 9,015 |
| | 2,099 |
| | 1,827 |
|
Expected return on plan assets | (4,250 | ) | | (4,691 | ) | | — |
| | — |
| (12,401 | ) | | (12,751 | ) | | — |
| | — |
|
Amortization of prior service cost (credit) | — |
| | 2 |
| | (419 | ) | | (384 | ) | |
Amortization of prior service credit | | — |
| | — |
| | — |
| | (1,257 | ) |
Amortization of actuarial loss (gain) | 2,515 |
| | 2,468 |
| | (226 | ) | | (1,662 | ) | 5,529 |
| | 7,543 |
| | (294 | ) | | (677 | ) |
Net periodic cost (benefit) | $ | 1,717 |
| | $ | 1,585 |
| | $ | (2 | ) | | $ | (1,317 | ) | $ | 4,289 |
| | $ | 5,149 |
| | $ | 1,873 |
| | $ | (5 | ) |
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(In thousands) | 2018 | | 2017 | | 2018 | | 2017 |
| Pension Benefit Plans | | Other Postretirement Employee Benefit Plans |
Service cost | $ | 1,342 |
| | $ | 1,552 |
| | $ | 102 |
| | $ | 122 |
|
Interest cost | 9,015 |
| | 9,862 |
| | 1,827 |
| | 2,059 |
|
Expected return on plan assets | (12,751 | ) | | (14,073 | ) | | — |
| | (1 | ) |
Amortization of prior service cost (credit) | — |
| | 6 |
| | (1,257 | ) | | (1,151 | ) |
Amortization of actuarial loss (gain) | 7,543 |
| | 7,405 |
| | (677 | ) | | (4,963 | ) |
Net periodic cost (benefit) | $ | 5,149 |
| | $ | 4,752 |
| | $ | (5 | ) | | $ | (3,934 | ) |
During the nine months ended September 30, 20182019 and 2017,2018, we made no contributions to our qualified pension plans. We do not expect, nor are we required, to make contributions in 20182019.
During the nine months ended September 30, 2018,2019, we made contributions of $0.4$0.3 million to our company-sponsored non-qualified pension plan. We estimate contributions will total $0.5$0.4 million in 2018.2019. We do not anticipate funding our OPEB plans in 20182019 except to pay benefit costs as incurred during the year by plan participants.
On January 1, 2018, we adopted ASU 2017-07, which allows for only
We record the service cost component of net periodic cost to be included(benefit) as an operating cost. The other componentspart of net periodic costs are to be included as non-operating costs in the accompanying Consolidated Statements of Operations. During the three and nine months ended September 30, 2018, $0.3 million and $0.8 million of net periodic pension and OPEB service costs were charged to "Cost of sales," $0.2 millionsales" and $0.6 million were charged to "Selling, general, and administrative expenses," and $1.2 million and $3.7 million of costs were charged to "Non-operating pension and other post retirement benefit (costs) income" inwhile the accompanying Consolidated Statements of Operations, respectively.
The adoption of ASU 2017-07 also required the reclassification of all prior period costs other than service costs from operating to non-operating. During the three and nine months ended September 30, 2017, $0.3 million and $1.0 millionnon-service components of net periodic costs were charged to "Cost of sales," $0.3 million and $0.7 million were charged to "Selling, general and administrative expenses," and $0.3 million and $0.9 million of income was chargedcost (benefit) are recorded to "Non-operating pension and other postretirement benefit (costs) income" in the accompanyingcosts (income)" on our Consolidated Statements of Operations, respectively.Operations.
NOTE 1211 Earnings per Common Share
Basic (loss) earnings per share areis based on the weighted averageweighted-average number of shares of common stock outstanding. Diluted earnings per share areis based upon the weighted averageweighted-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 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:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Basic weighted-average common shares outstanding1 | 16,486,935 |
| | 16,457,991 |
| | 16,492,843 |
| | 16,466,325 |
| 16,538,569 |
| | 16,486,935 |
| | 16,531,195 |
| | 16,492,843 |
|
Incremental shares due to: | | | | | | | | | | | | | | |
Restricted stock units | 22,461 |
| | 42,122 |
| | 27,893 |
| | 37,021 |
| — |
| | 22,461 |
| | — |
| | 27,893 |
|
Performance shares | 54,253 |
| | 50,506 |
| | 52,508 |
| | 42,914 |
| — |
| | 54,253 |
| | — |
| | 52,508 |
|
Stock options | — |
| | 16,265 |
| | 60 |
| | 26,347 |
| — |
| | — |
| | — |
| | 60 |
|
Diluted weighted-average common shares outstanding | 16,563,649 |
| | 16,566,884 |
| | 16,573,304 |
| | 16,572,607 |
| 16,538,569 |
| | 16,563,649 |
| | 16,531,195 |
| | 16,573,304 |
|
| | | | | | | | | | | | | | |
Basic net earnings per common share | $ | 2.09 |
| | $ | 0.05 |
| | $ | 2.67 |
| | $ | 1.00 |
| |
Diluted net earnings per common share | 2.08 |
| | 0.05 |
| | 2.66 |
| | 0.99 |
| |
Basic net (loss) earnings per common share | | $ | (0.66 | ) | | $ | 2.09 |
| | $ | (0.46 | ) | | $ | 2.67 |
|
Diluted net (loss) earnings per common share | | (0.66 | ) | | 2.08 |
| | (0.46 | ) | | 2.66 |
|
| | | | | | | | | | | | | | |
Anti-dilutive shares excluded from calculation | 985,312 |
| | 468,624 |
| | 935,037 |
| | 525,655 |
| 1,060,643 |
| | 985,312 |
| | 1,040,544 |
| | 935,037 |
|
| |
1 | Basic averageweighted-average common shares outstanding includeincludes restricted stock unit awards that are fully vested, but are deferred for future issuance. |
NOTE 1312 Equity-Based Compensation
We recognize equity-based compensation expense for all equity-based payment awards made to employees and directors, including restricted stock units, or RSUs, performance shares and stock options, based on estimated fair values.
EMPLOYEE AWARDS
Employee equity-based compensation expense (income) was recognized as follows:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Restricted stock units | $ | 595 |
| | $ | 429 |
| | $ | 1,599 |
| | $ | 1,224 |
| $ | 794 |
| | $ | 595 |
| | $ | 1,975 |
| | $ | 1,599 |
|
Performance shares | 499 |
| | 567 |
| | 1,409 |
| | 1,793 |
| (682 | ) | | 499 |
| | (164 | ) | | 1,409 |
|
Stock options | 639 |
| | 659 |
| | 1,767 |
| | 1,974 |
| 357 |
| | 639 |
| | 1,047 |
| | 1,767 |
|
Total employee equity-based compensation expense | $ | 1,733 |
| | $ | 1,655 |
| | $ | 4,775 |
| | $ | 4,991 |
| $ | 469 |
| | $ | 1,733 |
| | $ | 2,858 |
| | $ | 4,775 |
|
As provided in the Clearwater Paper Corporation 2008 and 2017 Stock Incentive Plans,Plan, the following performance measures aremeasure used to determine the number of performance shares ultimately issuable:
Forissuable for performance shares granted in 2017, the2019 is a free cash flow performance measure used for 40% of the grant is a comparison of the percentile ranking of our total stockholder return, or TSR, compared to the TSR of a selected index, and for 60%70% of the performance share awards grantedawards. For the performance measure used isremaining 30% of the grants, a return on invested capital or ROIC, performance measure.
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 total shareholder return, or TSR, compared to the TSR performance of a selected index.
The number of performance shares actually issued, as a percentage of the amount subject to the performance share award, could range from 0%-200%. Throughout the service periods we assess the probability of achieving the performance conditions for our applicable performance share grants, and expense is recognized based on the probable outcomes.
During the first nine months of 2018, 19,133ended September 30, 2019, 47,504 RSUs were settled and distributed. After adjusting for minimum tax withholdings, a net 13,22132,992 shares were issued. In connection with the issued RSUs, the minimum tax withholding payments made during the nine months ended September 30, 20182019 totaled $0.2$0.4 million.
During the nine months ended September 30, 2018,2019, we had 21,57775,223 stock option awards expire with a weighted-average exercise price of $62.76.$51.69. At September 30, 2018,2019, we had 282,848515,438 stock option awards that were exercisable with a weighted-average exercise price of $63.24.$51.19.
The following table summarizes the number of share-based awards granted under the Clearwater Paper Corporation 2017 Stock Incentive Plan during the nine months ended September 30, 20182019 and the grant-date fair value of the awards:
| | | Nine Months Ended | Nine Months Ended |
| September 30, 2018 | September 30, 2019 |
| Number of Shares Subject to Award | | Average Fair Value of Award Per Share | Number of Shares Subject to Award | | Weighted-Average Fair Value of Award Per Share |
Restricted stock units | 111,054 |
| | $ | 37.31 |
| 137,037 |
| | $ | 26.61 |
|
Performance shares | 49,040 |
| | 37.45 |
| 151,664 |
| | 26.60 |
|
Stock options | 198,426 |
| | 14.51 |
| |
DIRECTOR AWARDS
Annually, each outside member of our Board of Directors receives deferred equity-based awards that are measured in units of our common stock and ultimately settled in cash at the time of payment. Accordingly, the compensation expense associated with these awards is subject to fluctuations each quarter based on mark-to-market adjustments at each reporting period in line with changes in the market price of our common stock. As a result of the mark-to-market adjustment, we recorded director equity-based compensation expense of $0.8$0.4 million and $0.5$0.8 million for the three months ended September 30, 20182019 and 2017,2018, respectively. For the nine months ended September 30, 20182019 and 2017,2018, we recorded director equity-based compensation expense of $0.1 million and a benefit of $1.9 million, and $2.5 million, respectively.
As of September 30, 2019, the liability amounts associated with director equity-based compensation included in "Other long-term obligations" on the accompanying Consolidated Balance Sheet were $2.2 million. 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 the accompanying Consolidated Balance Sheet were $0.9totaled $0.8 million and $1.9 million, respectively. At December 31, 2017, the liability amounts associated with director equity-based compensation included in "Other long-term obligations" and "Accounts payable and accrued liabilities" totaled $3.6 million and $2.4$1.3 million, respectively.
NOTE 1413 Fair Value Measurements
The estimated fair values of our financial instruments at the dates presented below are as follows:
| | | September 30, | | December 31, | September 30, | | December 31, |
| 2018 | | 2017 | 2019 | | 2018 |
| Carrying | | Fair | | Carrying | | Fair | Carrying | | Fair | | Carrying | | Fair |
(In thousands) | Amount | | Value | | Amount | | Value | Amount | | Value | | Amount | | Value |
Cash, cash equivalents, and restricted cash (Level 1) | $ | 79,687 |
| | $ | 79,687 |
| | $ | 16,738 |
| | $ | 16,738 |
| |
Borrowings under revolving credit facilities (Level 2) | 100,000 |
| | 99,889 |
| | 155,000 |
| | 154,882 |
| |
Cash, cash equivalents and restricted cash (Level 1) | | $ | 10,295 |
| | $ | 10,295 |
| | $ | 24,947 |
| | $ | 24,947 |
|
Short-term borrowings under revolving credit agreements (Level 2) | | 58,000 |
| | 58,000 |
| | 100,000 |
| | 99,909 |
|
Other short-term debt (Level 1) | | — |
| | — |
| | 20,833 |
| | 20,833 |
|
Long-term debt (Level 2) | 675,000 |
| | 635,888 |
| | 575,000 |
| | 569,250 |
| 875,000 |
| | 863,340 |
| | 675,000 |
| | 612,546 |
|
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, cash equivalents and restricted cash, borrowings under the revolving credit facilitiesagreements, other short-term debt and long-term debt are the only items measured at fair value on a recurring basis.
For cash, cash equivalents, restricted cash and any revolving line of credit borrowings, the carrying amount approximates fair value due to the short-term nature of these financial instruments.
The fair value of our long-term debt is estimated based upon quoted market prices for similar debt issues or estimated based on average market prices for comparable debt when there is no quoted market price.
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 15 Business Interruption and Insurance Recovery
In the first quarter of 2017, our financial statements included the impact of two separate fires, one of which occurred in the fourth quarter of 2016. Both claims were finalized in the first quarter of 2017 and the net proceeds from our insurance provider of $4.3 million was included in "Cost of Sales" in our Consolidated Statement of Operations for the nine months ended September 30, 2017.
There was no business interruption insurance activity in the nine months ended September 30, 2018 at any of our facilities.
NOTE 1614 Segment Information
Our reportable segments are described below.
Consumer ProductsCONSUMER 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, some facial tissue product categories, 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.
PulpPULP and PaperboardPAPERBOARD
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.
The table below presents information about our reportable segments:
| | | | | | | | | | | Three Months Ended | | Nine Months Ended |
| Three Months Ended September 30, | | Nine Months Ended September 30, | September 30, | | September 30, |
(In thousands) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Segment net sales: | | | | | | | | | | | | | | |
Consumer Products | $ | 211,642 |
| | $ | 232,916 |
| | $ | 672,069 |
| | $ | 707,251 |
| $ | 228,544 |
| | $ | 211,642 |
| | $ | 676,220 |
| | $ | 672,069 |
|
Pulp and Paperboard | 214,818 |
| | 193,588 |
| | 623,442 |
| | 586,441 |
| 216,644 |
| | 214,818 |
| | 649,740 |
| | 623,442 |
|
Total segment net sales | $ | 426,460 |
| | $ | 426,504 |
| | $ | 1,295,511 |
| | $ | 1,293,692 |
| $ | 445,188 |
| | $ | 426,460 |
| | $ | 1,325,960 |
| | $ | 1,295,511 |
|
| | | | | | | | | | | | | | |
Earnings (loss) before income taxes: | | | | | | | | | | | | | | |
Consumer Products1,2,3 | $ | (1,269 | ) | | $ | 4,525 |
| | $ | (3,244 | ) | | $ | 21,427 |
| |
Gain on divested assets4 | 22,944 |
| | — |
| | 22,944 |
| | — |
| |
Pulp and Paperboard2,3 | 38,280 |
| | 14,735 |
| | 98,626 |
| | 63,006 |
| |
Consumer Products1 | | $ | (4,438 | ) | | $ | (1,269 | ) | | $ | (8,300 | ) | | $ | (3,244 | ) |
Gain on divested assets | | — |
| | 22,944 |
| | — |
| | 22,944 |
|
Pulp and Paperboard1 | | 17,098 |
| | 38,280 |
| | 80,073 |
| | 98,626 |
|
| 59,955 |
| | 19,260 |
| | 118,326 |
| | 84,433 |
| 12,660 |
| | 59,955 |
| | 71,773 |
| | 118,326 |
|
Corporate2,3 | (13,055 | ) | | (14,100 | ) | | (41,506 | ) | | (39,615 | ) | |
Income from operations | 46,900 |
| | 5,160 |
| | 76,820 |
| | 44,818 |
| |
Corporate1 | | (15,120 | ) | | (13,055 | ) | | (44,530 | ) | | (41,506 | ) |
(Loss) income from operations | | (2,460 | ) | | 46,900 |
| | 27,243 |
| | 76,820 |
|
Interest expense, net | (7,547 | ) | | (7,683 | ) | | (23,290 | ) | | (23,399 | ) | (13,077 | ) | | (7,547 | ) | | (32,477 | ) | | (23,290 | ) |
Non-operating pension and other postretirement benefit (costs) income2 | (1,234 | ) | | 291 |
| | (3,700 | ) | | 856 |
| |
Earnings (loss) before income taxes | $ | 38,119 |
| | $ | (2,232 | ) | | $ | 49,830 |
| | $ | 22,275 |
| |
Debt retirement costs | | (2,725 | ) | | — |
| | (2,725 | ) | | — |
|
Non-operating pension and other postretirement benefit costs | | (1,421 | ) | | (1,234 | ) | | (4,266 | ) | | (3,700 | ) |
(Loss) earnings before income taxes | | $ | (19,683 | ) | | $ | 38,119 |
| | $ | (12,225 | ) | | $ | 49,830 |
|
| | | | | | | | | | | | | | |
Depreciation and amortization: | | | | | | | | | | | | | | |
Consumer Products1 | $ | 14,447 |
| | $ | 16,073 |
| | $ | 42,964 |
| | $ | 50,607 |
| |
Consumer Products | | $ | 19,025 |
| | $ | 14,447 |
| | $ | 51,227 |
| | $ | 42,964 |
|
Pulp and Paperboard | 9,316 |
| | 8,328 |
| | 28,106 |
| | 24,789 |
| 11,168 |
| | 9,316 |
| | 30,144 |
| | 28,106 |
|
Corporate | 1,579 |
| | 1,455 |
| | 4,616 |
| | 4,072 |
| 1,797 |
| | 1,579 |
| | 4,972 |
| | 4,616 |
|
Total depreciation and amortization | $ | 25,342 |
| | $ | 25,856 |
| | $ | 75,686 |
| | $ | 79,468 |
| $ | 31,990 |
| | $ | 25,342 |
| | $ | 86,343 |
| | $ | 75,686 |
|
| |
1 | Operating income for the Consumer Products segment for the three and nine months ended September 30, 2017 includes $5.1 million and $11.1 million , respectively, of costs associated with the closure of the Oklahoma City facility. These costs include $4.3 million on the write down of assets to their held for sale value and $3.7 million of accelerated depreciation. |
| |
2
| 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 2, "Recently Adopted and New Accounting Standards," and Note 11, "Pension and Other Postretirement Benefit Plans," for additional detail. |
| |
3
| Income (loss) from operations for the Consumer Products, Pulp and Paperboard and Corporate segments for the nine months ended September 30, 2018 include $1.7 million, $0.5 million and $4.2 million, respectively, of expenses associated with our selling, general and administrative cost control measures. |
| |
4
| Gain on divested assets for the three and nine months ended September 30, 2018 relates to the sale of our Ladysmith, Wisconsin facility, For additional discussion, see Note 4 "Asset Divestiture". |
For the nine months ended September 30, 2019, no customer accounted for more than 10% of our total company net sales. For the nine months ended September 30, 2018, and 2017, one customer in our Consumer Products segment, the Kroger Company, accounted for approximately 11.9% and 15.2%, respectively, of our total company net sales.
Net sales, classified by the major geographic areas in which our customers are located and by major products, were as follows:
| | | | | | | | | | | Three Months Ended | | Nine Months Ended |
| Three Months Ended September 30, | | Nine Months Ended September 30, | September 30, | | September 30, |
(In thousands) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Primary geographical markets: | | | | | | | | | | | | | | |
United States | $ | 404,593 |
| | $ | 405,303 |
| | $ | 1,237,644 |
| | $ | 1,237,146 |
| $ | 424,743 |
| | $ | 404,593 |
| | $ | 1,270,944 |
| | $ | 1,237,644 |
|
Other countries | 21,867 |
| | 21,201 |
| | 57,867 |
| | 56,546 |
| 20,445 |
| | 21,867 |
| | 55,016 |
| | 57,867 |
|
Total net sales | $ | 426,460 |
| | $ | 426,504 |
| | $ | 1,295,511 |
| | $ | 1,293,692 |
| $ | 445,188 |
| | $ | 426,460 |
| | $ | 1,325,960 |
| | $ | 1,295,511 |
|
| | | | | | | | | | | | | | |
Major products: | | | | | | | | | | | | | | |
Paperboard | | $ | 215,370 |
| | $ | 214,818 |
| | $ | 644,565 |
| | $ | 623,442 |
|
Retail tissue | $ | 182,869 |
| | $ | 213,466 |
| | $ | 601,521 |
| | $ | 643,192 |
| 215,255 |
| | 183,948 |
| | 630,354 |
| | 601,557 |
|
Paperboard | 214,818 |
| | 193,588 |
| | 623,442 |
| | 586,441 |
| |
Non-retail tissue | 27,660 |
| | 19,029 |
| | 68,384 |
| | 62,988 |
| 12,421 |
| | 27,624 |
| | 43,153 |
| | 68,348 |
|
Other | 1,113 |
| | 421 |
| | 2,164 |
| | 1,071 |
| 2,142 |
| | 70 |
| | 7,888 |
| | 2,164 |
|
Total net sales | $ | 426,460 |
| | $ | 426,504 |
| | $ | 1,295,511 |
| | $ | 1,293,692 |
| $ | 445,188 |
| | $ | 426,460 |
| | $ | 1,325,960 |
| | $ | 1,295,511 |
|
NOTE 1715 Supplemental Guarantor Financial Information
All of our subsidiaries that are 100% directly or indirectly owned by Clearwater Paper, guarantee our $275 million aggregate principal amount of 4.5% senior notes issued in January 2013 and due 2023, which we refer to as the 2013 Notes, on a full and unconditional, and 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 subsidiaries, and the eliminations necessary to arrive at the information for Clearwater Paper on a consolidated basis.
Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
Three Months Ended September 30, 20182019
| | | | | | | | | | |
| | | Guarantor | | | | | | | | | | | | | |
(In thousands) | Issuer | | Subsidiaries | | Eliminations | | Total | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
Net sales | $ | 426,816 |
| | $ | 50,340 |
| | $ | (50,696 | ) | | $ | 426,460 |
| $ | 416,293 |
| | $ | 67,869 |
| | $ | (38,974 | ) | | $ | 445,188 |
|
Costs and expenses: | | | | | | | | | | | | | | |
Cost of sales | (383,737 | ) | | (45,693 | ) | | 53,209 |
| | (376,221 | ) | (396,794 | ) | | (60,240 | ) | | 38,330 |
| | (418,704 | ) |
Selling, general and administrative expenses | (20,721 | ) | | (5,562 | ) | | — |
| | (26,283 | ) | (24,255 | ) | | (4,689 | ) | | — |
| | (28,944 | ) |
Gain on divested assets | — |
| | 22,944 |
| | — |
| | 22,944 |
| |
Total operating costs and expenses | (404,458 | ) | | (28,311 | ) | | 53,209 |
| | (379,560 | ) | (421,049 | ) | | (64,929 | ) | | 38,330 |
| | (447,648 | ) |
Income from operations | 22,358 |
| | 22,029 |
| | 2,513 |
| | 46,900 |
| |
(Loss) income from operations | | (4,756 | ) | | 2,940 |
| | (644 | ) | | (2,460 | ) |
Interest expense, net | (7,366 | ) | | (181 | ) | | — |
| | (7,547 | ) | (13,076 | ) | | (1 | ) | | — |
| | (13,077 | ) |
Debt retirement costs | | (2,725 | ) | | — |
| | — |
| | (2,725 | ) |
Non-operating pension and other postretirement benefit costs | (1,234 | ) | | — |
| | — |
| | (1,234 | ) | (1,421 | ) | | — |
| | — |
| | (1,421 | ) |
Earnings before income taxes | 13,758 |
| | 21,848 |
| | 2,513 |
| | 38,119 |
| |
(Loss) earnings before income taxes | | (21,978 | ) | | 2,939 |
| | (644 | ) | | (19,683 | ) |
Income tax benefit (provision) | 1,748 |
| | (5,043 | ) | | (380 | ) | | (3,675 | ) | 13,996 |
| | (1,397 | ) | | (3,889 | ) | | 8,710 |
|
Equity in income of subsidiary | 16,805 |
| | — |
| | (16,805 | ) | | — |
| 1,542 |
| | — |
| | (1,542 | ) | | — |
|
Net earnings | $ | 32,311 |
| | $ | 16,805 |
| | $ | (14,672 | ) | | $ | 34,444 |
| |
Net (loss) earnings | | $ | (6,440 | ) | | $ | 1,542 |
| | $ | (6,075 | ) | | $ | (10,973 | ) |
Other comprehensive income, net of tax | 1,378 |
| | — |
| | — |
| | 1,378 |
| 1,286 |
| | — |
| | — |
| | 1,286 |
|
Comprehensive income | $ | 33,689 |
| | $ | 16,805 |
| | $ | (14,672 | ) | | $ | 35,822 |
| |
Comprehensive (loss) income | | $ | (5,154 | ) | | $ | 1,542 |
| | $ | (6,075 | ) | | $ | (9,687 | ) |
Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
Nine Months Ended September 30, 20182019
| | | | | | | | | | |
| | | Guarantor | | | | | | | | | | | | | |
(In thousands) | Issuer | | Subsidiaries | | Eliminations | | Total | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
Net sales | $ | 1,315,819 |
| | $ | 150,866 |
| | $ | (171,174 | ) | | $ | 1,295,511 |
| $ | 1,250,145 |
| | $ | 203,094 |
| | $ | (127,279 | ) | | $ | 1,325,960 |
|
Costs and expenses: | | | | | | | | | | | | | | |
Cost of sales | (1,190,954 | ) | | (133,971 | ) | | 169,117 |
| | (1,155,808 | ) | (1,154,834 | ) | | (181,741 | ) | | 123,800 |
| | (1,212,775 | ) |
Selling, general and administrative expenses | (69,579 | ) | | (16,248 | ) | | — |
| | (85,827 | ) | (71,578 | ) | | (14,364 | ) | | — |
| | (85,942 | ) |
Gain on divested assets | — |
| | 22,944 |
| | — |
| | 22,944 |
| |
Total operating costs and expenses | (1,260,533 | ) | | (127,275 | ) | | 169,117 |
| | (1,218,691 | ) | (1,226,412 | ) | | (196,105 | ) | | 123,800 |
| | (1,298,717 | ) |
Income from operations | 55,286 |
| | 23,591 |
| | (2,057 | ) | | 76,820 |
| 23,733 |
| | 6,989 |
| | (3,479 | ) | | 27,243 |
|
Interest expense, net | (22,922 | ) | | (368 | ) | | — |
| | (23,290 | ) | (32,338 | ) | | (139 | ) | | — |
| | (32,477 | ) |
Debt retirement costs | | (2,725 | ) | | — |
| | — |
| | (2,725 | ) |
Non-operating pension and other postretirement benefit costs | (3,700 | ) | | — |
| | — |
| | (3,700 | ) | (4,266 | ) | | — |
| | — |
| | (4,266 | ) |
Earnings before income taxes | 28,664 |
| | 23,223 |
| | (2,057 | ) | | 49,830 |
| |
Income tax provision | (1,208 | ) | | (5,242 | ) | | 625 |
| | (5,825 | ) | |
(Loss) earnings before income taxes | | (15,596 | ) | | 6,850 |
| | (3,479 | ) | | (12,225 | ) |
Income tax benefit (provision) | | 10,221 |
| | (1,821 | ) | | (3,735 | ) | | 4,665 |
|
Equity in income of subsidiary | 17,981 |
| | — |
| | (17,981 | ) | | — |
| 5,029 |
| | — |
| | (5,029 | ) | | — |
|
Net earnings | $ | 45,437 |
| | $ | 17,981 |
| | $ | (19,413 | ) | | $ | 44,005 |
| |
Net (loss) earnings | | $ | (346 | ) | | $ | 5,029 |
| | $ | (12,243 | ) | | $ | (7,560 | ) |
Other comprehensive income, net of tax | 4,133 |
| | — |
| | — |
| | 4,133 |
| 3,859 |
| | — |
| | — |
| | 3,859 |
|
Comprehensive income | $ | 49,570 |
| | $ | 17,981 |
| | $ | (19,413 | ) | | $ | 48,138 |
| $ | 3,513 |
| | $ | 5,029 |
| | $ | (12,243 | ) | | $ | (3,701 | ) |
Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
Three Months Ended September 30, 20172018
| | | | | | | | | | | | | | | | | | |
(In thousands) | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
Net sales | $ | 423,712 |
| | $ | 55,894 |
| | $ | (53,102 | ) | | $ | 426,504 |
| $ | 426,816 |
| | $ | 50,340 |
| | $ | (50,696 | ) | | $ | 426,460 |
|
Costs and expenses: | | | | | | | | | | | | | | |
Cost of sales | (387,877 | ) | | (51,052 | ) | | 52,167 |
| | (386,762 | ) | (383,737 | ) | | (45,693 | ) | | 53,209 |
| | (376,221 | ) |
Selling, general and administrative expenses | (24,786 | ) | | (9,796 | ) | | — |
| | (34,582 | ) | (20,721 | ) | | (5,562 | ) | | — |
| | (26,283 | ) |
Gain on divested assets, net | | — |
| | 22,944 |
| | — |
| | 22,944 |
|
Total operating costs and expenses | (412,663 | ) | | (60,848 | ) | | 52,167 |
| | (421,344 | ) | (404,458 | ) | | (28,311 | ) | | 53,209 |
| | (379,560 | ) |
Income (loss) from operations | 11,049 |
| | (4,954 | ) | | (935 | ) | | 5,160 |
| |
Income from operations | | 22,358 |
| | 22,029 |
| | 2,513 |
| | 46,900 |
|
Interest expense, net | (7,407 | ) | | (276 | ) | | — |
| | (7,683 | ) | (7,366 | ) | | (181 | ) | | — |
| | (7,547 | ) |
Non-operating pension and other postretirement benefit income | 291 |
| | — |
| | — |
| | 291 |
| |
Earnings (loss) before income taxes | 3,933 |
| | (5,230 | ) | | (935 | ) | | (2,232 | ) | |
Income tax (provision) benefit | (1,847 | ) | | 4,589 |
| | 353 |
| | 3,095 |
| |
Equity in loss of subsidiary | (641 | ) | | — |
| | 641 |
| | — |
| |
Net earnings (loss) | $ | 1,445 |
| | $ | (641 | ) | | $ | 59 |
| | $ | 863 |
| |
Non-operating pension and other postretirement benefit costs | | (1,234 | ) | | — |
| | — |
| | (1,234 | ) |
Earnings before income taxes | | 13,758 |
| | 21,848 |
| | 2,513 |
| | 38,119 |
|
Income tax benefit (provision) | | 1,748 |
| | (5,043 | ) | | (380 | ) | | (3,675 | ) |
Equity in income of subsidiary | | 16,805 |
| | — |
| | (16,805 | ) | | — |
|
Net earnings | | $ | 32,311 |
| | $ | 16,805 |
| | $ | (14,672 | ) | | $ | 34,444 |
|
Other comprehensive income, net of tax | 257 |
| | — |
| | — |
| | 257 |
| 1,378 |
| | — |
| | — |
| | 1,378 |
|
Comprehensive income (loss) | $ | 1,702 |
| | $ | (641 | ) | | $ | 59 |
| | $ | 1,120 |
| |
Comprehensive income | | $ | 33,689 |
| | $ | 16,805 |
| | $ | (14,672 | ) | | $ | 35,822 |
|
Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
Nine Months Ended September 30, 2017
2018
| | | | | | | | | | | | | | | | | | |
(In thousands) | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
Net sales | $ | 1,263,467 |
| | $ | 196,399 |
| | $ | (166,174 | ) | | $ | 1,293,692 |
| $ | 1,315,819 |
| | $ | 150,866 |
| | $ | (171,174 | ) | | $ | 1,295,511 |
|
Costs and expenses: | | | | | | | | | | | | | | |
Cost of sales | (1,138,470 | ) | | (178,732 | ) | | 162,319 |
| | (1,154,883 | ) | (1,190,954 | ) | | (133,971 | ) | | 169,117 |
| | (1,155,808 | ) |
Selling, general and administrative expenses | (71,762 | ) | | (22,229 | ) | | — |
| | (93,991 | ) | (69,579 | ) | | (16,248 | ) | | — |
| | (85,827 | ) |
Gain on divested assets, net | | — |
| | 22,944 |
| | — |
| | 22,944 |
|
Total operating costs and expenses | (1,210,232 | ) | | (200,961 | ) | | 162,319 |
| | (1,248,874 | ) | (1,260,533 | ) | | (127,275 | ) | | 169,117 |
| | (1,218,691 | ) |
Income (loss) from operations | 53,235 |
| | (4,562 | ) | | (3,855 | ) | | 44,818 |
| |
Income from operations | | 55,286 |
| | 23,591 |
| | (2,057 | ) | | 76,820 |
|
Interest expense, net | (22,981 | ) | | (418 | ) | | — |
| | (23,399 | ) | (22,922 | ) | | (368 | ) | | — |
| | (23,290 | ) |
Non-operating pension and other postretirement benefit income | 856 |
| | — |
| | — |
| | 856 |
| |
Earnings (loss) before income taxes | 31,110 |
| | (4,980 | ) | | (3,855 | ) | | 22,275 |
| |
Income tax (provision) benefit | (11,857 | ) | | 4,582 |
| | 1,415 |
| | (5,860 | ) | |
Equity in loss of subsidiary | (398 | ) | | — |
| | 398 |
| | — |
| |
Net earnings (loss) | $ | 18,855 |
| | $ | (398 | ) | | $ | (2,042 | ) | | $ | 16,415 |
| |
Non-operating pension and other postretirement benefit costs | | (3,700 | ) | | — |
| | — |
| | (3,700 | ) |
Earnings before income taxes | | 28,664 |
| | 23,223 |
| | (2,057 | ) | | 49,830 |
|
Income tax provision | | (1,208 | ) | | (5,242 | ) | | 625 |
| | (5,825 | ) |
Equity in income of subsidiary | | 17,981 |
| | — |
| | (17,981 | ) | | — |
|
Net earnings | | $ | 45,437 |
| | $ | 17,981 |
| | $ | (19,413 | ) | | $ | 44,005 |
|
Other comprehensive income, net of tax | 784 |
| | — |
| | — |
| | 784 |
| 4,133 |
| | — |
| | — |
| | 4,133 |
|
Comprehensive income (loss) | $ | 19,639 |
| | $ | (398 | ) | | $ | (2,042 | ) | | $ | 17,199 |
| |
Comprehensive income | | $ | 49,570 |
| | $ | 17,981 |
| | $ | (19,413 | ) | | $ | 48,138 |
|
Clearwater Paper Corporation
Consolidating Balance Sheet
At September 30, 20182019 | | | | | | | | | | | | | | | | | | |
(In thousands) | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
ASSETS | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 76,150 |
| | $ | — |
| | $ | — |
| | $ | 76,150 |
| $ | 7,815 |
| | $ | — |
| | $ | — |
| | $ | 7,815 |
|
Restricted cash | 1,080 |
| | — |
| | — |
| | 1,080 |
| 1,440 |
| | — |
| | — |
| | 1,440 |
|
Receivables, net | 118,405 |
| | 20,765 |
| | — |
| | 139,170 |
| 139,201 |
| | 18,728 |
| | — |
| | 157,929 |
|
Taxes receivable | 12,189 |
| | 14 |
| | (5,455 | ) | | 6,748 |
| 6,716 |
| | 24 |
| | (19 | ) | | 6,721 |
|
Inventories | 223,595 |
| | 41,736 |
| | (2,057 | ) | | 263,274 |
| 246,211 |
| | 39,663 |
| | (3,479 | ) | | 282,395 |
|
Other current assets | 5,837 |
| | 268 |
| | — |
| | 6,105 |
| 7,725 |
| | 235 |
| | — |
| | 7,960 |
|
Total current assets | 437,256 |
| | 62,783 |
| | (7,512 | ) | | 492,527 |
| 409,108 |
| | 58,650 |
| | (3,498 | ) | | 464,260 |
|
Property, plant and equipment, net | 1,127,534 |
| | 78,634 |
| | — |
| | 1,206,168 |
| 1,202,690 |
| | 70,784 |
| | — |
| | 1,273,474 |
|
Operating lease right-of-use assets | | 69,211 |
| | 5,292 |
| | — |
| | 74,503 |
|
Goodwill | 230,153 |
| | — |
| | — |
| | 230,153 |
| 35,074 |
| | — |
| | — |
| | 35,074 |
|
Intangible assets, net | 1,306 |
| | 24,559 |
| | — |
| | 25,865 |
| 261 |
| | 18,464 |
| | — |
| | 18,725 |
|
Intercompany (payable) receivable | (48,326 | ) | | 46,269 |
| | 2,057 |
| | — |
| (72,415 | ) | | 68,936 |
| | 3,479 |
| | — |
|
Investment in subsidiary | 174,981 |
| | — |
| | (174,981 | ) | | — |
| 180,330 |
| | — |
| | (180,330 | ) | | — |
|
Other assets, net | 24,340 |
| | 2,867 |
| | (1,825 | ) | | 25,382 |
| 13,906 |
| | 2,960 |
| | (1,825 | ) | | 15,041 |
|
TOTAL ASSETS | $ | 1,947,244 |
| | $ | 215,112 |
| | $ | (182,261 | ) | | $ | 1,980,095 |
| $ | 1,838,165 |
| | $ | 225,086 |
| | $ | (182,174 | ) | | $ | 1,881,077 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | |
Borrowings under revolving credit facilities | $ | 100,000 |
| | $ | — |
| | $ | — |
| | $ | 100,000 |
| |
Short-term debt | | $ | 58,000 |
| | $ | — |
| | $ | — |
| | $ | 58,000 |
|
Accounts payable and accrued liabilities | 326,573 |
| | 19,957 |
| | (5,455 | ) | | 341,075 |
| 211,805 |
| | 17,777 |
| | (19 | ) | | 229,563 |
|
Current liability for pensions and other postretirement employee benefits | 7,631 |
| | — |
| | — |
| | 7,631 |
| |
Current liability for pension and other postretirement employee benefits | | 7,430 |
| | — |
| | — |
| | 7,430 |
|
Total current liabilities | 434,204 |
| | 19,957 |
| | (5,455 | ) | | 448,706 |
| 277,235 |
| | 17,777 |
| | (19 | ) | | 294,993 |
|
Long-term debt | 671,100 |
| | — |
| | — |
| | 671,100 |
| 866,702 |
| | — |
| | — |
| | 866,702 |
|
Liability for pensions and other postretirement employee benefits | 67,759 |
| | — |
| | — |
| | 67,759 |
| |
Operating lease liabilities | | 62,792 |
| | 3,779 |
| | — |
| | 66,571 |
|
Liability for pension and other postretirement employee benefits | | 73,738 |
| | — |
| | — |
| | 73,738 |
|
Other long-term obligations | 37,788 |
| | — |
| | — |
| | 37,788 |
| 33,990 |
| | — |
| | — |
| | 33,990 |
|
Accrued taxes | 1,979 |
| | 860 |
| | — |
| | 2,839 |
| 2,186 |
| | 884 |
| | — |
| | 3,070 |
|
Deferred tax liabilities | 106,289 |
| | 19,314 |
| | (1,825 | ) | | 123,778 |
| 96,377 |
| | 22,316 |
| | (1,825 | ) | | 116,868 |
|
TOTAL LIABILITIES | 1,319,119 |
| | 40,131 |
| | (7,280 | ) | | 1,351,970 |
| 1,413,020 |
| | 44,756 |
| | (1,844 | ) | | 1,455,932 |
|
Stockholders’ equity excluding accumulated other comprehensive loss | 680,827 |
| | 174,981 |
| | (174,981 | ) | | 680,827 |
| 488,634 |
| | 180,330 |
| | (180,330 | ) | | 488,634 |
|
Accumulated other comprehensive loss, net of tax | (52,702 | ) | | — |
| | — |
| | (52,702 | ) | (63,489 | ) | | — |
| | — |
| | (63,489 | ) |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,947,244 |
| | $ | 215,112 |
| | $ | (182,261 | ) | | $ | 1,980,095 |
| $ | 1,838,165 |
| | $ | 225,086 |
| | $ | (182,174 | ) | | $ | 1,881,077 |
|
Clearwater Paper Corporation
Consolidating Balance Sheet
At December 31, 20172018
| | | | | | | | | | | | | | | | | | |
(In thousands) | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
ASSETS | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 15,738 |
| | $ | — |
| | $ | — |
| | $ | 15,738 |
| $ | 22,484 |
| | $ | — |
| | $ | — |
| | $ | 22,484 |
|
Receivables, net | 125,001 |
| | 17,064 |
| | — |
| | 142,065 |
| 127,952 |
| | 17,567 |
| | — |
| | 145,519 |
|
Taxes receivable | 20,242 |
| | 40 |
| | — |
| | 20,282 |
| 16,634 |
| | 41 |
| | (10,374 | ) | | 6,301 |
|
Inventories | 228,311 |
| | 41,594 |
| | (3,862 | ) | | 266,043 |
| 222,960 |
| | 48,361 |
| | (5,077 | ) | | 266,244 |
|
Other current assets | 8,587 |
| | 74 |
| | — |
| | 8,661 |
| 3,346 |
| | 53 |
| | — |
| | 3,399 |
|
Total current assets | 397,879 |
| | 58,772 |
| | (3,862 | ) | | 452,789 |
| 393,376 |
| | 66,022 |
| | (15,451 | ) | | 443,947 |
|
Property, plant and equipment, net | 936,659 |
| | 114,323 |
| | — |
| | 1,050,982 |
| 1,192,716 |
| | 76,555 |
| | — |
| | 1,269,271 |
|
Goodwill | 244,161 |
| | — |
| | — |
| | 244,161 |
| 35,074 |
| | — |
| | — |
| | 35,074 |
|
Intangible assets, net | 2,089 |
| | 30,453 |
| | — |
| | 32,542 |
| 1,045 |
| | 23,035 |
| | — |
| | 24,080 |
|
Intercompany payable | (2,807 | ) | | (1,055 | ) | | 3,862 |
| | — |
| |
Intercompany (payable) receivable | | (62,846 | ) | | 57,769 |
| | 5,077 |
| | — |
|
Investment in subsidiary | 157,000 |
| | — |
| | (157,000 | ) | | — |
| 175,301 |
| | — |
| | (175,301 | ) | | — |
|
Other assets, net | 21,413 |
| | 2,696 |
| | (2,331 | ) | | 21,778 |
| 14,839 |
| | 2,618 |
| | (1,711 | ) | | 15,746 |
|
TOTAL ASSETS | $ | 1,756,394 |
| | $ | 205,189 |
| | $ | (159,331 | ) | | $ | 1,802,252 |
| $ | 1,749,505 |
| | $ | 225,999 |
| | $ | (187,386 | ) | | $ | 1,788,118 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | |
Borrowings under revolving credit facilities | $ | 155,000 |
| | $ | — |
| | $ | — |
| | $ | 155,000 |
| |
Short-term debt | | $ | 120,833 |
| | $ | — |
| | $ | — |
| | $ | 120,833 |
|
Accounts payable and accrued liabilities | 235,439 |
| | 21,182 |
| | — |
| | 256,621 |
| 299,715 |
| | 31,691 |
| | (10,374 | ) | | 321,032 |
|
Current liability for pensions and other postretirement employee benefits | 7,631 |
| | — |
| | — |
| | 7,631 |
| |
Current liability for pension and other postretirement employee benefits | | 7,430 |
| | — |
| | — |
| | 7,430 |
|
Total current liabilities | 398,070 |
| | 21,182 |
| | — |
| | 419,252 |
| 427,978 |
| | 31,691 |
| | (10,374 | ) | | 449,295 |
|
Long-term debt | 570,524 |
| | — |
| | — |
| | 570,524 |
| 671,292 |
| | — |
| | — |
| | 671,292 |
|
Liability for pensions and other postretirement employee benefits | 72,469 |
| | — |
| | — |
| | 72,469 |
| |
Liability for pension and other postretirement employee benefits | | 78,191 |
| | — |
| | — |
| | 78,191 |
|
Other long-term obligations | 43,275 |
| | — |
| | — |
| | 43,275 |
| 38,977 |
| | — |
| | — |
| | 38,977 |
|
Accrued taxes | 1,928 |
| | 842 |
| | — |
| | 2,770 |
| 1,918 |
| | 867 |
| | — |
| | 2,785 |
|
Deferred tax liabilities | 94,694 |
| | 26,165 |
| | (2,331 | ) | | 118,528 |
| 104,753 |
| | 18,140 |
| | (1,711 | ) | | 121,182 |
|
TOTAL LIABILITIES | 1,180,960 |
| | 48,189 |
| | (2,331 | ) | | 1,226,818 |
| 1,323,109 |
| | 50,698 |
| | (12,085 | ) | | 1,361,722 |
|
Stockholders’ equity excluding accumulated other comprehensive loss | 619,417 |
| | 157,000 |
| | (157,000 | ) | | 619,417 |
| 493,744 |
| | 175,301 |
| | (175,301 | ) | | 493,744 |
|
Accumulated other comprehensive loss, net of tax | (43,983 | ) | | — |
| | — |
| | (43,983 | ) | (67,348 | ) | | — |
| | — |
| | (67,348 | ) |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,756,394 |
| | $ | 205,189 |
| | $ | (159,331 | ) | | $ | 1,802,252 |
| $ | 1,749,505 |
| | $ | 225,999 |
| | $ | (187,386 | ) | | $ | 1,788,118 |
|
Clearwater Paper Corporation
Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2019
|
| | | | | | | | | | | | | | | |
| | | | | | | |
(In thousands) | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
Net (loss) earnings | $ | (346 | ) | | $ | 5,029 |
| | $ | (12,243 | ) | | $ | (7,560 | ) |
Adjustments to reconcile net (loss) earnings to net cash flows from operating activities: | | | | | | | |
Depreciation and amortization | 74,186 |
| | 12,157 |
| | — |
| | 86,343 |
|
Equity-based compensation expense | 2,959 |
| | — |
| | — |
| | 2,959 |
|
Deferred taxes | (10,286 | ) | | 4,263 |
| | — |
| | (6,023 | ) |
Employee benefit plans | 1,006 |
| | — |
| | — |
| | 1,006 |
|
Amortization of deferred issuance costs on debt
| 1,452 |
| | — |
| | — |
| | 1,452 |
|
Loss on retirement of debt | 2,725 |
| | — |
| | — |
| | 2,725 |
|
Other non-cash activity, net | 734 |
| | (10 | ) | |
|
| | 724 |
|
Changes in working capital, net | (111,631 | ) | | 2,504 |
| | 10,861 |
| | (98,266 | ) |
Changes in taxes receivable | 9,918 |
| | 17 |
| | (10,355 | ) | | (420 | ) |
Other, net | 1,086 |
| | (261 | ) | | — |
| | 825 |
|
Net cash flows from operating activities | (28,197 | ) | | 23,699 |
| | (11,737 | ) | | (16,235 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
Additions to property, plant and equipment | (124,111 | ) | | (1,683 | ) | | — |
| | (125,794 | ) |
Other, net | 4 |
| | 10 |
| | — |
| | 14 |
|
Net cash flows from investing activities | (124,107 | ) | | (1,673 | ) | | — |
| | (125,780 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
Borrowings on long-term debt | 296,146 |
| | — |
| | — |
| | 296,146 |
|
Repayments of borrowings on long-term debt | (101,671 | ) | | — |
| | — |
| | (101,671 | ) |
Borrowings on short-term debt | 534,877 |
| | — |
| | — |
| | 534,877 |
|
Repayments of borrowings on short-term debt | (598,715 | ) | | — |
| | — |
| | (598,715 | ) |
Payments for debt issuance costs | (1,844 | ) | | — |
| | — |
| | (1,844 | ) |
Investment from (to) parent | 10,289 |
| | (22,026 | ) | | 11,737 |
| | — |
|
Other, net | (1,430 | ) | | — |
| | — |
| | (1,430 | ) |
Net cash flows from financing activities | 137,652 |
| | (22,026 | ) | | 11,737 |
| | 127,363 |
|
Decrease in cash, cash equivalents and restricted cash | (14,652 | ) | | — |
| | — |
| | (14,652 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 24,947 |
| | — |
| | — |
| | 24,947 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 10,295 |
| | $ | — |
| | $ | — |
| | $ | 10,295 |
|
Clearwater Paper Corporation
Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2018
|
| | | | | | | | | | | | | | | |
| | | | | | | |
(In thousands) | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
Net earnings | $ | 45,437 |
| | $ | 17,981 |
| | $ | (19,413 | ) | | $ | 44,005 |
|
Adjustments to reconcile net earnings to net cash flows from operating activities: | | | | | | | |
Depreciation and amortization | 59,632 |
| | 16,054 |
| | — |
| | 75,686 |
|
Equity-based compensation expense | 2,845 |
| | — |
| | — |
| | 2,845 |
|
Deferred taxes | 10,662 |
| | (6,732 | ) | | — |
| | 3,930 |
|
Employee benefit plans | 102 |
| | — |
| | — |
| | 102 |
|
Disposal of plant and equipment, net | 128 |
| | — |
| | — |
| | 128 |
|
Gain on divested assets | — |
| | (25,510 | ) | | — |
| | (25,510 | ) |
Other non-cash adjustments, net | 899 |
| | — |
| | — |
| | 899 |
|
Changes in working capital, net | 22,045 |
| | (7,383 | ) | | (7,260 | ) | | 7,402 |
|
Changes in taxes receivable, net | 8,053 |
| | 26 |
| | 5,455 |
| | 13,534 |
|
Other, net | (1,800 | ) | | (122 | ) | | — |
| | (1,922 | ) |
Net cash flows from operating activities | 148,003 |
| | (5,686 | ) | | (21,218 | ) | | 121,099 |
|
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
Additions to property, plant and equipment | (172,434 | ) | | (1,600 | ) | | — |
| | (174,034 | ) |
Net proceeds from divested assets | 70,930 |
| | — |
| | — |
| | 70,930 |
|
Other, net | 793 |
| | 14 |
| | — |
| | 807 |
|
Net cash flows from investing activities | (100,711 | ) | | (1,586 | ) | | — |
| | (102,297 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
Borrowings on revolving credit facilities | 322,454 |
| | — |
| | — |
| | 322,454 |
|
Repayments of borrowings on revolving credit facilities | (277,454 | ) | | — |
| | — |
| | (277,454 | ) |
Investment (to) from parent | (28,490 | ) | | 7,272 |
| | 21,218 |
| | — |
|
Other, net | (853 | ) | | — |
| | — |
| | (853 | ) |
Net cash flows from financing activities | 15,657 |
| | 7,272 |
| | 21,218 |
| | 44,147 |
|
Increase in cash, cash equivalents, and restricted cash | 62,949 |
| | — |
| | — |
| | 62,949 |
|
Cash, cash equivalents, and restricted cash at beginning of period | 16,738 |
| | — |
| | — |
| | 16,738 |
|
Cash, cash equivalents, and restricted cash at end of period | $ | 79,687 |
| | $ | — |
| | $ | — |
| | $ | 79,687 |
|
Clearwater Paper Corporation
Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2017
| | | | | | | | | | | | | | | | | | |
(In thousands) | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total | Issuer | | Guarantor Subsidiaries | | Eliminations | | Total |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | | | |
Net earnings (loss) | $ | 18,855 |
| | $ | (398 | ) | | $ | (2,042 | ) | | $ | 16,415 |
| |
Adjustments to reconcile net earnings (loss) to net cash flows from operating activities: | | | | | | | | |
Net earnings | | $ | 45,437 |
| | $ | 17,981 |
| | $ | (19,413 | ) | | $ | 44,005 |
|
Adjustments to reconcile net earnings to net cash flows from operating activities: | | | | | | | | |
Depreciation and amortization | 56,642 |
| | 22,826 |
| | — |
| | 79,468 |
| 59,632 |
| | 16,054 |
| | — |
| | 75,686 |
|
Equity-based compensation expense | 2,523 |
| | — |
| | — |
| | 2,523 |
| 2,845 |
| | — |
| | — |
| | 2,845 |
|
Deferred taxes | 19,531 |
| | (4,929 | ) | | — |
| | 14,602 |
| 10,662 |
| | (6,732 | ) | | — |
| | 3,930 |
|
Employee benefit plans | (2,999 | ) | | — |
| | — |
| | (2,999 | ) | 102 |
| | — |
| | — |
| | 102 |
|
Disposal of plant and equipment, net | 481 |
| | 3,274 |
| | — |
| | 3,755 |
| |
Other non-cash adjustments, net | 874 |
| | — |
| | — |
| | 874 |
| |
Deferred issuance costs on long term debt | | 943 |
| | — |
| | — |
| | 943 |
|
Gain on divested assets | | — |
| | (25,510 | ) | | — |
| | (25,510 | ) |
Other non-cash activity, net | | 84 |
| | — |
| | — |
| | 84 |
|
Changes in working capital, net | 32,501 |
| | 3,896 |
| | 7,449 |
| | 43,846 |
| 22,045 |
| | (7,383 | ) | | (7,260 | ) | | 7,402 |
|
Changes in taxes receivable, net | 600 |
| | — |
| | (5,469 | ) | | (4,869 | ) | |
Changes in taxes receivable | | 8,053 |
| | 26 |
| | 5,455 |
| | 13,534 |
|
Other, net | (413 | ) | | (1,026 | ) | | — |
| | (1,439 | ) | (1,800 | ) | | (122 | ) | | — |
| | (1,922 | ) |
Net cash flows from operating activities | 128,595 |
| | 23,643 |
| | (62 | ) | | 152,176 |
| 148,003 |
| | (5,686 | ) | | (21,218 | ) | | 121,099 |
|
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | | | |
Additions to property, plant and equipment | (132,725 | ) | | (3,925 | ) | | — |
| | (136,650 | ) | (172,434 | ) | | (1,600 | ) | | — |
| | (174,034 | ) |
Net proceeds from divested assets | | 70,930 |
| | — |
| | — |
| | 70,930 |
|
Other, net | 283 |
| | 470 |
| | — |
| | 753 |
| 793 |
| | 14 |
| | — |
| | 807 |
|
Net cash flows from investing activities | (132,442 | ) | | (3,455 | ) | | — |
| | (135,897 | ) | (100,711 | ) | | (1,586 | ) | | — |
| | (102,297 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | |
Purchase of treasury stock | (4,875 | ) | | — |
| | — |
| | (4,875 | ) | |
Borrowings on revolving credit facilities | 185,000 |
| | — |
| | — |
| | 185,000 |
| |
Repayments of borrowings on revolving credit facilities | (210,000 | ) | | — |
| | — |
| | (210,000 | ) | |
Investment from (to) parent | 23,541 |
| | (23,603 | ) | | 62 |
| | — |
| |
Borrowings on short-term debt | | 322,454 |
| | — |
| | — |
| | 322,454 |
|
Repayments of borrowings on short-term debt | | (277,454 | ) | | — |
| | — |
| | (277,454 | ) |
Investment (to) from parent | | (28,490 | ) | | 7,272 |
| | 21,218 |
| | — |
|
Other, net | (927 | ) | | — |
| | — |
| | (927 | ) | (853 | ) | | — |
| | — |
| | (853 | ) |
Net cash flows from financing activities | (7,261 | ) | | (23,603 | ) | | 62 |
| | (30,802 | ) | 15,657 |
| | 7,272 |
| | 21,218 |
| | 44,147 |
|
Decrease in cash, cash equivalents, and restricted cash | (11,108 | ) | | (3,415 | ) | | — |
| | (14,523 | ) | |
Cash, cash equivalents, and restricted cash at beginning of period | 19,586 |
| | 3,415 |
| | — |
| | 23,001 |
| |
Cash, cash equivalents, and restricted cash at end of period | $ | 8,478 |
| | $ | — |
| | $ | — |
| | $ | 8,478 |
| |
Increase in cash, cash equivalents and restricted cash | | 62,949 |
| | — |
| | — |
| | 62,949 |
|
Cash, cash equivalents and restricted cash at beginning of period | | 16,738 |
| | — |
| | — |
| | 16,738 |
|
Cash, cash equivalents and restricted cash at end of period | | $ | 79,687 |
| | $ | — |
| | $ | — |
| | $ | 79,687 |
|
|
| |
ITEM 2. | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
FORWARD-LOOKING STATEMENTS
Our disclosure, discussion 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 theaccounting standards; production quality and quantity, costs timing and benefits of optimization, cost management and strategic capital projects; costs, timing and benefits associated with the expansion of our Shelby, North Carolina facility expansion; selling, generalfacility; components and administrative cost reduction initiativetrends; our strengths and savings; sales volume;related benefits; competitive market conditions; operating costs including transportation and purchased pulp; raw materials and input usage and costs; timing and costs, related to major maintenance and repairs; capital expenditures;including energy costs and usage; major maintenance schedule and costs; tax rates; cash flows; raw materials; capital resources and expenditures; expected contributions to benefit plans; strategic projects and related costs and benefits; return on investment from capital projects; liquidity; credit agreement financialdebt and finance arrangements, including compliance with covenants; capitalized interest; interest expenses and market risks.the outcome of legal proceedings. Words such as anticipate, expect, intend, plan, target, project, believe, schedule, estimate, may, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are based on management’s current expectations, estimates, assumptions and projections that are subject to change. Our actual results of operations may differ materially from those expressed or implied by the forward-looking statements contained in this report. Important factors that could cause or contribute to such differences include those risks discussed in the section entitled “Risk Factors” in our 20172018 Form 10-K, 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 regardsregard to, or reduction in, orders from a significant customer;
changes in customer product preferences and competitors' product offerings;
our ability to successfully implement our operational efficiencies and cost savings strategies, including related capital projects, and achieve the expected operational or financial results of those projects, including from the continuous digesterfull production at our Lewiston facility;
our ability to complete construction of our new tissue manufacturing operations in Shelby, North Carolina on time and within current cost expectations.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 bymanufactured at our expanded Shelby, North Carolina operations when completed;upon full production;
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 pulp 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;
labor disruptions;
changes in transportation costs and disruptions in transportation services;
changes in the cost and availability of wood fiber and wood pulp;
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, and 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.
OVERVIEW
Background
We manufacture quality consumer tissue, away-from-home tissue, parent roll tissue, bleached paperboard and pulp at manufacturing facilities across the nation. We are a premier supplier of private label tissue to major retailers and wholesale distributors, including grocery, drug, mass merchant and discount stores. In addition, we produce bleached paperboard used by quality-conscious printers and packaging converters. Our employees build shareholder value by developing strong customer partnershipsrelationships through quality and service.
Recent Events
Asset DivestitureDebt Refinancing
On August 21, 2018,July 26, 2019, we soldcompleted the refinancing of our Ladysmith, Wisconsin manufacturing facility for net cash proceeds of approximately $71 million and recordedsecured revolving credit facilities with a related gain on divested assets of $22.9 million. Among other offsets, the net gain on divested assets includes $34.0 million of assets soldseven-year term loan credit agreement and a $14.0 million goodwill write-off.five-year revolving credit facility provided under an asset based loan credit facility. Refer to the "Liquidity and Capital Resources" discussion, under the heading "Credit Agreements," for additional information.
Shelby Expansion Project
We are inDuring the processsecond quarter of building a2019, we began production on our 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 premiumultra and ultra-premiumpremium bath, paper towel and napkin products. At full production capacity, the new tissue machineit is expected to produce approximately 70,000 to 75,000 tons of tissue products annually. The estimatedtotal cost for the project includes approximately $320 million to $330$360 million for the tissue machine, converting equipment and buildings, and approximately $60 million for the purchase andwarehouse expansion of an existing warehouse that will consolidate allconsolidated southeastern warehousing in Shelby. The total estimated cost of the project has increased by approximately $40 million to $50 million from our original estimates due to the combination of external factors and the 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 factors include higher steel costs, exacerbated by recently imposed tariffs, weather-related delays and impacts, and a very tight labor market. The weather-related delays and impacts were caused by a wet spring and summer, as well as the recent hurricanes, which combined led to an overtime component to keep the project on schedule. The increased cost for the Shelby expansion was offset by an approximately $30 million reduction in other capital expenditures originally forecasted for 2018.
We project that the construction of the new tissue machine at this facility will be completedattain a full production run-rate in early 2019 and will be fully operational in 2020.mid-2020. During the nine months ended September 30, 2018,2019, we incurred costs of $220.7$51.7 million on construction related activities and the new tissue machine in Shelby. We also capitalized $5.1$4.9 million of interest during the nine months ended September 30, 20182019 related to the Shelby expansion.
Selling, General We have incurred additional labor, operating supply and Administrative Cost Structure Changes
In the second half of 2017, we began a review of 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 to lower selling, general and administrative expenses beginning in 2018, and then is expected to result in approximately $20 million in annual SG&A savings, compared to 2017 SG&A expenses, beginning in the first quarter of 2019. For the nine months ended September 30, 2018, we incurred $6.4 million of expensesenergy related costs associated with these efforts,ramping up production of which $0.2 million was incurredthe new machine, and our inventory levels have also increased in connection with the third quarter and consisted primarily of severance and professional services expenses. As of September 30, 2018, we had achieved expected annual run-rate savings of approximately $8 million, compared to 2017 SG&A expenses, as a result of these changes.ramp-up.
Components and Trends in our Business
Net sales
Net sales predominantly consist of sales of consumer tissue and paperboard products, net of discounts, returns and allowances and any sales taxes collected. Prices for our consumer tissue products tend to be primarily drivenare affected by competitive market conditions and the relative prices of branded tissue products. DemandOur 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 for our pulp and paperboard products are largely determined by general global market conditions and the demand for high quality paperboard.promotion optimization.
In recent years, the tissue industry has seenexperienced an increase in ultra and premium 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 adversely affected by this increased supply as a result of new tissue machines that have been added or publicly announced in North America,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 contributecontributed to a very competitive environment for consumer tissue. In addition, intissue over 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 their private label tissue supply beginning inpast several years, which has continued through the first quarternine months of 2018. This decision has primarily affected conventional tissue supply to this customer and we do not expect to be able to fully replace this lost volume in 2018 through sales to other customers, which resulted in reduced tissue sales in the second and third quarters of 2018 and is expected to result in a reduction in our overall tissue sales volume in 2018.2019.
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. Additionally, while there has been some announced permanent reduction in solid bleached sulphate, or SBS, paperboard production in North America, there has also been new SBS production capacity brought on line which makes for a dynamic supply and demand market between paperboard grades and segments.
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.
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 our operating costs to increase. 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 the periods presented:
| | Cost of sales | Cost of sales | | | Cost of sales | | |
| Three Months Ended September 30, | | | Three Months Ended September 30, | | |
(Dollars in thousands) | 2018 | | 2017 | | | 2019 | | 2018 | | |
| Cost | | Percentage of Sales | | Cost | | Percentage of Sales | | Cost Variance | Cost | | Percentage of Sales | | Cost3 | | Percentage of Sales | | Cost Variance |
Wages and benefits | $ | 70,143 |
| | 16.4 | % | | $ | 68,189 |
| | 16.0 | % | | $ | 1,954 |
| $ | 74,004 |
| | 16.6 | % | | $ | 70,143 |
| | 16.4 | % | | $ | 3,861 |
|
Purchased pulp | | 50,916 |
| | 11.4 |
| | 45,347 |
| | 10.7 |
| | 5,569 |
|
Transportation1 | 44,264 |
| | 10.4 |
| | 50,243 |
| | 11.8 |
| | (5,979 | ) | 47,705 |
| | 10.7 |
| | 44,264 |
| | 10.4 |
| | 3,441 |
|
Purchased pulp | 45,347 |
| | 10.7 |
| | 53,411 |
| | 12.5 |
| | (8,064 | ) | |
Chemicals | 43,096 |
| | 10.1 |
| | 39,768 |
| | 9.3 |
| | 3,328 |
| 42,151 |
| | 9.5 |
| | 43,096 |
| | 10.1 |
| | (945 | ) |
Chips, sawdust and logs | 41,535 |
| | 9.7 |
| | 29,801 |
| | 7.0 |
| | 11,734 |
| 40,765 |
| | 9.2 |
| | 41,535 |
| | 9.7 |
| | (770 | ) |
Packaging supplies | 21,326 |
| | 5.0 |
| | 21,977 |
| | 5.2 |
| | (651 | ) | |
Packaging and operating supplies | | 40,479 |
| | 9.1 |
| | 36,399 |
| | 8.5 |
| | 4,080 |
|
Depreciation | 21,790 |
| | 5.1 |
| | 22,359 |
| | 5.2 |
| | (569 | ) | 28,371 |
| | 6.4 |
| | 21,790 |
| | 5.1 |
| | 6,581 |
|
Energy | 21,645 |
| | 5.1 |
| | 22,408 |
| | 5.3 |
| | (763 | ) | 21,064 |
| | 4.7 |
| | 22,715 |
| | 5.3 |
| | (1,651 | ) |
Maintenance and repairs2 | 19,968 |
| | 4.7 |
| | 29,078 |
| | 6.8 |
| | (9,110 | ) | 32,623 |
| | 7.3 |
| | 19,968 |
| | 4.7 |
| | 12,655 |
|
| 329,114 |
| | 77.2 |
| | 337,234 |
| | 79.1 |
| | (8,120 | ) | 378,078 |
| | 84.9 |
| | 345,257 |
| | 80.9 |
| | 32,821 |
|
Other operating costs | 47,107 |
| | 11.0 |
| | 49,528 |
| | 11.6 |
| | (2,421 | ) | 40,626 |
| | 9.2 |
| | 30,964 |
| | 7.3 |
| | 9,662 |
|
Total cost of sales | $ | 376,221 |
| | 88.2 | % | | $ | 386,762 |
| | 90.7 | % | | $ | (10,541 | ) | $ | 418,704 |
| | 94.1 | % | | $ | 376,221 |
| | 88.2 | % | | $ | 42,483 |
|
| | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | Nine Months Ended September 30, | | |
(Dollars in thousands) | 2018 | | 2017 | | | 2019 | | 2018 | | |
| Cost | | Percentage of Sales | | Cost | | Percentage of Sales | | Cost Variance | Cost | | Percentage of Sales | | Cost3 | | Percentage of Sales | | Cost Variance |
Wages and benefits | $ | 213,316 |
| | 16.4 | % | | $ | 209,720 |
| | 16.2 | % | | $ | 3,596 |
| $ | 213,019 |
| | 16.1 | % | | $ | 213,316 |
| | 16.4 | % | | $ | (297 | ) |
Purchased pulp | | 154,528 |
| | 11.6 |
| | 138,614 |
| | 10.7 |
| | 15,914 |
|
Transportation1 | 155,131 |
| | 12.0 |
| | 146,646 |
| | 11.3 |
| | 8,485 |
| 146,954 |
| | 11.1 |
| | 155,131 |
| | 12.0 |
| | (8,177 | ) |
Purchased pulp | 138,614 |
| | 10.7 |
| | 144,869 |
| | 11.2 |
| | (6,255 | ) | |
Chemicals | 130,719 |
| | 10.0 |
| | 122,407 |
| | 9.4 |
| | 8,312 |
| 125,856 |
| | 9.5 |
| | 130,719 |
| | 10.0 |
| | (4,863 | ) |
Chips, sawdust and logs | 123,902 |
| | 9.6 |
| | 99,887 |
| | 7.7 |
| | 24,015 |
| 124,300 |
| | 9.4 |
| | 123,902 |
| | 9.6 |
| | 398 |
|
Packaging supplies | 65,530 |
| | 5.1 |
| | 65,867 |
| | 5.1 |
| | (337 | ) | |
Packaging and operating supplies | | 114,941 |
| | 8.7 |
| | 111,710 |
| | 8.7 |
| | 3,231 |
|
Depreciation | 65,086 |
| | 5.0 |
| | 69,266 |
| | 5.4 |
| | (4,180 | ) | 75,910 |
| | 5.7 |
| | 65,086 |
| | 5.0 |
| | 10,824 |
|
Energy | 61,671 |
| | 4.8 |
| | 66,710 |
| | 5.2 |
| | (5,039 | ) | 70,400 |
| | 5.3 |
| | 64,879 |
| | 5.0 |
| | 5,521 |
|
Maintenance and repairs2 | 55,425 |
| | 4.3 |
| | 74,244 |
| | 5.7 |
| | (18,819 | ) | 67,782 |
| | 5.1 |
| | 55,425 |
| | 4.3 |
| | 12,357 |
|
| 1,009,394 |
| | 77.9 |
| | 999,616 |
| | 77.3 |
| | 9,778 |
| 1,093,690 |
| | 82.5 |
| | 1,058,782 |
| | 81.7 |
| | 34,908 |
|
Other operating costs | 146,414 |
| | 11.3 |
| | 155,267 |
| | 12.0 |
| | (8,853 | ) | 119,085 |
| | 9.0 |
| | 97,026 |
| | 7.5 |
| | 22,059 |
|
Total cost of sales | $ | 1,155,808 |
| | 89.2 | % | | $ | 1,154,883 |
| | 89.3 | % | | $ | 925 |
| $ | 1,212,775 |
| | 91.5 | % | | $ | 1,155,808 |
| | 89.2 | % | | $ | 56,967 |
|
| |
1 | Includes internal and external transportation costs. |
| |
2 | Excludes related internal labor costs. |
| |
3 | Certain 2018 operating costs were reclassified to conform to the 2019 presentation. |
Wages and benefits. Costs related to our employees primarily consist of wages and related benefit costs and payroll taxes. Wage and benefit costs increased for the three months ended September 30, 2019, compared to the same period in 2018, due primarily to increased headcount at our Shelby, North Carolina facility and annual wage increases, partially offset by reduced headcount resulting from the sale of our Ladysmith, Wisconsin facility in August 2018 and the favorable impact in 2019 of selling, general and administrative, or SG&A, cost reduction efforts implemented throughout 2018. For the nine months ended September 30, 2019, wage and benefit costs were flat compared to the same period in 2018, as reduced headcount related to the sale of our Ladysmith facility and the impact of the SG&A cost reduction efforts were offset by increased headcount at our North Carolina facility and annual wage increases.
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. Purchased pulp costs increased in the three and nine months ended September 30, 2018, wage and benefit costs increased2019, compared to the same periods in 2017,2018, primarily due to severance related costs associated withas a result of increased purchases of external pulp resulting from a major maintenance outage at our SG&A cost structure changesIdaho pulp manufacturing facility in the third quarter of 2019 and the impactramp-up of annual wage increases,production on our new tissue machine in addition to costs for hiring and training new employees for the Shelby expansion project.North Carolina.
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 the 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.United States and transport unconverted parent rolls from our tissue mills to our tissue converting facilities. Transportation costs decreasedincreased in the three month periodmonths ended September 30, 2018,2019, compared to the same period in 2017,2018, due primarily to increased retail tissue case shipments for our Consumer Products segment, partially offset by reductions in partinternal tissue parent roll and finished good shipments as a result of the ramp-up of production on the new tissue machine and converting lines in North Carolina. Transportation costs decreased in the nine months ended September 30, 2019, compared to the same period in 2018, due largely to production from the new tissue machine and converting lines in North Carolina that reduced internal shipments, as well as improvements in our Consumer Products segment's operating model as a result of the acceleration of converting operationsresulting in Shelby, as well as lower miles shipped overall and lower line haul-rates, partially offset by increased retail tissue shipments in the third quarter of 2018. Transportation costs increased for the nine months ended September 30, 2018 due to increased paperboard shipments and higher line haul rates on both internal and externalcase shipments.
Purchased pulpChips, sawdust and logs. We purchase a significant amount of the pulp neededchips, sawdust and logs to manufacture our consumer productspulp. We source residual wood fibers under both long-term and to a lesser extent our paperboard, from external suppliers. Purchased pulpshort-term supply agreements, as well as in the spot market. Chips, sawdust and log costs decreased inwere essentially flat for both the three and nine months ended September 30, 2018,2019, compared to the same periods in 2018. For the three month period, in 2017, mainlythe benefit of lower residual pricing for our Idaho pulp and paperboard facility, as well as lower usage at that facility due to no plannedthe major maintenance outagesoutage in the third quarter of 2019, was offset by higher residual pricing for our Arkansas pulp and paperboard facility due to inclement weather. For the nine month period, unfavorable residual pricing at both our Idaho and Arkansas pulp and paperboard facilities in 2018for the nine months ended September 30, 2019 was offset by lower residual usage as a result of the major maintenance outage at the Idaho facility and lower tissue shipments in our consumer products division.unplanned downtime at the same facility.
Chemicals. We consume a substantial amount of chemicals in the production of pulp and paperboard, as well as in the production of through-air-dried, or 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.
Chemical costs increaseddecreased in the three and nine months ended September 30, 2018,2019, compared to the same periods in 2017,2018, due to increased paperboard productionfavorable pricing on polyethylene, caustic and higher pricing for polyethylene, latex, and caustic.
Chips, sawdust and logs. We purchase chips, sawdust and logs to manufacture pulp. We source residual wood fibers under both long-term and short-term supply agreements, as well as in the spot market. Chips, sawdust and log costs increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to increased paperboard production and higher prices for these materials at bothsale of our pulp and paperboard locations.Ladysmith manufacturing facility in 2018.
Packaging and operating 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. Packaging and operating supplies costs remained flatincreased for the three and nine months ended September 30, 2018,2019, compared to the same periods in 2017,2018, due primarily to increased retail sales volumes at our Consumer Products segment and increased operating supplies usage as higher pricing for packaging materials was offset by reduced shipmentsa result of the planned major maintenance outage at our Idaho pulp and paperboard facility in our consumer products segment.the third quarter of 2019.
Depreciation. We record substantially all of our depreciation expense associated with our plant and equipment in "Cost of sales" on our Consolidated Statements of Operations. Depreciation expense for the three and nine months ended September 30, 2018 decreased2019 increased compared to the same periodperiods in 20172018 due primarily due to acceleratingthe startup of the new Shelby tissue machine and two converting lines, and the resulting commencement of depreciation in 2017 on certain Oklahoma Cityfor these assets, in connection2019, as well as additional depreciation expense recorded in association with the March 2017 facility closure, partially offset by increased depreciation as a resultreview of higher capital spending.depreciable lives and remaining salvage values for certain of our fixed assets.
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 primarily due to volatility in temperatures and electricity and natural gas rates. We generally strive to reduce our exposure to volatile energy prices through conservation. In addition, a co-generation facility that produces steam and electricity at our Lewiston, Idaho manufacturing site helps to lower our energy costs. Energy costs for the three months ended September 30, 2019 decreased compared to the same period in 2018 due primarily to the sale of our Ladysmith facility in 2018, partially offset by increased natural gas usage in the third quarter of 2019 related to the planned major maintenance at our Idaho pulp and paperboard facility. Energy costs increased for the nine months ended September 30, 2018, decreased2019, compared to the same periodsperiod in 2017,2018, primarily due to favorablea regional pipeline disruption in the first quarter of 2019 that caused natural gas and electricity prices into increase at our pulp and paperboard segment, in addition to lowerLewiston, Idaho facility, combined with the increased natural gas usage at our Idaho pulp and paperboard facility.facility related to the planned major maintenance, partially offset by the sale of our Ladysmith facility in 2018 and lower electricity prices.
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 September 30, 2018,2019, these contracts covered approximately 29%47% of our expected average monthly natural gas requirements for the remainder of 2018,2019, and a lesser amount for 2019.2020.
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. During the three and nine months ended September 30, 2018,2019, maintenance and repair spending was lowerhigher than the same periods in 20172018 due to nothe planned major maintenance inthat took place at our Idaho pulp and paperboard segmentfacility in 2018.the third quarter of 2019, as well as increased maintenance associated with the startup of our new tissue machine in North Carolina. We expect our fourth quarter 2019 planned major maintenance costs to be approximately $6 to $7 million at our Arkansas facility.
OtherOther operating costs. Other costs primarily consist of miscellaneousOur other operating costs which decreased inincreased $9.7 million and $22.1 million, respectively, for the three and nine months ended September 30, 2018,2019, compared to the same periods in 2017,2018, due in partmainly to reducedramp-up costs associated with the Shelby expansion project, increased purchased paper costs lower professional service fees and decreased operating supplies charges.higher inventory related costs.
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 for the three and nine months ended September 30, 20182019 and 20172018 includes interest on our $275 million aggregate principal amount of 4.5% senior notes issued in 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 2025, which we refer to as the 2014 Notes. In addition, interest expense includes interest on amounts drawn on our Term Loan Credit Agreement and ABL Credit Agreement entered into on July 26, 2019, as well as interest prior to July 26, 2019 on the amounts drawn under our prior revolving credit facilities. 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, Term Loan Credit Agreement and revolving credit facilities.ABL Credit Agreement. 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 the jurisdictions in which our operations occur and offices are located, adjusted for available credits, changes in valuation allowances and differences between reported earnings and taxable income using current tax laws and rates. We generally expect ourThe annual effective income tax rate excluding discrete items,is subject to remain fairly constant, although it could fluctuatevariation due to several factors, including variability in pre-tax income (or loss), changes in tax law.credits, forecasted pre-tax income (or loss), changes in business practices and tax law developments.
RESULTS OF OPERATIONS
Three Months Ended September 30, 20182019 Compared to Three Months Ended September 30, 20172018
The following table sets forth data included in our Consolidated Statements of Operations as a percentage of net sales.
| | | Three Months Ended September 30, | Three Months Ended September 30, |
(Dollars in thousands) | 2018 | | 2017 | 2019 | | 2018 |
Net sales | $ | 426,460 |
| | 100.0 | % | | $ | 426,504 |
| | 100.0 | % | $ | 445,188 |
| | 100.0 | % | | $ | 426,460 |
| | 100.0 | % |
Costs and expenses: | | | | | | | | | | | | | | |
Cost of sales | (376,221 | ) | | 88.2 |
| | (386,762 | ) | | 90.7 |
| (418,704 | ) | | 94.1 |
| | (376,221 | ) | | 88.2 |
|
Selling, general and administrative expenses | (26,283 | ) | | 6.2 |
| | (34,582 | ) | | 8.1 |
| (28,944 | ) | | 6.5 |
| | (26,283 | ) | | 6.2 |
|
Gain on divested assets | 22,944 |
| | 5.4 |
| | — |
| | — |
| |
Gain on divested assets, net | | — |
| | — |
| | 22,944 |
| | 5.4 |
|
Total operating costs and expenses | (379,560 | ) | | 89.0 |
| | (421,344 | ) | | 98.8 |
| (447,648 | ) | | 100.6 |
| | (379,560 | ) | | 89.0 |
|
Income from operations | 46,900 |
| | 11.0 |
| | 5,160 |
| | 1.2 |
| |
(Loss) income from operations | | (2,460 | ) | | 0.6 |
| | 46,900 |
| | 11.0 |
|
Interest expense, net | (7,547 | ) | | 1.8 |
| | (7,683 | ) | | 1.8 |
| (13,077 | ) | | 2.9 |
| | (7,547 | ) | | 1.8 |
|
Non-operating pension and other postretirement benefit (costs) income | (1,234 | ) | | 0.3 |
| | 291 |
| | 0.1 |
| |
Earnings (loss) before income taxes | 38,119 |
| | 8.9 |
| | (2,232 | ) | | 0.5 |
| |
Income tax (provision) benefit | (3,675 | ) | | 0.9 |
| | 3,095 |
| | 0.7 |
| |
Net earnings | $ | 34,444 |
| | 8.1 | % | | $ | 863 |
| | 0.2 | % | |
Debt retirement costs | | (2,725 | ) | | 0.6 |
| | — |
| | — |
|
Non-operating pension and other postretirement benefit costs | | (1,421 | ) | | 0.3 |
| | (1,234 | ) | | 0.3 |
|
(Loss) earnings before income taxes | | (19,683 | ) | | 4.4 |
| | 38,119 |
| | 8.9 |
|
Income tax benefit (provision) | | 8,710 |
| | 1.9 |
| | (3,675 | ) | | 0.8 |
|
Net (loss) earnings | | $ | (10,973 | ) | | 2.5 | % | | $ | 34,444 |
| | 8.1 | % |
Net sales—Third quarter 20182019 net sales were flatincreased compared to the third quarter of 2017, as increased2018, due to higher net paperboard sales volumes and tissue prices wereand retail tissue shipments, partially offset by reducedlower non-retail tissue volumes and prices.shipments primarily resulting from the sale of our Ladysmith, Wisconsin facility in August 2018. These items are further discussed below under “Discussion of Business Segments.”
Cost of sales—Cost of sales was 88.2%94.1% of net sales for the third quarter of 20182019 and 90.7%88.2% of net sales for the same period in 2017.2018. Our overall cost of sales was $10.5$42.5 million lowerhigher than the third quarter of 2017,2018, primarily due to lowercosts associated with the planned major maintenance at our Idaho pulp and internally sourced paperboard facility in the third quarter of 2019, higher purchased pulp costs which were partially offset by higher inputand increased depreciation expense and ramp-up costs for chips, sawdustassociated with our new paper machine and logs, chemicals and wages and benefits.converting lines at our North Carolina facility.
Selling, general and administrative expenses—Selling, general and administrative expenses for the third quarter of 2018 decreased $8.3 million2019 increased compared to the third quarter of 2017.2018. The lower expenseincrease was primarily due in part to decreased wages resulting from cost structure changes, reduced consulting andhigher professional fees and lower commission and marketing expense. In addition, selling, general and administrative expenses forin the third quarter of 2017 included $4.3 million2019 compared to the third quarter of asset writedowns to held for sale value on certain assets at our former Oklahoma City facility.2018.
Gain on divested assets—On August 21, 2018, we sold our Ladysmith facility for net cash proceeds of approximately $71$71.0 million. In total, we recorded $22.9 million of gain was recorded on the sale in the third quarter of 2018, 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 for the third quarter of 2018 remained flat compared to2019 was $5.5 million higher than the third quarter of 2017, as2018 due to higher interest expense associated with a larger average balance on our revolving credit facilities was offset by higherand lower capitalized interestinterest.
Debt retirement costs—In association with the refinancing of our prior revolving credit facilities in the third quarter of 2018.2019, we incurred $2.7 million of debt retirement costs, which consisted largely of breakage fees of $1.7 million and the write-off of unamortized deferred fees associated with the prior credit facilities.
Income tax provisionbenefit (provision)—We recorded an income tax provisionbenefit of $3.7$8.7 million for the three months ended September 30, 2018,2019, compared to a benefit of $3.1$3.7 million provision in the same period of 2017.2018. The rate determined under generally accepted accounting principles, or GAAP, for the three months ended September 30, 20182019 was a benefit of approximately 10%44%, compared to a beneficial rateprovision of approximately 139%10% for the same period of 2017.2018. The rate in each period is primarily the result of benefits from Federal income tax credits, combined with a loss before income taxes for the third quarter of 2017.
During2018 included the third quartersbenefit of 2018 and 2017, there were a number of items that were included in the calculation of ourfederal income tax provision that we do not believe were indicative of our core operating performance. Excluding these items,credits while the tax ratesbenefit for 2019 resulted from the pre-tax loss for the three months ended September 30, 2018 and 2017 would have been benefits of approximately 40% and 18%, respectively. See the section entitled “Non-GAAP Measures” on page 35 of this report for a reconciliation of these adjusted income tax provision amounts to the comparable GAAP income tax provision amounts.quarter.
Discussion of Business Segments
Consumer Products
| | | Three Months Ended | Three Months Ended |
| September 30, | September 30, |
(Dollars in thousands - except per ton amounts) | 2018 | | 2017 | 2019 | | 2018 |
Net sales | $ | 211,642 |
| | $ | 232,916 |
| $ | 228,544 |
| | $ | 211,642 |
|
Operating income | 21,675 |
| | 4,525 |
| |
Operating (loss) income | | (4,438 | ) | | 21,675 |
|
Percent of net sales | 10.2 | % | | 1.9 | % | (1.9 | )% | | 10.2 | % |
| | | | | | |
Shipments (short tons) | | | | | | |
Retail | 70,335 |
| | 77,544 |
| 79,526 |
| | 70,335 |
|
Non-retail | 18,525 |
| | 12,958 |
| 6,882 |
| | 18,525 |
|
Total tissue tons | 88,860 |
| | 90,502 |
| 86,408 |
| | 88,860 |
|
Converted products cases (in thousands) | 11,789 |
| | 12,727 |
| 13,162 |
| | 11,789 |
|
| | | | | | |
Sales price (per short ton) | | | | | | |
Retail | $ | 2,615 |
| | $ | 2,754 |
| $ | 2,707 |
| | $ | 2,615 |
|
Non-retail | 1,491 |
| | 1,468 |
| 1,805 |
| | 1,491 |
|
Total tissue | $ | 2,381 |
| | $ | 2,574 |
| $ | 2,635 |
| | $ | 2,381 |
|
Net sales for the Consumer Products segment during the third quarter of 2018 decreased2019 increased by $21.3$16.9 million compared to the third quarter of 20172018 due to lowerhigher retail tissue volumes sold, increased average net selling prices for both retail and non-retail tissue products, and a favorable mix shift to a higher percentage of retail shipments, partially offset by a reduction in non-retail sales volume an unfavorable mix shift to increased parent roll sales andresulting from the sale of our Ladysmith facility during the third quarter ofin August 2018. These decreases were partially offset by increased TAD towel sales.
The segment had an operating incomeloss of $21.7$4.4 million for the third quarter of 2019, compared to operating income of $21.7 million in the third quarter of 2018 whichthat included thea gain of $22.9 million on the sale of our Ladysmith facility. Excluding this gain, the segment had an operatinglarger loss of $1.3 million, compared to operating income of $4.5 million in the third quarter of 2017, primarily due to the decreased sales and higher wage and benefits expenses associated primarily with an increase of employees at our Shelby facility related to the Shelby expansion project and the effect of annual wage increases. Operating income for the third quarter of 2017 also included $4.3 million of asset writedowns2019 was primarily attributable to held for sale value on certain assets athigher pulp costs and increased depreciation expense and ramp-up costs associated with our former Oklahoma City facility.
Shelby expansion project.
Pulp and Paperboard
| | | Three Months Ended | Three Months Ended |
| September 30, | September 30, |
(Dollars in thousands - except per ton amounts) | 2018 | | 2017 | 2019 | | 2018 |
Net sales | $ | 214,818 |
| | $ | 193,588 |
| $ | 216,644 |
| | $ | 214,818 |
|
Operating income | 38,280 |
| | 14,735 |
| 17,098 |
| | 38,280 |
|
Percent of net sales | 17.8 | % | | 7.6 | % | 7.9 | % | | 17.8 | % |
| | | | | | |
Paperboard shipments (short tons) | 218,135 |
| | 200,569 |
| 214,537 |
| | 218,135 |
|
Paperboard sales price (per short ton) | $ | 985 |
| | $ | 965 |
| $ | 1,004 |
| | $ | 985 |
|
Net sales for the Pulp and Paperboard segment increased by $1.8 million during the third quarter of 2019, compared to the third quarter of 2018. The increase was due to higher paperboard selling prices from previously announced price increases, partially offset by decreased shipment volumes.
Operating income for the segment decreased by $21.2 million during the third quarter of 2018,2019, compared to the third quarter of 2017. The increase was due primarily to strong production and sales volume increases in addition to paperboard net price increases.
Operating income for the segment increased by $23.5 million during the third quarter of 2018, compared to the third quarter of 2017, primarily due to increased sales, in addition to nothe planned major maintenance at our Idaho pulp and paperboard facility in the third quarter of 2018, compared to approximately $21 million in the third quarter of 2017, and lower purchased paper costs. These favorable impacts were partially offset by higher chips, sawdust and log costs, as well as higher transportation, chemical and depreciation costs.2019.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 20182019 Compared to Nine Months Ended September 30, 20172018
The following table sets forth data included in our Consolidated Statements of Operations as a percentage of net sales.
| | | Nine Months Ended September 30, | Nine Months Ended September 30, |
(Dollars in thousands) | 2018 | | 2017 | 2019 | | 2018 |
Net sales | $ | 1,295,511 |
| | 100.0 | % | | $ | 1,293,692 |
| | 100.0 | % | $ | 1,325,960 |
| | 100.0 | % | | $ | 1,295,511 |
| | 100.0 | % |
Costs and expenses: | | | | | | | | | | | | | | |
Cost of sales | (1,155,808 | ) | | 89.2 |
| | (1,154,883 | ) | | 89.3 |
| (1,212,775 | ) | | 91.5 |
| | (1,155,808 | ) | | 89.2 |
|
Selling, general and administrative expenses | (85,827 | ) | | 6.6 |
| | (93,991 | ) | | 7.3 |
| (85,942 | ) | | 6.5 |
| | (85,827 | ) | | 6.6 |
|
Gain on divested assets | 22,944 |
| | 1.8 |
| | — |
| | — |
| |
Gain on divested assets, net | | — |
| | — |
| | 22,944 |
| | 1.8 |
|
Total operating costs and expenses | (1,218,691 | ) | | 94.1 |
| | (1,248,874 | ) | | 96.5 |
| (1,298,717 | ) | | 98.0 |
| | (1,218,691 | ) | | 94.1 |
|
Income from operations | 76,820 |
| | 5.9 |
| | 44,818 |
| | 3.5 |
| 27,243 |
| | 2.1 |
| | 76,820 |
| | 5.9 |
|
Interest expense, net | (23,290 | ) | | 1.8 |
| | (23,399 | ) | | 1.8 |
| (32,477 | ) | | 2.5 |
| | (23,290 | ) | | 1.8 |
|
Non-operating pension and other postretirement benefit (costs) income | (3,700 | ) | | 0.3 |
| | 856 |
| | (0.1 | ) | |
Earnings before income taxes | 49,830 |
| | 3.8 |
| | 22,275 |
| | 1.7 |
| |
Income tax provision | (5,825 | ) | | 0.4 |
| | (5,860 | ) | | 0.5 |
| |
Net earnings | $ | 44,005 |
| | 3.4 |
| | $ | 16,415 |
| | 1.3 |
| |
Debt retirement costs | | (2,725 | ) | | 0.2 |
| | — |
| | — |
|
Non-operating pension and other postretirement benefit costs | | (4,266 | ) | | 0.3 |
| | (3,700 | ) | | 0.3 |
|
(Loss) earnings before income taxes | | (12,225 | ) | | 0.9 |
| | 49,830 |
| | 3.8 |
|
Income tax benefit (provision) | | 4,665 |
| | 0.3 |
| | (5,825 | ) | | 0.4 |
|
Net (loss) earnings | | $ | (7,560 | ) | | 0.6 |
| | $ | 44,005 |
| | 3.4 |
|
Net sales—Net sales for the nine months ended September 30, 20182019 increased by $1.8$30.4 million, or 0.1%2.4%, compared to the same period in 2017.2018. The increase was primarily due to favorablehigher prices and sales volume in our Pulp and Paperboard segment,for both segments, partially offset by lower average selling prices and reduced non-retail tissue shipment volumes in our Consumer Products segment.resulting primarily from the August 2018 sale of the Ladysmith facility. These items are further discussed below under “Discussion of Business Segments.”
Cost of sales—Cost of sales was approximately 89%91.5% of net sales for the nine months ended September 30, 20182019 and 89.2% of net sales for the same period in 2017.2018. Our overall cost of sales was slightly$57.0 million higher in the first nine months of 2018ended September 30, 2019 compared to 2017,the same period of 2018, primarily due to increased costs for wood fiberpurchased pulp, maintenance and energy, as well as higher transportationdepreciation expense and ramp-up costs driven by higher line haul rates.associated with our Shelby expansion project. These cost increasesunfavorable comparisons were partially offset by lower maintenance, internally sourced paperboard, energytransportation and depreciationchemical costs.
Selling, general and administrative expenses—Selling, general and administrative expenses for the nine months ended September 30, 2018 decreased by $8.2 million compared2019 were comparable to the same period in 2017. The decrease was due2018. Lower wage and benefit expenses in part to lower commissionthe nine months ended September 30, 2019 and marketingthe absence of $6.2 million of reorganization related expenses incurred in the nine months ended September 30, 2018 were offset primarily by $0.1 million of expense reduced travel expenses and lower profit dependent accruals, which were partially offset by higher severance and professional services expenses related to the selling, general, and administrative cost structure changes. In addition, selling, general and administrative expensesmark-to-market adjustment for directors' equity based compensation for the third quarter of 2017 included $4.3nine months ended September 30, 2019, compared to a $1.9 million of asset writedowns to heldbenefit for sale value on certain assets at our former Oklahoma City facility.the same period in 2018, and increased legal and professional fees in the nine months ended September 30, 2019.
Gain on divested assets—On August 21, 2018, we sold our Ladysmith facility for net cash proceeds of approximately $71$71.0 million. In total, we recorded $22.9 million of gain was recorded on the sale in the third quarter of 2018, 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 for the nine months ended September 30, 2018 remained flat2019 increased $9.2 million compared to the same period in 2017, as2018 driven by higher interest expense associated with a larger average balance on our revolving credit facilities was offset by higherand lower capitalized interest for the nine months ended September 30, 2019, compared to the same period in 2018.
Debt retirement costs—In association with the refinancing of our prior revolving credit facilities in the 2018 period.third quarter of 2019, we incurred $2.7 million of debt retirement costs in the nine months ended September 30, 2019, which consisted largely of breakage fees of $1.7 million and the write-off of unamortized deferred fees associated with the prior credit facilities.
Income tax provisionbenefit (provision)—We recorded an income tax provisionbenefit of $5.8$4.7 million in the nine months ended September 30, 2018,2019, compared to $5.9a provision of $5.8 million in the same period of 2017.2018. The rate determined under GAAP for the nine months ended September 30, 20182019 was a benefit of approximately 12%38%, compared to 26%a provision of approximately 12% for the same period of 2017.2018. The net change to our effective tax rate in the nine months ended September 30, 2018 was primarily the result of the Federal rate reduction enacted by the Tax Cuts and Jobs Act, offset by an increase in the rate due to basis differences associated with the goodwill written-off as part of the sale of our Ladysmith facility. The rate in each period also includes the benefit from Federal credits.
During the nine months ended September 30, 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 rate for the nine months ended September 30, 2018 would have been aincluded the benefit of approximately 7% compared to expense of approximately 29%federal income tax credits while the tax benefit for the nine months ended September 30, 2017. See2019 resulted from the section entitled “Non-GAAP Measures” on page 35 of this reportpre-tax loss for a reconciliation of these adjusted income tax provision amounts to the comparable GAAP income tax provision amounts.period.
Discussion of Business SegmentsConsumer Products
| | | Nine Months Ended | Nine Months Ended |
| September 30, | September 30, |
(Dollars in thousands - except per ton amounts) | 2018 | | 2017 | 2019 | | 2018 |
Net sales | $ | 672,069 |
| | $ | 707,251 |
| $ | 676,220 |
| | $ | 672,069 |
|
Operating income | 19,700 |
| | 21,427 |
| |
Operating (loss) income | | (8,300 | ) | | 19,700 |
|
Percent of net sales | 2.9 | % | | 3.0 | % | (1.2 | )% | | 2.9 | % |
| | | | | | |
Shipments (short tons) | | | | | | |
Retail | 224,376 |
| | 233,944 |
| 229,057 |
| | 224,376 |
|
Non-retail | 47,077 |
| | 43,372 |
| 23,771 |
| | 47,077 |
|
Total tissue tons | 271,453 |
| | 277,316 |
| 252,828 |
| | 271,453 |
|
Converted products cases (in thousands) | 37,078 |
| | 38,559 |
| 37,970 |
| | 37,078 |
|
| | | | | | |
Sales price (per short ton) | | | | | | |
Retail | $ | 2,681 |
| | $ | 2,750 |
| $ | 2,752 |
| | $ | 2,681 |
|
Non-retail | 1,452 |
| | 1,452 |
| 1,815 |
| | 1,452 |
|
Total tissue | $ | 2,468 |
| | $ | 2,547 |
| $ | 2,664 |
| | $ | 2,468 |
|
Net sales for our Consumer Products segment decreased $35.2increased $4.2 million for the nine months ended September 30, 2018,2019, compared to the same period of 2017,2018, due to lowerhigher average net selling prices forand a favorable mix shift resulting from a higher percentage of retail tissue,sales, partially offset by decreased non-retail sales volumes in retail cases, andvolume resulting primarily from the sale of our Ladysmith facility duringin the third quarter of 2018. These unfavorable impacts were partially offset by a favorable sales mix driven by increased TAD paper towel sales.
The segment had an operating incomeloss of $19.7$8.3 million for the nine months ended September 30, 2019, compared to operating income of $19.7 million for the same period of 2018, which included thea gain of $22.9 million on the sale of our Ladysmith facility. Excluding this gain, the segment had an operating loss of $3.2 million compared to operating income of $21.4 million for the same period of 2017. This lossunfavorable comparison was primarily due to decreased sales volumes, higher pulp prices,costs and ramp-up costs, increased depreciation expense and higher wage and benefits expensesbenefit costs associated primarily with an increase of employees at our Shelby facility related to the Shelby expansion project, and the effect of annual wage increases, and higherpartially offset by lower transportation costs. Operating income for the nine months ended September 30, 2017 also included $4.3 million of asset writedowns to held for sale value on certain assets at our former Oklahoma City facility.
Pulp and Paperboard
| | | Nine Months Ended | Nine Months Ended |
| September 30, | September 30, |
(Dollars in thousands - except per ton amounts) | 2018 | | 2017 | 2019 | | 2018 |
Net sales | $ | 623,442 |
| | $ | 586,441 |
| $ | 649,740 |
| | $ | 623,442 |
|
Operating income | 98,626 |
| | 63,006 |
| 80,073 |
| | 98,626 |
|
Percent of net sales | 15.8 | % | | 10.7 | % | 12.3 | % | | 15.8 | % |
| | | | | | |
Paperboard shipments (short tons) | 641,026 |
| | 618,103 |
| 642,559 |
| | 641,026 |
|
Paperboard sales price (per short ton) | $ | 973 |
| | $ | 949 |
| $ | 1,003 |
| | $ | 973 |
|
Net sales for the Pulp and Paperboard segment increased by $37.0$26.3 million during the nine months ended September 30, 2018,2019, compared to the same period of 2017. The increase was primarily2018, due to increased sales volume in addition to price increases.favorable pricing.
Operating income for the segment increased $35.6decreased $18.6 million during the nine months ended September 30, 2018,2019, compared to the same period of 2017,2018, primarily due to increased sales, reduced maintenance costs due to nothe planned major maintenance at our Idaho pulp and paperboard facility in the first nine monthsthird quarter of 2018, compared to approximately $30 million for the nine months ended September 30, 2017, and lower2019, as well as higher energy costs. These favorable impactsunfavorable comparisons were partially offset by increased chips, sawdust and log costs, higherlower chemical and transportation costs and higher depreciation expense.the favorable pricing.
NON-GAAP MEASURES
We use earnings before interest, 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.
We present EBITDA Adjusted EBITDA and Adjusted income tax provisionEBITDA 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 use metrics similar to EBITDA to measure our compliance with certain covenants.
The following table provides our EBITDA and Adjusted EBITDA for the periods presented, as well as a reconciliation to net earnings.
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In thousands) | 2018 | | 2017 | | 2018 | | 2017 |
Net earnings | $ | 34,444 |
| | $ | 863 |
| | $ | 44,005 |
| | $ | 16,415 |
|
Interest expense, net | 7,547 |
| | 7,683 |
| | 23,290 |
| | 23,399 |
|
Income tax provision (benefit) | 3,675 |
| | (3,095 | ) | | 5,825 |
| | 5,860 |
|
Depreciation and amortization expense1 | 25,342 |
| | 25,856 |
| | 75,686 |
| | 79,468 |
|
EBITDA | $ | 71,008 |
| | $ | 31,307 |
| | $ | 148,806 |
| | $ | 125,142 |
|
Gain on divested assets, net | (22,944 | ) | | — |
| | (22,944 | ) | | — |
|
Directors' equity-based compensation expense (benefit) | 769 |
| | 463 |
| | (1,930 | ) | | (2,470 | ) |
Reorganization related expenses associated with SG&A cost control measures | 210 |
| | 480 |
| | 6,390 |
| | 480 |
|
Consumer products reorganization related expenses | 158 |
| | — |
| | 950 |
| | — |
|
Other | (338 | ) | | — |
| | — |
| | — |
|
Costs associated with Oklahoma City facility closure2 | — |
| | 5,057 |
| | — |
| | 7,406 |
|
Costs associated with Long Island facility closure | — |
| | 314 |
| | — |
| | 1,145 |
|
Manchester Industries acquisition related expenses | — |
| | — |
| | — |
| | 220 |
|
Write-off of assets as a result of Warehouse Automation project | — |
| | — |
| | — |
| | 41 |
|
Adjusted EBITDA | $ | 48,863 |
| | $ | 37,621 |
| | $ | 131,272 |
| | $ | 131,964 |
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Net (loss) earnings | $ | (10,973 | ) | | $ | 34,444 |
| | $ | (7,560 | ) | | $ | 44,005 |
|
Interest expense, net1 | 15,802 |
| | 7,547 |
| | 35,202 |
| | 23,290 |
|
Income tax (benefit) provision | (8,710 | ) | | 3,675 |
| | (4,665 | ) | | 5,825 |
|
Depreciation and amortization expense | 31,990 |
| | 25,342 |
| | 86,343 |
| | 75,686 |
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EBITDA | $ | 28,109 |
| | $ | 71,008 |
| | $ | 109,320 |
| | $ | 148,806 |
|
Directors' equity-based compensation expense (benefit) | 420 |
| | 769 |
| | 101 |
| | (1,930 | ) |
Non-operating pension and other postretirement benefit costs2 | 1,421 |
| | 1,234 |
| | 4,266 |
| | 3,700 |
|
Reorganization related expenses | 934 |
| | 158 |
| | 986 |
| | 950 |
|
Gain on divested assets, net | — |
| | (22,944 | ) | | — |
| | (22,944 | ) |
Reorganization related expenses associated with SG&A cost control measures | — |
| | 210 |
| | — |
| | 6,390 |
|
Other | — |
| | (338 | ) | | — |
| | — |
|
Adjusted EBITDA | $ | 30,884 |
| | $ | 50,097 |
| | $ | 114,673 |
| | $ | 134,972 |
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1 | Depreciation and amortizationInterest expense, net for the three months ended September 30, 2017 includes accelerated depreciation of $0.3 million associated with the closure of our Long Island facility and $0.1 million as a result of our warehouse automation project. In addition, depreciation and amortization for the nine months ended September 30, 20172019 includes $3.7 milliondebt retirement costs of accelerated depreciation associated with the closure of our Oklahoma City facility, $0.6 million associated with the Long Island facility closure and $0.4 million as a result of the warehouse automation project.$2.7 million. |
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2 | Costs associatedIn 2018, we adopted Accounting Standards Update 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires all net periodic pension and postretirement costs other than service cost to be presented on a line outside of operating income. Beginning in the first quarter of 2019, we are excluding these non-operating costs from the calculation of Adjusted EBITDA. The corresponding prior period amounts have been reclassified to conform with the Oklahoma City facility closure for both the three and nine months ended September 30, 2017 include $4.3 million of loss on the writedown of assets to their held for sale value.current period presentation. |
The following table provides our Adjusted income tax provisions for the three and nine months ended September 30, 2018 and 2017, as well as a reconciliation to the GAAP income tax benefit (provision).
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In thousands) | 2018 | | 2017 | | 2018 | | 2017 |
GAAP Income tax (provision) benefit | $ | (3,675 | ) | | $ | 3,095 |
| | $ | (5,825 | ) | | $ | (5,860 | ) |
Special items, tax impact: | | | | | | | |
Gain on divested assets | 10,264 |
| | — |
| | 10,264 |
| | — |
|
Reorganization related expenses associated with SG&A cost control measures | (67 | ) | | (163 | ) | | (1,623 | ) | | (163 | ) |
Directors' equity-based compensation (expense) benefit | (245 | ) | | (157 | ) | | 450 |
| | 831 |
|
Consumer products reorganization related expenses | (50 | ) | | — |
| | (256 | ) | | — |
|
Other | 88 |
| | — |
| | — |
| | — |
|
Impact of state tax reform | — |
| | — |
| | (676 | ) | | — |
|
Costs associated with Oklahoma City facility closure | — |
| | (1,719 | ) | | — |
| | (3,762 | ) |
Manchester Industries acquisition related expenses | — |
| | — |
| | — |
| | (74 | ) |
Costs associated with Long Island facility closure | — |
| | (208 | ) | | — |
| | (586 | ) |
Write off of assets as a result of Warehouse Automation project | — |
| | — |
| | — |
| | (14 | ) |
Accelerated depreciation of assets as a result of Warehouse Automation project | — |
| | (41 | ) | | — |
| | (121 | ) |
Adjusted income tax benefit (provision) | $ | 6,315 |
| | $ | 807 |
| | $ | 2,334 |
| | $ | (9,749 | ) |
LIQUIDITY AND CAPITAL RESOURCES
The following table presents information regarding our cash flows for the nine months ended September 30, 20182019 and 2017:2018:
| | (In thousands) | 2018 | | 2017 | 2019 | | 2018 |
Net cash flows from operating activities | $ | 121,099 |
| | $ | 152,176 |
| $ | (16,235 | ) | | $ | 121,099 |
|
Net cash flows from investing activities | (102,297 | ) | | (135,897 | ) | (125,780 | ) | | (102,297 | ) |
Net cash flows from financing activities | 44,147 |
| | (30,802 | ) | 127,363 |
| | 44,147 |
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Cash Flows Summary
Net cash flows provided byfrom operating activities for the nine months ended September 30, 20182019 decreased by $31.1$137.3 million compared to the same period in 2017.2018. The decrease in operating cash flows was driven bylargely due to higher cost of sales as a decrease of $36.4 million from changes in working capital primarily as the result of a decreasehigher purchased pulp, maintenance and energy costs, including higher production costs associated with the ramp-up of the new tissue machine at our North Carolina facility, as well as an $11.3 million increase in the amount of cash provided by accounts payable and accrued liabilities and accounts receivables inpaid for interest for the nine months ended September 30, 2018, compared to the same period of 2017, as well as a decrease in net earnings of $12.6 million, after adjusting for non-cash related items. These unfavorable changes were partially offset by a net $13.5 million decrease in taxes receivable in the nine months ended September 30, 2018, as the result of cash received from income tax refunds, compared to a net $4.9 million increase in taxes receivable in the nine months ended September 30, 2017.2019.
Net cash flows used for investing activities for the nine months ended September 30, 2018 were $33.62019 increased by $23.5 million lower thancompared to the prior year period primarily due to approximately $71 million of net cash proceeds from divested assets, which resulted from the salecompletion of our Ladysmith facility. These proceedsShelby expansion project in the first half of 2019.
Net cash flows provided by financing activities were partially offset by an increase in cash paid$127.4 million for plant and equipment in the nine months ended September 30, 2018, compared2019 due to increased net borrowings. With the same period in 2017. In addition to cash paid for plantclosing of our $300 million Term Loan Credit Agreement and equipment,$250 million ABL Credit Agreement, of which $58 million was advanced, we also incurred $78.5repaid our $200.0 million of non-cash additions related to accrued property plantoutstanding credit agreement balance with Northwest Farm Credit Services and equipment in the 2018 period, which is largely associated$135.0 million outstanding balance on our credit agreement with our Shelby expansion project.
Wells Fargo. Net cash flows provided by financing activities were $44.1 million for the nine months ended September 30,same period of 2018, and were largely driven byprimarily due to net borrowings of $45.0 million on our revolving credit facilities. Borrowings and repayments on our credit facilities are presented gross on our Consolidated Statements of Cash Flows. Net cash flows used for financing activities were $30.8 million for the same period of 2017, due largely to net repayments of $25.0 million on our revolving credit facilities, as well as $4.9 million in repurchases of our outstanding common stock pursuant to our stock repurchase program.
short-term debt.
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 facilitiesagreements, as discussed below under "Credit Agreements," will be adequate to fund our 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.
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. DuringFor the nine months ended September 30, 2018,2019, excluding capitalized interest of $6.0$5.7 million, we spent $246.5incurred $73.6 million on capital expenditures, which included $228.0$61.9 million of capital spending on strategic projects and other projects designed to reduce future manufacturing costs and provide a positive return on investment. DuringIncluding $46.5 million of capital expenditures that were incurred in 2018 and paid in 2019, as well as the capitalized interest of $5.7 million, cash paid for capital expenditures in the nine months ended September 30, 2017, we spent $135.4 million on2019 totaled $125.8 million. Cash paid for capital expenditures excludingin the nine months ended September 30, 2018 totaled $174.0 million, which included capitalized interest of $3.4$6.0 million which included $104.3and excluded $78.5 million of capital spending on strategic projects and other projects expected to reduce future manufacturing costs and provide a positive return on investment.expenditures that had been accrued but not yet paid as of September 30, 2018.
Debt ArrangementsSenior Notes
Our annual debt service obligation, consisting of cash payments for interest on the 2013 Notes and the 2014 Notes, is estimated to be $28.5 million for 2018.2019. The terms of the 2013 Notes limit our ability and the ability of any restricted subsidiaries to borrow money, pay dividends, redeem or repurchase capital stock, make investments, sell assets, create restrictions on the payment of dividends or other amounts to us from any restricted subsidiaries, enter into transactions with affiliates, enter into sale and lease back transactions, create liens, and consolidate, merge or sell all or substantially all of our assets. The terms of the 2014 Notes limit our ability and the ability of any restricted subsidiaries to incur certain liens, engage in sale and leaseback transactions and consolidate, merge with, or convey, transfer, or lease substantially all of our or their assets to another person.
Credit ArrangementsAgreements
Commencing March 31, 2020, we are required to make quarterly installment payments of approximately $0.8 million on the outstanding principal of our Term Loan Credit Agreement.
In addition, we must make mandatory prepayments of principal under the Term Loan Credit Agreement upon the occurrence of certain specified events. Amounts repaid or prepaid cannot be reborrowed. However, we may add one or more incremental term loan facilities to the Term Loan Credit Agreement, subject to obtaining commitments from any participating lenders and certain other conditions, so long as our first lien secured leverage ratio does not exceed 2.00 to 1.00.
The ABL Credit Agreement includes a $250 million revolving loan commitment, subject to borrowing base limitations. Borrowings under the ABL Credit Agreement are subject to mandatory prepayment in certain circumstances. We may also increase commitments under the ABL Credit Agreement in an aggregate principal amount of up to $100 million, subject to obtaining commitments from any participating lenders and certain other conditions.
Our revolving credit facilitiesCredit Agreements contain various loan covenants that restrict our abilitycertain customary representations, warranties, and that of our 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, through September 30, 2018, the revolving credit facilities containedaffirmative and negative covenants. The ABL Credit Agreement also contains a financial covenants that requiredcovenant, which requires us to maintain a consolidated total leverage ratio in an amount not to exceed 4.50 to 1.00 in 2018, 4.25 to 1.00 in 2019, and 4.00 to 1.00 thereafter (subject to certain exceptions with respect to acquisitions in excess of an agreed threshold amount) and a consolidated interestfixed charge coverage ratio in an amountof not less than 1.751.10 to 1.00, through 2020 and 2.25 to 1.00 thereafter. provided that the financial covenant under the ABL Credit Agreement is only applicable when availability falls below a certain threshold.
As of
At September 30, 2018, our consolidated total leverage ratio for2019, we were in compliance with the most recent four quarters was 3.97 to 1.0Credit Agreements, and our consolidated interest coverage ratio was 2.56 to 1.0. Basedbased on our current financial projections, and also taking into account certain actions that are available to us to enhance our compliance with these covenants, we expect to remain in compliance with them.compliance. However, if our financial position, results of operations or market conditions deteriorate, we may not be able to remain in compliance. There can be no assurance that we will be able to remain in compliance with these covenants.our Credit
Agreements. If we are unable to do so, it would be necessary to seek amendments to the affected covenantsan amendment from our lenders, which, if obtained, could require payment of additional fees, increased interest rates or other conditions or restrictions.
On November 8, 2018, we entered into separate amendments (the “Amendments”) to our credit agreements, each dated as of October 31, 2016, one of which is with Wells Fargo Bank, National Association, as agent and the lenders party thereto (as amended, the "Commercial Credit Agreement"), and the other of which is with Northwest Farm Credit Services, PCA, as agent and the lenders party thereto (as amended, the "Farm Credit Agreement", and collectively with the Commercial Credit Agreement, the “Credit Agreements”). Pursuant to the Amendments, the interest rate margin, which may vary from quarter to quarter based upon grid pricing under the Credit Agreements determined in accordance with our consolidated leverage ratio, was increased (i) in the case of the Commercial Credit Agreement, by 0.50% per annum in the highest tier, (ii) in the case of the Farm Credit Agreement, by 0.50% in the second highest tier and by 0.75% per annum in the highest tier, and (iii) in the case of the commitment fee for unused availability under each of the Credit Agreements’ revolving credit facilities, by 0.05% per annum in the highest tier. In addition, the financial covenants in the Credit Agreements were modified to provide that going forward we will be required to 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, in lieu of being required to maintain a maximum consolidated leverage ratio which was in effect prior to the amendments;
minimum consolidated interest coverage ratio of 1.25 to 1.00; and
minimum consolidated asset coverage ratio of 1.00 to 1.00 which was not in effect prior to the Amendments.
See Note 8, "Debt""Debt," to the condensed notes to the consolidated financial statements included in this Reportreport for additional discussion of our revolving credit facilities.agreements.
OTHER FINANCING ARRANGEMENTS
To provide additional working capital, we have agreements with unrelated third-party financial institutions to sell certain trade receivables. For the nine months ended September 30, 2019, we sold $159.3 million of receivables. We also have 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. Refer to "Accounts Receivable Arrangements" and "Accounts Payable Arrangements" in Note 1, "Nature of Operations and Basis of Presentation", for further information.
CONTRACTUAL OBLIGATIONS
As of September 30, 2018,2019, except for the new Credit Agreements and the retirement of the Prior Credit Agreements, there were no significant changes to the contractual obligations table disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.2018. Refer to "Credit Agreements" in Note 8, "Debt", for further discussion.
OFF-BALANCE SHEET ARRANGEMENTS
We currently are not a party to off-balance sheet arrangements that would require disclosure under this section.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP requires our management to select and apply accounting policies that best provide the framework to report our results of operations and financial position. The selection and application of those policies requires management to make difficult, subjective and complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. As a result, it is possible that materially different amounts would be reported under different conditions or using different assumptions.
As of September 30, 2018,2019, there have been no significant changes with regard to the critical accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
See Note 2, "Recently Adopted and New Accounting Standards", to the Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information regarding recently adopted and new accounting pronouncements.
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ITEM 3. | |
Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
Our exposure to market risks on financial instruments includes interest rate risk on our secured revolving credit facilities. As of September 30, 2018,2019, there were $200.0$58.0 million in borrowings outstanding under our revolving credit facilities.ABL and $300 million under our Term Loan Credit Agreement. The interest rates applied to borrowings under the credit facilitiesCredit Agreements are adjusted often and therefore may 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$358.0 million, would have an approximate $2.0$3.6 million annual effect on interest expense. During the nine months ended September 30, 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 facilityfacilities' 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 our natural gas requirements for our manufacturing facilities. As of September 30, 2018,2019, these contracts covered approximately 29%47% of our expected average monthly natural gas requirements for the remainder of 2018,2019, and a lesser amount for 2019.2020.
Foreign Currency Risk
We have minimal foreign currency exchange risk. Nearly all of our international sales are denominated in U.S. dollars.
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ITEM 4. | |
Controls and Procedures |
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Material Weaknesses In Internal Control Over Financial Reporting
Subject to the limitations noted above, our management, with the participation of our CEO and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the third quarter of 2018.2019. Based on that evaluation, the CEO and CFO have concluded that, as of September 30, 2018,2019, our disclosure controls and procedures were not effective to meet the objective for which they were designed as a result of the material weaknesses in our internal control over financial reporting previously disclosed under Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, or Annual Report.
Remediation Efforts
The material weaknesses in our internal control over financial reporting, which are described more fully in our Annual Report, continued to exist as of September 30, 2019. We are actively engaged in implementing the remediation efforts described in the Annual Report which are designed to address these material weaknesses, and operatedsubsequent to the filing of our Annual Report we have implemented enhanced controls governing our sub-certifications and are in the process of hiring additional accounting personnel, implementing enhanced controls governing our risk management committee and our disclosure committee, and 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. While progress has been made, additional time is needed to fully implement and demonstrate the effectiveness of the remediation efforts. We are committed to operating effective controls, and management continues to regularly assess the progress and sufficiency of the ongoing initiatives and make adjustments as and when necessary.
Notwithstanding the identified material weaknesses, management has concluded that the consolidated financial statements included in this quarterly report on Form 10-Q fairly present in all material respects our financial position, results of operations and cash flows at and for the reasonable assurance level.periods presented in accordance with U.S. generally accepted accounting principles.
Changes in Internal Controls
ThereOther than the remediation efforts related to the material weaknesses described in our Annual Report, there was no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II
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ITEM 1. | |
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.
There are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 20172018. See Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20172018, entitled “Risk Factors.”
On November 8, 2018, we entered into separate amendments (the “Amendments”) to our credit agreements, each dated as of October 31, 2016, one of which is with Wells Fargo Bank, National Association, as agent and the lenders party thereto (as amended, the "Commercial Credit Agreement"), and the other of which is with Northwest Farm Credit Services, PCA, as agent and the lenders party thereto (as amended, the "Farm Credit Agreement", and collectively with the Commercial Credit Agreement, the “Credit Agreements”). Pursuant to the Amendments, the interest rate margin, which may vary from quarter to quarter based upon grid pricing under the Credit Agreements determined in accordance with our consolidated leverage ratio, was increased (i) in the case of the Commercial Credit Agreement, by 0.50% per annum in the highest tier, (ii) in the case of the Farm Credit Agreement, by 0.50% in the second highest tier and by 0.75% per annum in the highest tier, and (iii) in the case of the commitment fee for unused availability under each of the Credit Agreements’ revolving credit facilities, by 0.05% per annum in the highest tier. In addition, the financial covenants in the Credit Agreements were modified to provide that going forward we will be required to 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, in lieu of being required to maintain a maximum consolidated leverage ratio which was in effect prior to the amendments;
minimum consolidated interest coverage ratio of 1.25 to 1.00; and
minimum consolidated asset coverage ratio of 1.00 to 1.00 which was not in effect prior to the Amendments.
ITEM 6.
Exhibits
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EXHIBIT NUMBER | | DESCRIPTION |
10.1* | | |
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10.2* | | |
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(31) | | |
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(32)** | | |
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10(i) | |
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10(ii)
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101.INS | | XBRL Instance Document |
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101.SCH | | XBRL Taxonomy Extension Schema. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase. |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase. |
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* | Incorporated by reference. |
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** | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act. |
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1
| Management contract or compensatory plan, contract or arrangement. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | CLEARWATER PAPER CORPORATION |
| | | (Registrant) |
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November 9, 20185, 2019 | | By | /s/ JOHN D. HERTZROBERT G. HRIVNAK |
| | | | John D. HertzRobert G. Hrivnak |
| | | | Senior Vice President, Finance and |
| | | | Chief Financial Officer |
| | | | (Duly Authorized Officer; Principal |
| | | | Financial Officer) |
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November 9, 2018 | | By | /s/ ROBERT N. DAMMARELL |
| | | | Robert N. Dammarell |
| | | | Vice President, Corporate Controller |
| | | | (Duly Authorized Officer;Officer and Principal |
| | | | Accounting Officer) |
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