UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
ýQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended JuneSeptember 30, 2019
or
¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                     to                     
Commission File Number: 001-34146
CLEARWATER PAPER CORPORATION
(Exact name of registrant as specified in its charter)
   
Delaware 20-3594554
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
  
601 West Riverside, Suite 1100
Spokane, Washington
 99201
(Address of principal executive offices) (Zip Code)
(509) 344-5900
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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.
Large accelerated filer 
¨  

  Accelerated filer 
ý

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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.0001 per shareCLWNew York Stock Exchange
The number of shares of common stock of the registrant outstanding as of August 6,November 1, 2019 was 16,515,156.16,515,813.


CLEARWATER PAPER CORPORATION
Index to Form 10-Q
 
   
  
Page
Number
   
PART I. 
   
ITEM 1. 
  
  
  
  
  
  
78 - 2629
   
ITEM 2.
   
ITEM 3.
   
ITEM 4.
   
PART II. 
   
ITEM 1.
   
ITEM 1A.
   
ITEM 6.
  


Part I
ITEM 1. 
Consolidated Financial Statements
Clearwater Paper Corporation
Consolidated Statements of Operations
Unaudited (Dollars in thousands - except per-share amounts)
 
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, June 30,September 30, September 30,
2019 2018 2019 20182019 2018 2019 2018
Net sales$451,993
 $432,099
 $880,772
 $869,051
$445,188
 $426,460
 $1,325,960
 $1,295,511
Costs and expenses:              
Cost of sales(409,825) (387,154) (794,071) (779,587)(418,704) (376,221) (1,212,775) (1,155,808)
Selling, general and administrative expenses(26,827) (26,564) (56,998) (59,544)(28,944) (26,283) (85,942) (85,827)
Gain on divested assets, net
 22,944
 
 22,944
Total operating costs and expenses(436,652) (413,718) (851,069) (839,131)(447,648) (379,560) (1,298,717) (1,218,691)
Income from operations15,341
 18,381
 29,703
 29,920
(Loss) income from operations(2,460) 46,900
 27,243
 76,820
Interest expense, net(10,914) (7,723) (19,400) (15,743)(13,077) (7,547) (32,477) (23,290)
Debt retirement costs(2,725) 
 (2,725) 
Non-operating pension and other postretirement benefit costs(1,531) (1,187) (2,845) (2,466)(1,421) (1,234) (4,266) (3,700)
Earnings before income taxes2,896
 9,471
 7,458
 11,711
Income tax provision(3,320) (2,510) (4,045) (2,150)
(Loss) earnings before income taxes(19,683) 38,119
 (12,225) 49,830
Income tax benefit (provision)8,710
 (3,675) 4,665
 (5,825)
Net (loss) earnings$(424) $6,961
 $3,413
 $9,561
$(10,973) $34,444
 $(7,560) $44,005
Net (loss) earnings per common share:              
Basic$(0.03) $0.42
 $0.21
 $0.58
$(0.66) $2.09
 $(0.46) $2.67
Diluted(0.03) 0.42
 0.21
 0.58
(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)
 
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, June 30,September 30, September 30,
2019 2018 2019 20182019 2018 2019 2018
Net (loss) earnings$(424) $6,961
 $3,413
 $9,561
$(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 $475, $588, $917 and $1,2051,334
 1,644
 2,573
 3,372
Amortization of prior service credit included in net periodic cost, net of tax of $-, $(111), $- and $(221)
 (308) 
 (617)
Amortization of actuarial loss included in net periodic cost, net of tax of $459, $602, $1,376 and $1,8071,286
 1,687
 3,859
 5,059
Amortization of prior service credit included in net periodic cost, net of tax of $-, $(110), $- and $(331)
 (309) 
 (926)
Other comprehensive income, net of tax1,334
 1,336
 2,573
 2,755
1,286
 1,378
 3,859
 4,133
Comprehensive income$910
 $8,297
 $5,986
 $12,316
Comprehensive (loss) income$(9,687) $35,822
 $(3,701) $48,138
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)
 
June 30,
2019
 December 31,
2018
September 30,
2019
 December 31,
2018
ASSETS      
Current assets:      
Cash and cash equivalents$41,800
 $22,484
$7,815
 $22,484
Restricted cash1,440
 
1,440
 
Receivables, net169,972
 145,519
157,929
 145,519
Taxes receivable7,943
 6,301
6,721
 6,301
Inventories287,863
 266,244
282,395
 266,244
Other current assets10,118
 3,399
7,960
 3,399
Total current assets519,136
 443,947
464,260
 443,947
Property, plant and equipment, net1,293,694
 1,269,271
1,273,474
 1,269,271
Operating lease right-of-use assets75,338
 
74,503
 
Goodwill35,074
 35,074
35,074
 35,074
Intangible assets, net20,510
 24,080
18,725
 24,080
Other assets, net12,095
 15,746
15,041
 15,746
TOTAL ASSETS$1,955,847
 $1,788,118
$1,881,077
 $1,788,118
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Current liabilities:      
Short-term debt$235,000
 $120,833
$58,000
 $120,833
Accounts payable and accrued liabilities301,294
 321,032
229,563
 321,032
Current liability for pensions and other postretirement employee benefits7,430
 7,430
Current liability for pension and other postretirement employee benefits7,430
 7,430
Total current liabilities543,724
 449,295
294,993
 449,295
Long-term debt671,676
 671,292
866,702
 671,292
Operating lease liabilities70,194
 
66,571
 
Liability for pensions and other postretirement employee benefits74,903
 78,191
Liability for pension and other postretirement employee benefits73,738
 78,191
Other long-term obligations33,498
 38,977
33,990
 38,977
Accrued taxes2,257
 2,785
3,070
 2,785
Deferred tax liabilities125,230
 121,182
116,868
 121,182
TOTAL LIABILITIES1,521,482
 1,361,722
1,455,932
 1,361,722
Commitments and contingent liabilities
 
Stockholders’ equity:      
Preferred stock, par value $0.0001 per share, 5,000,000 authorized shares,
no shares issued

 

 
Common stock, par value $0.0001 per share, 100,000,000 authorized shares
-16,515,156 and 16,482,345 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
Additional paid-in capital8,386
 6,403
8,853
 6,403
Retained earnings490,752
 487,339
479,779
 487,339
Accumulated other comprehensive loss, net of tax(64,775) (67,348)(63,489) (67,348)
TOTAL STOCKHOLDERS' EQUITY434,365
 426,396
425,145
 426,396
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,955,847
 $1,788,118
$1,881,077
 $1,788,118
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)
Six Months EndedNine Months Ended
June 30,September 30,
2019 20182019 2018
CASH FLOWS FROM OPERATING ACTIVITIES      
Net earnings$3,413
 $9,561
Adjustments to reconcile net earnings to net cash flows from operating activities:   
Net (loss) earnings$(7,560) $44,005
Adjustments to reconcile net (loss) earnings to net cash flows from operating activities:   
Depreciation and amortization54,353
 50,344
86,343
 75,686
Equity-based compensation expense2,070
 343
2,959
 2,845
Deferred taxes5,180
 2,649
(6,023) 3,930
Deferred issuance costs on debt938
 716
Employee benefit plans1,006
 102
Amortization of deferred issuance costs on debt1,452
 943
Loss on retirement of debt2,725
 
Gain on divested assets
 (25,510)
Other non-cash activity, net(792) 410
724
 84
Changes in working capital, net(50,146) 36,317
(98,266) 7,402
Changes in taxes receivable(1,642) 11,498
(420) 13,534
Changes in non-current accrued taxes(528) 346
Other, net1,876
 (1,296)825
 (1,922)
Net cash flows from operating activities14,722
 110,888
(16,235) 121,099
CASH FLOWS FROM INVESTING ACTIVITIES      
Additions to property, plant and equipment(108,419) (78,600)(125,794) (174,034)
Net proceeds from divested assets
 70,930
Other, net4
 807
14
 807
Net cash flows from investing activities(108,415) (77,793)(125,780) (102,297)
CASH FLOWS FROM FINANCING ACTIVITIES      
Borrowings on long-term debt296,146
 
Repayments of borrowings on long-term debt(101,671) 
Borrowings on short-term debt436,927
 124,063
534,877
 322,454
Repayments of borrowings on short-term debt(322,760) (119,063)(598,715) (277,454)
Payments for debt issuance costs(1,844) 
Other, net(1,147) (543)(1,430) (853)
Net cash flows from financing activities113,020
 4,457
127,363
 44,147
Increase in cash, cash equivalents and restricted cash19,327
 37,552
(Decrease) increase in cash, cash equivalents and restricted cash(14,652) 62,949
Cash, cash equivalents and restricted cash at beginning of period24,947
 16,738
24,947
 16,738
Cash, cash equivalents and restricted cash at end of period$44,274
 $54,290
$10,295
 $79,687
      
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION      
Cash paid for interest, net of amounts capitalized$16,427
 $14,294
$38,789
 $27,449
Cash paid for income taxes1,918
 1,517
2,202
 1,665
Cash received from income tax refunds233
 13,281
238
 13,483
(Decrease) increase in accrued property, plant and equipment(38,429) 88,859
(46,454) 78,465
The accompanying condensed notes are an integral part of these consolidated financial statements.


CLEARWATER PAPER CORPORATION
Consolidated Statements of Stockholders’ Equity
Unaudited (In thousands)
 
 Common Stock Additional Paid-In Capital 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders'
Equity
 Common Stock Additional Paid-In Capital 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders'
Equity
 Shares Amount  Shares Amount 
Balance at December 31, 2017 16,448
 $2
 $1,161
 $618,254
 $(43,983) $575,434
 16,448
 $2
 $1,161
 $618,254
 $(43,983) $575,434
Net earnings 
 
 
 2,600
 
 2,600
 
 
 
 2,600
 
 2,600
Performance share, restricted stock unit, and stock option awards 13
 
 1,267
 
 
 1,267
 13
 
 1,267
 
 
 1,267
Reclassification of the income tax effects of the Tax Cuts and Jobs Act 
 
 
 12,852
 (12,852) 
 
 
 
 12,852
 (12,852) 
Pension and other postretirement employee benefit plans, net
of tax of $507
 
 
 
 
 1,419
 1,419
 
 
 
 
 1,419
 1,419
Balance at March 31, 2018 16,461
 $2
 $2,428
 $633,706
 $(55,416) $580,720
 16,461
 $2
 $2,428
 $633,706
 $(55,416) $580,720
Net earnings 
 
 
 6,961
 
 6,961
 
 
 
 6,961
 
 6,961
Performance share, restricted stock unit, and stock option awards 
 
 1,552
 
   1,552
 
 
 1,552
 
   1,552
Pension and other postretirement employee benefit plans, net
of tax of $477
 
 
   
 1,336
 1,336
 
 
   
 1,336
 1,336
Balance at June 30, 2018 16,461
 2
 $3,980
 $640,667
 $(54,080) $590,569
 16,461
 $2
 $3,980
 $640,667
 $(54,080) $590,569
            
Balance at December 31, 2018 16,482
 $2
 $6,403
 $487,339
 $(67,348) $426,396
Net earnings 
 
 
 3,837
 
 3,837
 
 
 
 34,444
 
 34,444
Performance share, restricted stock unit, and stock option awards 33
 
 772
 
 
 772
 
 
 1,734
 
   1,734
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
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)

  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.
FINANCIAL STATEMENT PREPARATION AND PRESENTATION
The accompanying Consolidated Balance Sheets at JuneSeptember 30, 2019 and December 31, 2018, and the related Consolidated Statements of Operations, Comprehensive Income and Stockholders' Equity for the three and sixnine months ended JuneSeptember 30, 2019 and 2018, and Consolidated Statements of Cash Flows for the sixnine months ended JuneSeptember 30, 2019 and 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, 2018, as filed with the Securities and Exchange Commission, or SEC, on 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 and goodwill, 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 Consolidated Balance Sheets that sum to the total of those same amounts shown in ourand Consolidated Statements of Cash Flows.
(In thousands)June 30, 2019 June 30, 2018September 30, 2019 December 31, 2018 September 30, 2018
Cash and cash equivalents$41,800
 $53,278
$7,815
 $22,484
 $76,150
Restricted cash1,440
 
1,440
 
 1,080
Restricted cash included in other assets, net1,034
 1,012
1,040
 2,463
 2,457
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows$44,274
 $54,290
$10,295
 $24,947
 $79,687


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 $1,741.3 million and $1,691.7 million at June 30, 2019 and December 31, 2018, respectively.
For the sixnine months ended JuneSeptember 30, 2019, we capitalized $4.9 million of interest expense associated with the construction of a paper machine at our Shelby, North Carolina consumer products facility and $0.5$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 sixnine months ended JuneSeptember 30, 2018, we capitalized $2.6$5.1 million of interest expense associated with the Shelby paper machine and $0.6$0.9 million of interest expense associated with the continuous pulp digester project.
We 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. 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 JuneSeptember 30, 2019 and December 31, 2018, we had allowances for doubtful accounts of $1.6$1.4 million and $1.5 million, respectively.


Refer to Note 14, "Segment Information," for further information, including the disaggregation of revenue by segment, primary geographical market, and major product type.
ACCOUNT PURCHASE AGREEMENTACCOUNTS RECEIVABLE ARRANGEMENTS
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 $30.0 million.
outstanding being serviced by us. For the sixnine months ended JuneSeptember 30, 2019, $87.3we sold $159.3 million of receivables were sold under the Account Purchase Agreement. As of June 30, 2019, $9.3 million of accounts receivable sold under the Asset Purchase Agreement were outstanding.receivables. The proceeds from these sales of receivables are included within the "Changes in working capital, net" line in thewithin operating activities section of our Consolidated Statements of Cash Flows. For the sixnine months ended JuneSeptember 30, 2019, we recorded factoring expense on salesthe sale of receivables of $0.3was $0.7 million, which is included in the "Interest expense, net" line in the Consolidated Statement of Operations. For the nine months ended September 30, 2018, factoring expense was $0.1 million.
We have no retained interest in the receivables sold under the Account Purchase Agreement, however, we do have servicing responsibilities for the sold receivables. The fair value of the servicing arrangement was not material to the financial statements. As of June 30, 2019 and December 31, 2018, we had collected $16.9 million and $4.9 million of cash, respectively, from customers that had not yet been remitted to the third-party financial institution.
Subsequent to June 30, 2019, during the third quarter of 2019, we entered into an arrangement with an unrelated third party financial intermediary to sell receivables associated with a large customer to the financial intermediary in order to receive advance cash for payment of these receivables at a discounted rate.
SUPPLY-CHAIN FINANCINGACCOUNTS PAYABLE ARRANGEMENTS
We have entered into supply-chain financing programs with financial intermediaries, which provide certain of our vendors the option to be paid by the financial intermediaries on our trade payables earlier than the due date on the applicable invoice. When a vendor receives an early payment from a financial intermediary on a trade payable for which it invoiced us, for from a financial intermediary, we pay that financial intermediary the face amount of the invoice on the regularly scheduled due date. 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 termshort-term debt. As of December 31, 2018, $20.8 million was included in “Short-term debt” on our Consolidated Balance Sheets related to invoices for which we had reimbursed our vendors’ fees. There were no such amounts as of JuneSeptember 30, 2019.
DERIVATIVES
We had no activity during the three and sixnine months ended JuneSeptember 30, 2019 and 2018 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 JuneSeptember 30, 2019, these contracts covered approximately 35%47% of our expected average monthly natural gas requirements for the remainder of 2019. Historically, these2019, and a lesser amount for 2020. 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
On January 1, 2019, 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 balance sheet and disclosing key information about leasing arrangements. The adoption of Topic 842 had a material impact on our Consolidated Balance Sheet due to the recognition of right-of-use assets of $82.5approximately $83 million and lease liabilities of $87.7approximately $88 million respectively, as of January 1, 2019. The difference between these lease assets and lease liabilities represents existing deferred rent balances that were reclassified on the balance sheet. The adoption of Topic 842 did not have a material impact on our Consolidated Statement of Operations or our Consolidated Statement of Cash Flows. We will continue to report periods prior to January 1, 2019 under prior guidance as outlined in Accounting Standards Codification Topic 840, "Leases.Leases". Refer to Note 4, "Leases,""Leases", for further discussion.
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. This ASU is 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 do not believe it will have a material impact on our consolidated financial statements beyond updating footnote disclosures.
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 supplies93,965
 86,892
Logs, pulpwood, chips and sawdust22,367
 19,853
 $282,395
 $266,244

Property, Plant and Equipment at the balance sheet dates consist of:
(In thousands)June 30, 2019 December 31, 2018
Pulp, paperboard and tissue products$175,566
 $159,499
Materials and supplies91,801
 86,892
Logs, pulpwood, chips and sawdust20,496
 19,853
 $287,863
 $266,244
(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, and weas 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. Lease ROU assets and liabilities are measured based on the present value of lease payments over the lease term. The lease ROU asset also includesterm and are reduced by any lease payments made and excludes any lease incentives.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 JuneSeptember 30, 2019, we didour short-term leases were not have any short-term leases.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 sixthree and nine months ended JuneSeptember 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, JuneSeptember 30, 2019. As noted above, we adopted Topic 842 using a transition method that does not require application to periods prior to adoption.

LEASE EXPENSE
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
(In thousands)June 30, 2019September 30, 2019
      
Operating lease costs$3,529
 $7,009
$4,062
 $11,071
      
Finance lease costs:      
Amortization of right-of-use assets463
 878
395
 1,273
Interest on lease liabilities467
 939
466
 1,405
Total finance lease costs930
 1,817
861
 2,678
      
Variable lease costs337
 556
290
 846
      
Total lease costs$4,796
 $9,382
$5,213
 $14,595



SUPPLEMENTAL CASH FLOW INFORMATION
Six Months EndedNine Months Ended
(In thousands)June 30, 2019September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:  
Operating cash flows from operating leases$8,074
$12,635
Operating cash flows from finance leases939
1,405
Financing cash flows from finance leases592
1,023
  
Non-cash amounts for lease liabilities arising from obtaining right-of-use assets:  
Operating leases$937
$973
Finance leases493
493

SUPPLEMENTAL BALANCE SHEET INFORMATION
(In thousands)ClassificationJune 30, 2019ClassificationSeptember 30, 2019
Lease ROU Assets    
Operating lease assetsOperating lease right-of-use assets$75,338
Operating lease right-of-use assets$74,503
Finance lease assetsProperty, plant and equipment, net16,740
Property, plant and equipment, net15,837
Total lease ROU assets $92,078
 $90,340
    
Lease Liabilities    
Current operating lease liabilitiesAccounts payable and accrued liabilities$12,396
Accounts payable and accrued liabilities$13,200
Current finance lease liabilitiesAccounts payable and accrued liabilities1,381
Accounts payable and accrued liabilities1,398
Total current lease liabilities 13,777
 14,598
    
Non-current operating lease liabilitiesOperating lease liabilities70,194
Operating lease liabilities66,571
Non-current finance lease liabilitiesOther long-term obligations21,376
Other long-term obligations20,929
Total non-current lease liabilities 91,570
 87,500
   

Total operating lease liabilities 79,771
Total finance lease liabilities 22,327
Total lease liabilities $105,347
 $102,098

LEASE TERM AND DISCOUNT RATE
 JuneSeptember 30, 2019
Weighted average remaining lease term (years) 
Operating leases7.26.9
Finance leases11.010.9
  
Weighted average discount rate 
Operating leases4.9%
Finance leases8.3%





MATURITY OF LEASE LIABILITIES

As of JuneSeptember 30, 2019, our future maturities of lease liabilities were as follows:
(In thousands)Operating FinanceOperating Finance
2019$7,979
 $1,669
$3,964
 $774
202016,221
 3,175
16,727
 3,175
202115,513
 3,220
16,019
 3,220
202214,575
 3,128
15,081
 3,128
20239,590
 2,897
9,413
 2,897
Thereafter34,639
 21,468
33,661
 21,468
Total lease payments$98,517
 $35,557
$94,865
 $34,662
Less interest portion(15,927) (12,800)(15,094) (12,335)
Total$82,590
 $22,757
$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
202011,421
 3,062
202110,424
 3,112
20229,489
 3,019
20237,163
 2,789
Thereafter24,276
 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
Intangible assets at the balance sheet dates comprise the following:
June 30, 2019September 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 relationships9.4 $56,453
 $(38,487) $17,966
9.4 $56,453
 $(39,995) $16,458
Trade names and trademarks7.4 6,786
 (4,543) 2,243
7.4 6,786
 (4,800) 1,986
Other intangibles6.0 572
 (271) 301
6.0 572
 (291) 281
 $63,811
 $(43,301) $20,510
 $63,811
 $(45,086) $18,725
            
December 31, 2018December 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 relationships9.4 $56,453
 $(35,469) $20,984
9.4 $56,453
 $(35,469) $20,984
Trade names and trademarks7.4 6,786
 (4,029) 2,757
7.4 6,786
 (4,029) 2,757
Other intangibles6.0 572
 (233) 339
6.0 572
 (233) 339
 $63,811
 $(39,731) $24,080
 $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 JuneSeptember 30, 2019 and 2018, intangible assets amortization expense was $1.8 million and $2.0$1.9 million, respectively. For the sixnine months ended JuneSeptember 30, 2019 and 2018, intangible assets amortization expense was $3.6$5.4 million and $3.9$5.8 million, respectively.
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 secondthird quarter of 2019 is approximately 59%34%, compared with approximately 26%32% for the comparable interim period in 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 in 2018 reflected the Federal rate reduction enacted by the Tax effected itemsCuts and Jobs Act offset by an increase in the second quarterrate due to basis differences associated with the goodwill written-off as part of 2019 have a greater impact on a percentage basisthe sale of our $2.9 million of earnings before taxes compared to $9.5 million in pre-tax earnings in the second quarter of 2018.

Ladysmith facility.
NOTE 7 Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at the balance sheet dates consist of:
(In thousands)June 30, 2019 December 31, 2018September 30, 2019 December 31, 2018
Trade accounts payable$183,663
 $228,059
$141,458
 $228,059
Accrued wages, salaries and employee benefits37,275
 41,426
37,395
 41,426
Accrued account purchase agreement liabilities16,889
 4,885
Accrued interest15,824
 14,672
Lease liabilities13,777
 
14,598
 
Accrued taxes other than income taxes payable10,723
 6,243
7,037
 6,243
Accrued utilities6,707
 6,934
Accrued discounts and allowances7,458
 8,143
6,502
 8,143
Accrued utilities6,923
 6,934
Accrued interest5,322
 14,672
Accrued account purchase agreement liabilities
 4,885
Other8,762
 10,670
10,544
 10,670
$301,294
 $321,032
$229,563
 $321,032
NOTE 8 Debt
CREDIT ARRANGEMENTSAGREEMENTS
As of June 30, 2019, there was an aggregate of $335.0 million in borrowings outstanding under our revolving credit facilities and $7.8 million of the credit facilities was being used to support outstanding standby letters of credit. As of December 31, 2018, there was an aggregate of $200.0 million in borrowings outstanding under the credit facilities. Our borrowings outstanding under the revolving credit facilities as of June 30, 2019 consisted of $235.0 million of short-term base and LIBOR rate loans classified as current liabilities that are included in "Short-term debt" in our Consolidated Balance Sheet and $100.0 million of fixed rate, three-year borrowings classified as a non-current liability that are included in "Long-term debt" in our Consolidated Balance Sheet. As of June 30, 2019, we would have been permitted to draw an additional $57.2 million under the credit facilities.

Following the end of the quarter, onOn July 26, 2019, we entered into (a) a Term Loan Credit Agreementcredit agreements with the several lenders from time to time parties thereto and JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, which included (a) a $300 million Term Loan Credit Agreement (the “Term Loan Credit Agreement”), and (b) ana $250 million asset based lending, or ABL, Credit Agreement with(the "Term Loan Credit Agreement" and "ABL Credit Agreement" collectively the several lenders from time to time parties thereto and JPMorgan, as administrative agent (the “ABL Credit Agreement” and, together with"Credit Agreements"). At closing, the Term Loan Credit Agreement the “Credit Agreements”). The Term Loan Credit Agreement includes a $300 million term loan commitment, which was fully advanced at closing. Theand $58.0 million was


drawn under the ABL Credit Agreement, includes a $250 million revolving loan commitment, subject to borrowing base limitations based on a percentage of applicable eligible receivables and eligible inventory,proceeds of which $58.0were used to refinance and terminate our: (a) $200 million credit agreement dated October 31, 2016, as amended, with Wells Fargo Bank, National Association, ("Wells Fargo") as administrative agent, and the lenders party thereto, of which $135.0 million was advanced at closing. The proceeds fromoutstanding and b) the closing date borrowings under$200 million credit agreement dated October 31, 2016, as amended, with Northwest Farm Credit Services, PCA, ("Farm Credit") as administrative agent, and the lenders party thereto, of which $200.0 million was outstanding (the "Prior Credit Agreements were used by us to refinance our existing credit facilities, toAgreements"); pay fees and expenses in connection with the Credit Agreements,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 term loanborrowings 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, and the ABL Credit Agreement terminates on July 26, 2024.

Subject to certain customary exceptions, the obligations under each of the Credit Agreements are, or will be, guaranteed by each of our existing and future, direct or indirect, domestic subsidiaries. Our obligations under each Credit Agreement are secured by liens on substantially all of our assets and the assets of each of our domestic subsidiaries that are guarantors under the Credit Agreements.

2026. We may, at our option, prepay any borrowings under the Term Loan Credit Agreement, in whole or in part, at any time and from time to time without premium or penalty (except in certain circumstances). Pursuant to the Term Loan Credit Agreement, we are required to repay the aggregate outstanding principal amount of the borrowings under the Term Loan Credit Agreement 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 maturity date, in an aggregate amount for each such date equal to the 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.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 50% to 0% 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 Agreement. 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 whole 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 pro forma first lien secured leverage ratio would 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 LIBOR loans and of 2.00% per annum in the 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 case of annual base rate loans. At September 30, 2019, our applicable margin on LIBOR loans was 3.25%.
ABL Credit Agreement
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.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 event 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, by obtaining additional commitments from lenders, subject to obtaining commitments from any participating lenders and certain other conditions.


Under the ABL Credit Agreement, loans generally 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 case of annual base rate loans. In addition, a commitment fee based on unused availability is also payable which may vary from 0.25% per annum to 0.375% per annum.

We may, atFrom July 26, 2019 through September 30, 2019, our option, prepay any borrowings under the ABL Credit Agreement, in whole or in part, at any time and from timeweighted average interest rate was 3.8%. At September 30, 2019, we were able 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 event that borrowings exceedborrow with an applicable borrowing base limits.
The Credit Agreements contain certain customary representations, warranties, and affirmative and negative covenantsmargin of us1.25% on LIBOR loans 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. commitment fee rate was 0.375%.
The ABL Credit Agreement also contains a financial covenant, which requires us to maintain a consolidated fixed charge coverage ratio of not less than 1.10 to 1.00, provided that the financial covenant under the ABL Credit Agreement is only applicable when availability falls below a certain threshold. The obligations under the Credit Agreements may be accelerated or the commitments terminated upon the occurrence of events of default under the Credit Agreements, which include payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, cross defaults to other material indebtedness, defaults arising in connection with changes in control, and other customary events of default.



NOTE 9 Other Long-Term Obligations
Other long-term obligations at the balance sheet dates consist of: 
(In thousands)June 30, 2019 December 31, 2018September 30, 2019 December 31, 2018
Finance lease obligations, net of current portion$21,376
 $21,589
$20,929
 $21,589
Deferred compensation4,471
 2,585
Deferred proceeds4,189
 4,511
3,955
 4,511
Deferred compensation4,005
 2,585
Other3,928
 10,292
4,635
 10,292
$33,498
 $38,977
$33,990
 $38,977
NOTE 10 Pension and Other Postretirement Employee Benefit Plans
The following table details the components of net periodic cost of our company-sponsored pension and 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 cost3,110
 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 June 30,Nine Months Ended September 30,
(In thousands)2019 2018 2019 20182019 2018 2019 2018
Pension Benefit Plans 
Other Postretirement
Employee  Benefit Plans
Pension Benefit Plans 
Other Postretirement
Employee  Benefit Plans
Service cost$669
 $461
 $20
 $20
$1,828
 $1,342
 $68
 $102
Interest cost3,102
 3,010
 752
 611
9,333
 9,015
 2,099
 1,827
Expected return on plan assets(4,132) (4,247) 
 
(12,401) (12,751) 
 
Amortization of prior service cost (credit)
 
 
 (419)
Amortization of prior service credit
 
 
 (1,257)
Amortization of actuarial loss (gain)1,776
 2,458
 33
 (226)5,529
 7,543
 (294) (677)
Net periodic cost (benefit)$1,415
 $1,682
 $805
 $(14)$4,289
 $5,149
 $1,873
 $(5)
 Six Months Ended June 30,
(In thousands)2019 2018 2019 2018
 Pension Benefit Plans 
Other Postretirement
Employee  Benefit Plans
Service cost$1,219
 $895
 $45
 $68
Interest cost6,223
 6,010
 1,399
 1,218
Expected return on plan assets(8,267) (8,501) 
 
Amortization of prior service cost (credit)
 
 
 (838)
Amortization of actuarial loss (gain)3,685
 5,028
 (195) (451)
Net periodic cost (benefit)$2,860
 $3,432
 $1,249
 $(3)
During the sixnine months ended JuneSeptember 30, 2019 and 2018, we made no contributions to our qualified pension plans. We do not expect, nor are we required, to make contributions in 2019.
During the sixnine months ended JuneSeptember 30, 2019, we made contributions of $0.2$0.3 million to our company-sponsored non-qualified pension plan. We estimate contributions will total $0.4 million in 2019. We do not anticipate funding our OPEB plans in 2019 except to pay benefit costs as incurred during the year by plan participants.
During each

We record the service component of net periodic cost (benefit) as part of "Cost of sales" and "Selling, general, and administrative expenses," while the three months ended June 30, 2019 and 2018,non-service components of net periodic cost (benefit) are recorded to "Non-operating pension and OPEB changes in accumulated other comprehensive loss, net of tax, inpostretirement benefit costs (income)" on our Consolidated Balance Sheets totaled $1.3 million. During the six months ended June 30, 2019 and 2018, pension and OPEB changes in accumulated other comprehensive loss, net of tax, in our Consolidated Balance Sheets totaled $2.6 million and $2.8 million, respectively. Refer to the Consolidated Statements of Stockholders' Equity for additional information.Operations.


NOTE 11 Earnings per Share
Basic (loss) earnings per share areis based on the weighted-average number of shares of common stock outstanding. Diluted earnings per share areis based upon the weighted-average number of shares of common stock outstanding plus all potentially dilutive securities that were assumed to be converted into common shares at the beginning of the period under the treasury stock method. This method requires 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 June 30, Six Months Ended June 30,Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 20182019 2018 2019 2018
Basic weighted-average common shares outstanding1
16,538,501
 16,486,935
 16,527,448
 16,491,366
16,538,569
 16,486,935
 16,531,195
 16,492,843
Incremental shares due to:              
Restricted stock units
 20,970
 16,570
 29,530

 22,461
 
 27,893
Performance shares
 47,266
 7,569
 52,051

 54,253
 
 52,508
Stock options
 
 
 90

 
 
 60
Diluted weighted-average common shares outstanding16,538,501
 16,555,171
 16,551,587
 16,573,037
16,538,569
 16,563,649
 16,531,195
 16,573,304
              
Basic net (loss) earnings per common share$(0.03) $0.42
 $0.21
 $0.58
$(0.66) $2.09
 $(0.46) $2.67
Diluted net (loss) earnings per common share(0.03) 0.42
 0.21
 0.58
(0.66) 2.08
 (0.46) 2.66
              
Anti-dilutive shares excluded from calculation1,104,277
 1,029,983
 1,018,641
 912,863
1,060,643
 985,312
 1,040,544
 935,037
1 
Basic weighted-average common shares outstanding includes restricted stock unit awards that are fully vested, but are deferred for future issuance.
NOTE 12 Equity-Based Compensation
We recognize equity-based compensation expense for all equity-based payment awards made to employees and directors, including restricted stock units, 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 June 30, Six Months Ended June 30,Three Months Ended September 30, Nine Months Ended September 30,
(In thousands)2019 2018 2019 20182019 2018 2019 2018
Restricted stock units$679
 $582
 $1,181
 $1,004
$794
 $595
 $1,975
 $1,599
Performance shares184
 377
 518
 910
(682) 499
 (164) 1,409
Stock options348
 593
 690
 1,128
357
 639
 1,047
 1,767
Total employee equity-based compensation expense$1,211
 $1,552
 $2,389
 $3,042
$469
 $1,733
 $2,858
 $4,775
As provided in the Clearwater Paper Corporation 2017 Stock Incentive Plan, the performance measure used to determine the number of performance shares ultimately issuable for performance shares granted in 2019 is a free cash flow performance measure for 70% of the performance share awards. For the remaining 30% of the grants, a return on invested capital 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 sixnine months ofended September 30, 2019, 47,26447,504 RSUs were settled and distributed. After adjusting for minimum tax withholdings, a net 32,81132,992 shares were issued. In connection with the issued RSUs, the minimum tax withholding payments made during the sixnine months ended JuneSeptember 30, 2019 totaled $0.4 million.
During the sixnine months ended JuneSeptember 30, 2019, we had 71,50375,223 stock option awards expiredexpire with a weighted-average exercise price of $51.95.$51.69. At JuneSeptember 30, 2019, we had 519,158515,438 stock option awards that were exercisable with a weighted-average exercise price of $51.15.


$51.19.
The following table summarizes the number of share-based awards granted under the Clearwater Paper Corporation 2017 Stock Incentive Plan during the sixnine months ended JuneSeptember 30, 2019 and the grant-date fair value of the awards: 
Six Months EndedNine Months Ended
June 30, 2019September 30, 2019
Number of
Shares Subject to Award
 Weighted-Average Fair
Value of Award Per Share
Number of
Shares Subject to Award
 Weighted-Average Fair
Value of Award Per Share
Restricted stock units133,533
 $26.79
137,037
 $26.61
Performance shares151,664
 26.60
151,664
 26.60
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 $0.1$0.4 million and benefit of $2.0$0.8 million for the three months ended JuneSeptember 30, 2019 and 2018, respectively. For the sixnine months ended JuneSeptember 30, 2019 and 2018, we recorded director equity-based compensation expense of $0.1 million and a benefit of $0.3 million and $2.7$1.9 million, respectively.
As of JuneSeptember 30, 2019, the liability amounts associated with director equity-based compensation included in "Other long-term obligations" on the accompanying Consolidated Balance Sheet were $1.8$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" totaled $0.8 million and $1.3 million, respectively.
NOTE 13 Fair Value Measurements
The estimated fair values of our financial instruments at the dates presented below are as follows: 
June 30, December 31,September 30, December 31,
2019 20182019 2018
Carrying Fair Carrying FairCarrying Fair Carrying Fair
(In thousands)Amount Value Amount ValueAmount Value Amount Value
Cash, cash equivalents and restricted cash (Level 1)$44,274
 $44,274
 $24,947
 $24,947
$10,295
 $10,295
 $24,947
 $24,947
Short-term borrowings under revolving credit facilities (Level 2)235,000
 234,995
 100,000
 99,909
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

 
 20,833
 20,833
Long-term debt (Level 2)675,000
 635,244
 675,000
 612,546
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 facilities,agreements, 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.
NOTE 14 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 June 30, Six Months Ended June 30,September 30, September 30,
(In thousands)2019 2018 2019 20182019 2018 2019 2018
Segment net sales:              
Consumer Products$224,340
 $221,585
 $447,676
 $460,427
$228,544
 $211,642
 $676,220
 $672,069
Pulp and Paperboard227,653
 210,514
 433,096
 408,624
216,644
 214,818
 649,740
 623,442
Total segment net sales$451,993
 $432,099
 $880,772
 $869,051
$445,188
 $426,460
 $1,325,960
 $1,295,511
              
Earnings (loss) before income taxes:              
Consumer Products1
$(5,133) $(3,604) $(3,862) $(1,975)$(4,438) $(1,269) $(8,300) $(3,244)
Gain on divested assets
 22,944
 
 22,944
Pulp and Paperboard1
33,587
 34,192
 62,975
 60,346
17,098
 38,280
 80,073
 98,626
28,454
 30,588
 59,113
 58,371
12,660
 59,955
 71,773
 118,326
Corporate1
(13,113) (12,207) (29,410) (28,451)(15,120) (13,055) (44,530) (41,506)
Income from operations15,341
 18,381
 29,703
 29,920
(Loss) income from operations(2,460) 46,900
 27,243
 76,820
Interest expense, net(10,914) (7,723) (19,400) (15,743)(13,077) (7,547) (32,477) (23,290)
Debt retirement costs(2,725) 
 (2,725) 
Non-operating pension and other postretirement benefit costs(1,531) (1,187) (2,845) (2,466)(1,421) (1,234) (4,266) (3,700)
Earnings before income taxes$2,896
 $9,471
 $7,458
 $11,711
(Loss) earnings before income taxes$(19,683) $38,119
 $(12,225) $49,830
              
Depreciation and amortization:              
Consumer Products$17,431
 $14,220
 $32,202
 $28,517
$19,025
 $14,447
 $51,227
 $42,964
Pulp and Paperboard9,491
 9,361
 18,976
 18,790
11,168
 9,316
 30,144
 28,106
Corporate1,595
 1,596
 3,175
 3,037
1,797
 1,579
 4,972
 4,616
Total depreciation and amortization$28,517
 $25,177
 $54,353
 $50,344
$31,990
 $25,342
 $86,343
 $75,686

1 
Income (loss) from operations for the Consumer Products, Pulp and Paperboard and Corporate segments for the threenine months ended June 30, 2018 include $0.2 million, $0.1 million and $0.8 million, respectively, of expenses associated with our selling, general, and administrative cost control measures. Income (loss) from operations for the Consumer Products, Pulp and Paperboard and Corporate segments for the six months ended JuneSeptember 30, 2018 include $1.7 million, $0.4$0.5 million and $4.1$4.2 million, respectively, of expenses associated with our selling, general and administrative cost control measures.     


For the sixnine months ended JuneSeptember 30, 2019, no customer accounted for more than 10% of our total company net sales. For the sixnine months ended JuneSeptember 30, 2018, one customer in our Consumer Products segment, the Kroger Company, accounted for approximately 13.4%11.9% 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 June 30, Six Months Ended June 30,September 30, September 30,
(In thousands)2019 2018 2019 20182019 2018 2019 2018
Primary geographical markets:              
United States$431,432
 $412,231
 $846,201
 $833,051
$424,743
 $404,593
 $1,270,944
 $1,237,644
Other countries20,561
 19,868
 34,571
 36,000
20,445
 21,867
 55,016
 57,867
Total net sales$451,993
 $432,099
 $880,772
 $869,051
$445,188
 $426,460
 $1,325,960
 $1,295,511
              
Major products:              
Paperboard$226,170
 $210,514
 $429,195
 $408,624
$215,370
 $214,818
 $644,565
 $623,442
Retail tissue210,514
 197,767
 415,099
 417,609
215,255
 183,948
 630,354
 601,557
Non-retail tissue12,263
 23,765
 30,732
 40,724
12,421
 27,624
 43,153
 68,348
Other3,046
 53
 5,746
 2,094
2,142
 70
 7,888
 2,164
Total net sales$451,993
 $432,099
 $880,772
 $869,051
$445,188
 $426,460
 $1,325,960
 $1,295,511



NOTE 15 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 JuneSeptember 30, 2019
(In thousands)Issuer Guarantor
Subsidiaries
 Eliminations TotalIssuer Guarantor
Subsidiaries
 Eliminations Total
Net sales$421,457
 $67,685
 $(37,149) $451,993
$416,293
 $67,869
 $(38,974) $445,188
Costs and expenses:              
Cost of sales(385,788) (61,325) 37,288
 (409,825)(396,794) (60,240) 38,330
 (418,704)
Selling, general and administrative expenses(21,078) (5,749) 
 (26,827)(24,255) (4,689) 
 (28,944)
Total operating costs and expenses(406,866) (67,074) 37,288
 (436,652)(421,049) (64,929) 38,330
 (447,648)
Income from operations14,591
 611
 139
 15,341
(Loss) income from operations(4,756) 2,940
 (644) (2,460)
Interest expense, net(10,877) (37) 
 (10,914)(13,076) (1) 
 (13,077)
Debt retirement costs(2,725) 
 
 (2,725)
Non-operating pension and other postretirement benefit costs(1,531) 
 
 (1,531)(1,421) 
 
 (1,421)
Earnings before income taxes2,183
 574
 139
 2,896
Income tax (provision) benefit(1,969) 428
 (1,779) (3,320)
(Loss) earnings before income taxes(21,978) 2,939
 (644) (19,683)
Income tax benefit (provision)13,996
 (1,397) (3,889) 8,710
Equity in income of subsidiary1,002
 
 (1,002) 
1,542
 
 (1,542) 
Net earnings (loss)$1,216
 $1,002
 $(2,642) $(424)
Net (loss) earnings$(6,440) $1,542
 $(6,075) $(10,973)
Other comprehensive income, net of tax1,334
 
 
 1,334
1,286
 
 
 1,286
Comprehensive income$2,550
 $1,002
 $(2,642) $910
Comprehensive (loss) income$(5,154) $1,542
 $(6,075) $(9,687)



Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
SixNine Months Ended JuneSeptember 30, 2019
(In thousands)Issuer Guarantor
Subsidiaries
 Eliminations TotalIssuer Guarantor
Subsidiaries
 Eliminations Total
Net sales$833,852
 $135,225
 $(88,305) $880,772
$1,250,145
 $203,094
 $(127,279) $1,325,960
Costs and expenses:              
Cost of sales(758,040) (121,501) 85,470
 (794,071)(1,154,834) (181,741) 123,800
 (1,212,775)
Selling, general and administrative expenses(47,323) (9,675) 
 (56,998)(71,578) (14,364) 
 (85,942)
Total operating costs and expenses(805,363) (131,176) 85,470
 (851,069)(1,226,412) (196,105) 123,800
 (1,298,717)
Income from operations28,489
 4,049
 (2,835) 29,703
23,733
 6,989
 (3,479) 27,243
Interest expense, net(19,262) (138) 
 (19,400)(32,338) (139) 
 (32,477)
Debt retirement costs(2,725) 
 
 (2,725)
Non-operating pension and other postretirement benefit costs(2,845) 
 
 (2,845)(4,266) 
 
 (4,266)
Earnings before income taxes6,382
 3,911
 (2,835) 7,458
Income tax (provision) benefit(3,775) (424) 154
 (4,045)
(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 subsidiary3,487
 
 (3,487) 
5,029
 
 (5,029) 
Net earnings$6,094
 $3,487
 $(6,168) $3,413
Net (loss) earnings$(346) $5,029
 $(12,243) $(7,560)
Other comprehensive income, net of tax2,573
 
 
 2,573
3,859
 
 
 3,859
Comprehensive income$8,667
 $3,487
 $(6,168) $5,986
$3,513
 $5,029
 $(12,243) $(3,701)
Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
Three Months Ended JuneSeptember 30, 2018
(In thousands)Issuer 
Guarantor
Subsidiaries
 Eliminations TotalIssuer 
Guarantor
Subsidiaries
 Eliminations Total
Net sales$433,826
 $54,313
 $(56,040) $432,099
$426,816
 $50,340
 $(50,696) $426,460
Costs and expenses:              
Cost of sales(394,260) (47,918) 55,024
 (387,154)(383,737) (45,693) 53,209
 (376,221)
Selling, general and administrative expenses(21,226) (5,338) 
 (26,564)(20,721) (5,562) 
 (26,283)
Gain on divested assets, net
 22,944
 
 22,944
Total operating costs and expenses(415,486) (53,256) 55,024
 (413,718)(404,458) (28,311) 53,209
 (379,560)
Income from operations18,340
 1,057
 (1,016) 18,381
22,358
 22,029
 2,513
 46,900
Interest expense, net(7,627) (96) 
 (7,723)(7,366) (181) 
 (7,547)
Non-operating pension and other postretirement benefit costs(1,187) 
 
 (1,187)(1,234) 
 
 (1,234)
Earnings before income taxes9,526
 961
 (1,016) 9,471
13,758
 21,848
 2,513
 38,119
Income tax provision(2,574) (186) 250
 (2,510)
Income tax benefit (provision)1,748
 (5,043) (380) (3,675)
Equity in income of subsidiary775
 
 (775) 
16,805
 
 (16,805) 
Net earnings$7,727
 $775
 $(1,541) $6,961
$32,311
 $16,805
 $(14,672) $34,444
Other comprehensive income, net of tax1,336
 
 
 1,336
1,378
 
 
 1,378
Comprehensive income$9,063
 $775
 $(1,541) $8,297
$33,689
 $16,805
 $(14,672) $35,822



Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
SixNine Months Ended JuneSeptember 30, 2018
(In thousands)Issuer 
Guarantor
Subsidiaries
 Eliminations TotalIssuer 
Guarantor
Subsidiaries
 Eliminations Total
Net sales$889,003
 $100,526
 $(120,478) $869,051
$1,315,819
 $150,866
 $(171,174) $1,295,511
Costs and expenses:              
Cost of sales(807,217) (88,278) 115,908
 (779,587)(1,190,954) (133,971) 169,117
 (1,155,808)
Selling, general and administrative expenses(48,858) (10,686) 
 (59,544)(69,579) (16,248) 
 (85,827)
Gain on divested assets, net
 22,944
 
 22,944
Total operating costs and expenses(856,075) (98,964) 115,908
 (839,131)(1,260,533) (127,275) 169,117
 (1,218,691)
Income from operations32,928
 1,562
 (4,570) 29,920
55,286
 23,591
 (2,057) 76,820
Interest expense, net(15,556) (187) 
 (15,743)(22,922) (368) 
 (23,290)
Non-operating pension and other postretirement benefit costs(2,466) 
 
 (2,466)(3,700) 
 
 (3,700)
Earnings before income taxes14,906
 1,375
 (4,570) 11,711
28,664
 23,223
 (2,057) 49,830
Income tax provision(2,956) (199) 1,005
 (2,150)(1,208) (5,242) 625
 (5,825)
Equity in income of subsidiary1,176
 
 (1,176) 
17,981
 
 (17,981) 
Net earnings$13,126
 $1,176
 $(4,741) $9,561
$45,437
 $17,981
 $(19,413) $44,005
Other comprehensive income, net of tax2,755
 
 
 2,755
4,133
 
 
 4,133
Comprehensive income$15,881
 $1,176
 $(4,741) $12,316
$49,570
 $17,981
 $(19,413) $48,138



Clearwater Paper Corporation
Consolidating Balance Sheet
At JuneSeptember 30, 2019
(In thousands)Issuer 
Guarantor
Subsidiaries
 Eliminations TotalIssuer 
Guarantor
Subsidiaries
 Eliminations Total
ASSETS              
Current assets:              
Cash and cash equivalents$41,800
 $
 $
 $41,800
$7,815
 $
 $
 $7,815
Restricted cash1,440
 
 
 1,440
1,440
 
 
 1,440
Receivables, net151,072
 18,900
 
 169,972
139,201
 18,728
 
 157,929
Taxes receivable7,995
 295
 (347) 7,943
6,716
 24
 (19) 6,721
Inventories248,236
 42,462
 (2,835) 287,863
246,211
 39,663
 (3,479) 282,395
Other current assets9,832
 286
 
 10,118
7,725
 235
 
 7,960
Total current assets460,375
 61,943
 (3,182) 519,136
409,108
 58,650
 (3,498) 464,260
Property, plant and equipment, net1,220,503
 73,191
 
 1,293,694
1,202,690
 70,784
 
 1,273,474
Operating lease right-of-use assets69,656
 5,682
 
 75,338
69,211
 5,292
 
 74,503
Goodwill35,074
 
 
 35,074
35,074
 
 
 35,074
Intangible assets, net522
 19,988
 
 20,510
261
 18,464
 
 18,725
Intercompany (payable) receivable(65,731) 62,896
 2,835
 
(72,415) 68,936
 3,479
 
Investment in subsidiary178,788
 
 (178,788) 
180,330
 
 (180,330) 
Other assets, net11,365
 2,818
 (2,088) 12,095
13,906
 2,960
 (1,825) 15,041
TOTAL ASSETS$1,910,552
 $226,518
 $(181,223) $1,955,847
$1,838,165
 $225,086
 $(182,174) $1,881,077
LIABILITIES AND STOCKHOLDERS’ EQUITY              
Current liabilities:              
Short-term debt$235,000
 $
 $
 $235,000
$58,000
 $
 $
 $58,000
Accounts payable and accrued liabilities278,415
 23,226
 (347) 301,294
211,805
 17,777
 (19) 229,563
Current liability for pensions and
other postretirement employee benefits
7,430
 
 
 7,430
Current liability for pension and
other postretirement employee benefits
7,430
 
 
 7,430
Total current liabilities520,845
 23,226
 (347) 543,724
277,235
 17,777
 (19) 294,993
Long-term debt671,676
 
 
 671,676
866,702
 
 
 866,702
Operating lease liabilities65,966
 4,228
 
 70,194
62,792
 3,779
 
 66,571
Liability for pensions and
other postretirement employee benefits
74,903
 
 
 74,903
Liability for pension and
other postretirement employee benefits
73,738
 
 
 73,738
Other long-term obligations33,498
 
 
 33,498
33,990
 
 
 33,990
Accrued taxes1,378
 879
 
 2,257
2,186
 884
 
 3,070
Deferred tax liabilities107,921
 19,397
 (2,088) 125,230
96,377
 22,316
 (1,825) 116,868
TOTAL LIABILITIES1,476,187
 47,730
 (2,435) 1,521,482
1,413,020
 44,756
 (1,844) 1,455,932
Stockholders’ equity excluding
accumulated other comprehensive loss
499,140
 178,788
 (178,788) 499,140
488,634
 180,330
 (180,330) 488,634
Accumulated other comprehensive loss, net of tax(64,775) 
 
 (64,775)(63,489) 
 
 (63,489)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,910,552
 $226,518
 $(181,223) $1,955,847
$1,838,165
 $225,086
 $(182,174) $1,881,077



Clearwater Paper Corporation
Consolidating Balance Sheet
At December 31, 2018
(In thousands)Issuer 
Guarantor
Subsidiaries
 Eliminations TotalIssuer 
Guarantor
Subsidiaries
 Eliminations Total
ASSETS              
Current assets:              
Cash and cash equivalents$22,484
 $
 $
 $22,484
$22,484
 $
 $
 $22,484
Receivables, net127,952
 17,567
 
 145,519
127,952
 17,567
 
 145,519
Taxes receivable16,634
 41
 (10,374) 6,301
16,634
 41
 (10,374) 6,301
Inventories222,960
 48,361
 (5,077) 266,244
222,960
 48,361
 (5,077) 266,244
Other current assets3,346
 53
 
 3,399
3,346
 53
 
 3,399
Total current assets393,376
 66,022
 (15,451) 443,947
393,376
 66,022
 (15,451) 443,947
Property, plant and equipment, net1,192,716
 76,555
 
 1,269,271
1,192,716
 76,555
 
 1,269,271
Goodwill35,074
 
 
 35,074
35,074
 
 
 35,074
Intangible assets, net1,045
 23,035
 
 24,080
1,045
 23,035
 
 24,080
Intercompany (payable) receivable(62,846) 57,769
 5,077
 
(62,846) 57,769
 5,077
 
Investment in subsidiary175,301
 
 (175,301) 
175,301
 
 (175,301) 
Other assets, net14,839
 2,618
 (1,711) 15,746
14,839
 2,618
 (1,711) 15,746
TOTAL ASSETS$1,749,505
 $225,999
 $(187,386) $1,788,118
$1,749,505
 $225,999
 $(187,386) $1,788,118
LIABILITIES AND STOCKHOLDERS’ EQUITY              
Current liabilities:              
Short-term debt$120,833
 $
 $
 $120,833
$120,833
 $
 $
 $120,833
Accounts payable and accrued liabilities299,715
 31,691
 (10,374) 321,032
299,715
 31,691
 (10,374) 321,032
Current liability for pensions and
other postretirement employee benefits
7,430
 
 
 7,430
Current liability for pension and
other postretirement employee benefits
7,430
 
 
 7,430
Total current liabilities427,978
 31,691
 (10,374) 449,295
427,978
 31,691
 (10,374) 449,295
Long-term debt671,292
 
 
 671,292
671,292
 
 
 671,292
Liability for pensions and
other postretirement employee benefits
78,191
 
 
 78,191
Liability for pension and
other postretirement employee benefits
78,191
 
 
 78,191
Other long-term obligations38,977
 
 
 38,977
38,977
 
 
 38,977
Accrued taxes1,918
 867
 
 2,785
1,918
 867
 
 2,785
Deferred tax liabilities104,753
 18,140
 (1,711) 121,182
104,753
 18,140
 (1,711) 121,182
TOTAL LIABILITIES1,323,109
 50,698
 (12,085) 1,361,722
1,323,109
 50,698
 (12,085) 1,361,722
Stockholders’ equity excluding
accumulated other comprehensive loss
493,744
 175,301
 (175,301) 493,744
493,744
 175,301
 (175,301) 493,744
Accumulated other comprehensive loss, net of tax(67,348) 
 
 (67,348)(67,348) 
 
 (67,348)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,749,505
 $225,999
 $(187,386) $1,788,118
$1,749,505
 $225,999
 $(187,386) $1,788,118



Clearwater Paper Corporation
Consolidating Statement of Cash Flows
SixNine Months Ended JuneSeptember 30, 2019
       
(In thousands)Issuer 
Guarantor
Subsidiaries
 Eliminations TotalIssuer 
Guarantor
Subsidiaries
 Eliminations Total
CASH FLOWS FROM OPERATING ACTIVITIES              
Net earnings$6,094
 $3,487
 $(6,168) $3,413
Adjustments to reconcile net earnings to net
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 amortization46,457
 7,896
 
 54,353
74,186
 12,157
 
 86,343
Equity-based compensation expense2,070
 
 
 2,070
2,959
 
 
 2,959
Deferred taxes3,880
 1,300
 
 5,180
(10,286) 4,263
 
 (6,023)
Deferred issuance costs on debt938
 
 
 938
Employee benefit plans1,006
 
 
 1,006
Amortization of deferred issuance costs on debt

1,452
 
 
 1,452
Loss on retirement of debt2,725
 
 
 2,725
Other non-cash activity, net(792) 
 

 (792)734
 (10) 

 724
Changes in working capital, net(64,846) 4,811
 9,889
 (50,146)(111,631) 2,504
 10,861
 (98,266)
Changes in taxes receivable8,639
 (254) (10,027) (1,642)9,918
 17
 (10,355) (420)
Changes in non-current accrued taxes(540) 12
 
 (528)
Other, net1,942
 (66) 
 1,876
1,086
 (261) 
 825
Net cash flows from operating activities3,842
 17,186
 (6,306) 14,722
(28,197) 23,699
 (11,737) (16,235)
CASH FLOWS FROM INVESTING ACTIVITIES              
Additions to property, plant and equipment(107,155) (1,264) 
 (108,419)(124,111) (1,683) 
 (125,794)
Other, net4
 
 
 4
4
 10
 
 14
Net cash flows from investing activities(107,151) (1,264) 
 (108,415)(124,107) (1,673) 
 (125,780)
CASH FLOWS FROM FINANCING ACTIVITIES              
Borrowings on long-term debt296,146
 
 
 296,146
Repayments of borrowings on long-term debt(101,671) 
 
 (101,671)
Borrowings on short-term debt436,927
 
 
 436,927
534,877
 
 
 534,877
Repayments of borrowings on short-term debt(322,760) 
 
 (322,760)(598,715) 
 
 (598,715)
Payments for debt issuance costs(1,844) 
 
 (1,844)
Investment from (to) parent9,616
 (15,922) 6,306
 
10,289
 (22,026) 11,737
 
Other, net(1,147) 
 
 (1,147)(1,430) 
 
 (1,430)
Net cash flows from financing activities122,636
 (15,922) 6,306
 113,020
137,652
 (22,026) 11,737
 127,363
Increase in cash, cash equivalents and restricted cash19,327
 
 
 19,327
Decrease in cash, cash equivalents and restricted cash(14,652) 
 
 (14,652)
Cash, cash equivalents and restricted cash at beginning of period24,947
 
 
 24,947
24,947
 
 
 24,947
Cash, cash equivalents and restricted cash at end of period$44,274
 $
 $
 $44,274
$10,295
 $
 $
 $10,295


Clearwater Paper Corporation
Consolidating Statement of Cash Flows
SixNine Months Ended JuneSeptember 30, 2018
(In thousands)Issuer Guarantor Subsidiaries Eliminations TotalIssuer Guarantor Subsidiaries Eliminations Total
CASH FLOWS FROM OPERATING ACTIVITIES              
Net earnings$13,126
 $1,176
 $(4,741) $9,561
$45,437
 $17,981
 $(19,413) $44,005
Adjustments to reconcile net earnings to net
cash flows from operating activities:
              
Depreciation and amortization39,905
 10,439
 
 50,344
59,632
 16,054
 
 75,686
Equity-based compensation expense343
 
 
 343
2,845
 
 
 2,845
Deferred taxes2,979
 (330) 
 2,649
10,662
 (6,732) 
 3,930
Employee benefit plans102
 
 
 102
Deferred issuance costs on long term debt716
 
 
 716
943
 
 
 943
Gain on divested assets
 (25,510) 
 (25,510)
Other non-cash activity, net414
 (4) 
 410
84
 
 
 84
Changes in working capital, net41,660
 (6,051) 708
 36,317
22,045
 (7,383) (7,260) 7,402
Changes in taxes receivable11,502
 (4) 
 11,498
8,053
 26
 5,455
 13,534
Changes in non-current accrued taxes, net346
 
 
 346
Other, net(770) (526) 
 (1,296)(1,800) (122) 
 (1,922)
Net cash flows from operating activities110,221
 4,700
 (4,033) 110,888
148,003
 (5,686) (21,218) 121,099
CASH FLOWS FROM INVESTING ACTIVITIES              
Additions to property, plant and equipment(77,257) (1,343) 
 (78,600)(172,434) (1,600) 
 (174,034)
Net proceeds from divested assets70,930
 
 
 70,930
Other, net793
 14
 
 807
793
 14
 
 807
Net cash flows from investing activities(76,464) (1,329) 
 (77,793)(100,711) (1,586) 
 (102,297)
CASH FLOWS FROM FINANCING ACTIVITIES              
Borrowings on short-term debt124,063
 
 
 124,063
322,454
 
 
 322,454
Repayments of borrowings on short-term debt(119,063) 
 
 (119,063)(277,454) 
 
 (277,454)
Investment (to) from parent(662) (3,371) 4,033
 
(28,490) 7,272
 21,218
 
Other, net(543) 
 
 (543)(853) 
 
 (853)
Net cash flows from financing activities3,795
 (3,371) 4,033
 4,457
15,657
 7,272
 21,218
 44,147
Increase in cash, cash equivalents and restricted cash37,552
 
 
 37,552
62,949
 
 
 62,949
Cash, cash equivalents and restricted cash
at beginning of period
16,738
 
 
 16,738
16,738
 
 
 16,738
Cash, cash equivalents and restricted cash at end of period$54,290
 $
 $
 $54,290
$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 accounting standards; production quality and quantity, costs and timing associated with the expansion of our Shelby, North Carolina facility; components and trends; our strengths and related benefits; competitive market conditions, raw materials,conditions; operating costs and input usage and costs, including energy costs and usage; major maintenance schedule and costs; tax rates; cash flows; accounts receivable;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; debt and finance arrangements, including compliance with covenants; capitalized interest; interest expenses and interest expenses.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 2018 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 regard to, or reduction in, orders from a significant customer;
changes in customer product preferences and competitors' product offerings;
our ability to achieve full production at our new tissue manufacturing operations in Shelby, North Carolina on time and within current cost expectations;
customer acceptance and timing and quantity of purchases of our tissue products, including the existence of sufficient demand for and the quality of tissue manufactured at our expanded Shelby, North Carolina operations 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;
manufacturing or operating disruptions, including IT system and IT system implementation failures, equipment malfunctions and damage to our manufacturing facilities;
changes in costs for and availability of packaging supplies, chemicals, energy and maintenance and repairs;
larger competitors having operational and other advantages;
cyclical industry conditions;
changes in expenses, required contributions and potential withdrawal costs associated with our pension plans;
environmental liabilities or expenditures;
cyber-security risks;
reliance on a limited number of third-party suppliers for raw materials;
our ability to attract, motivate, train and retain qualified and key personnel;
material weaknesses in our internal control over financial reporting;
our substantial indebtedness and ability to service our debt obligations;
restrictions on our business from debt covenants and terms; and
changes in laws, regulations or industry standards affecting our business.
Forward-looking statements contained in this report present management’s views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management’s views to reflect events or circumstances occurring after the date of this report.


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 relationships through quality and service.
Recent Events
Debt Refinancing
Subsequent to June 30, 2019, onOn July 26, 2019, we completed the refinancing of our secured revolving credit facilities with a seven-year Term Loan Bterm loan credit agreement and a five-year revolving credit facility provided under an asset based revolvingloan credit facility. Refer to the "Liquidity and Capital Resources" discussion, under the heading "Credit Arrangements,Agreements," for additional information.
Shelby Expansion Project
During the second quarter of 2019, we began production on our new tissue machine at our facility in Shelby, North Carolina. The new tissue machine will produce a variety of high-quality private label ultra and premium bath, paper towel and napkin products. At full production capacity, it is expected to produce approximately 70,000 to 75,000 tons of tissue products annually. The estimatedtotal cost for the project includes approximately $360 million for the tissue machine, converting equipment and buildings, and approximately $60 million for warehouse expansion that consolidated southeastern warehousing in Shelby.
We project that the new tissue machine and related converting equipment at this facility will attain a full production run-rate in late 2020.mid-2020. During the sixnine months ended JuneSeptember 30, 2019, we incurred costs of $50.2$51.7 million on construction related activities and the new tissue machine in Shelby. We also capitalized $4.9 million of interest during the sixnine months ended JuneSeptember 30, 2019 related to the Shelby expansion. With the startup of the new tissue machine, weWe have incurred additional labor, operating supply and energy related costs associated with ramping up production of the new machine, and our inventory levels have also increased in connection with the startup.ramp-up.
Components and Trends in our Business
Net sales
Prices for our consumer tissue products are affected by competitive conditions and the prices of branded tissue products. Our Consumer Products segment competes based on product quality, customer service and price. We deliver customer-focused business solutions by assisting in managing product assortment, category management, and pricing and promotion optimization.

In recent years, the industry has experienced 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 affected by this increased capacity, as well as changing dynamics in the at-home tissue segment as a result of changing consumer purchasing habits, consolidations and new entrants in the consumer retail channel, and new and evolving sales and distribution channels. These changing conditions contributed to a very competitive environment for consumer tissue over the past several years, which has continued through the first half of 2019. Reflecting these competitive conditions, in the third quarter of 2017, our largest tissue customer made the decision to go from a single source model to a multi-source model for its private label tissue supply beginning in the first quarter of 2018. This significantly affected sales volumes for our conventional tissue in 2018 and into the first halfnine months of 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 salesCost of sales  Cost of sales  
Three Months Ended June 30,  Three Months Ended September 30,  
(Dollars in thousands)2019 2018  2019 2018  
Cost 
Percentage of
Sales
 
Cost3
 
Percentage of
Sales
 Cost VarianceCost 
Percentage of
Sales
 
Cost3
 
Percentage of
Sales
 Cost Variance
Wages and benefits$73,463
 16.3% $72,721
 16.8% $742
$74,004
 16.6% $70,143
 16.4% $3,861
Purchased pulp52,932
 11.7
 45,013
 10.4
 7,919
50,916
 11.4
 45,347
 10.7
 5,569
Transportation1
50,190
 11.1
 56,061
 13.0
 (5,871)47,705
 10.7
 44,264
 10.4
 3,441
Chemicals42,151
 9.5
 43,096
 10.1
 (945)
Chips, sawdust and logs45,448
 10.0
 43,940
 10.2
 1,508
40,765
 9.2
 41,535
 9.7
 (770)
Chemicals44,354
 9.8
 44,949
 10.4
 (595)
Packaging and operating supplies38,469
 8.4
 37,341
 8.6
 1,128
40,479
 9.1
 36,399
 8.5
 4,080
Depreciation25,104
 5.6
 21,574
 5.0
 3,530
28,371
 6.4
 21,790
 5.1
 6,581
Energy19,770
 4.4
 20,282
 4.7
 (512)21,064
 4.7
 22,715
 5.3
 (1,651)
Maintenance and repairs2
19,767
 4.4
 16,807
 3.9
 2,960
32,623
 7.3
 19,968
 4.7
 12,655

369,497
 81.7
 358,688
 83.0
 10,809
378,078
 84.9
 345,257
 80.9
 32,821
Other operating costs40,328
 9.0
 28,466
 6.6
 11,862
40,626
 9.2
 30,964
 7.3
 9,662
Total cost of sales$409,825
 90.7% $387,154
 89.6% $22,671
$418,704
 94.1% $376,221
 88.2% $42,483
                  
Six Months Ended June 30,  Nine Months Ended September 30,  
(Dollars in thousands)2019 2018  2019 2018  
Cost Percentage of
Sales
 
Cost3
 Percentage of
Sales
 Cost VarianceCost Percentage of
Sales
 
Cost3
 Percentage of
Sales
 Cost Variance
Wages and benefits$139,015
 15.8% $143,173
 16.5% $(4,158)$213,019
 16.1% $213,316
 16.4% $(297)
Purchased pulp103,612
 11.8
 93,267
 10.7
 10,345
154,528
 11.6
 138,614
 10.7
 15,914
Transportation1
99,249
 11.3
 110,867
 12.8
 (11,618)146,954
 11.1
 155,131
 12.0
 (8,177)
Chemicals125,856
 9.5
 130,719
 10.0
 (4,863)
Chips, sawdust and logs83,535
 9.5
 82,367
 9.5
 1,168
124,300
 9.4
 123,902
 9.6
 398
Chemicals83,705
 9.5
 87,623
 10.1
 (3,918)
Packaging and operating supplies74,462
 8.4
 75,311
 8.6
 (849)114,941
 8.7
 111,710
 8.7
 3,231
Depreciation47,539
 5.4
 43,296
 5.0
 4,243
75,910
 5.7
 65,086
 5.0
 10,824
Energy49,336
 5.6
 42,164
 4.8
 7,172
70,400
 5.3
 64,879
 5.0
 5,521
Maintenance and repairs2
35,159
 4.0
 35,457
 4.1
 (298)67,782
 5.1
 55,425
 4.3
 12,357

715,612
 81.3
 713,525
 82.1
 2,087
1,093,690
 82.5
 1,058,782
 81.7
 34,908
Other operating costs78,459
 8.9
 66,062
 7.6
 12,397
119,085
 9.0
 97,026
 7.5
 22,059
Total cost of sales$794,071
 90.2% $779,587
 89.7% $14,484
$1,212,775
 91.5% $1,155,808
 89.2% $56,967
1
Includes internal and external transportation costs.
2
Excludes related 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. WagesWage and benefitsbenefit costs increased slightly for the three month periodmonths ended JuneSeptember 30, 2019, compared to the same period in 2018, due primarily to increased headcount at our Shelby, expansionNorth Carolina facility and annual wage increases, along with higher sales volumes in our Pulp and Paperboard segment, which resulted in increased wages, partially offset by reduced headcount driven byresulting 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 sixnine months ended JuneSeptember 30, 2019, wage and benefit costs decreasedwere flat compared to the same period in 2018, primarily due to theas reduced headcount related to the sale of our Ladysmith facility and the impact of the SG&A cost reduction of hourly workersefforts were offset by increased headcount at our LewistonNorth Carolina facility in 2018.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 sixnine months ended JuneSeptember 30, 2019, compared to the same periods in 2018, due to higher overall prices andprimarily as a result of increased purchases of external pulp due to increased paperboard sales volumes and unexpected downtimeresulting from a major maintenance outage at our Idaho pulp manufacturing facility in the first halfthird quarter of 2019.2019 and the ramp-up of production on our new tissue machine in 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 United States and transport unconverted parent rolls from our tissue mills to our tissue converting facilities. Transportation costs decreasedincreased in the three and six month periodsmonths ended JuneSeptember 30, 2019, compared to the same periodsperiod in 2018. These decreases were2018, due primarily to increased retail tissue case shipments for our Consumer Products segment, partially offset by reductions in internal 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 ShelbyNorth Carolina that reduced internal shipments, as well as improvements in our Consumer Products segment's operating model resulting in lower miles shipped overall and lower line haul-rates, partially offset by increased customer shipments at our Pulp and Paperboard segment.retail tissue case shipments.
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 increasedwere essentially flat for both the three and sixnine months ended JuneSeptember 30, 2019, compared to the same periods in 2018,2018. For the three month period, the benefit of lower residual pricing for our Idaho pulp and paperboard facility, as well as lower usage at that facility due to the major maintenance outage in the third quarter of 2019, was offset by higher residual pricing largely attributable to inclement weather nearfor our Arkansas pulp and paperboard facility due to inclement weather. For the nine month period, unfavorable residual pricing at both our Idaho and increased sales volumes, which were partiallyArkansas pulp and paperboard facilities for the nine months ended September 30, 2019 was offset by lower costsresidual usage as a result of the major maintenance outage at ourthe Idaho pulpfacility and paperboardunplanned 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 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 decreased in the three and sixnine months ended JuneSeptember 30, 2019, compared to the same periods in 2018, due to favorable pricing on polyethylene, caustic and latex, partially offset by increased production.as well as the sale of our 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 increased for the three and nine months ended JuneSeptember 30, 2019, compared to the same periodperiods in 2018, due primarily to increased retail sales volumes at our Consumer Products segment and higher overall sales volumesincreased operating supplies usage as a result of the planned major maintenance outage at our PulpIdaho pulp and Paperboard segment. Costs decreased forpaperboard facility in the six month period ended June 30, 2019, compared to the same period in 2018, due to lower retail sales volumes at our Consumer Products segment, partially offset by increased costs for our Pulp and Paperboard segment, driven by higher sales volumes.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 sixnine months ended JuneSeptember 30, 2019 increased compared to the same periods in 2018 due largelyprimarily to the startup of the new Shelby tissue machine and two converting lines, and the resulting commencement of depreciation for these assets, in the second quarter2019, as well as additional depreciation expense recorded in association with a review of 2019.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 JuneSeptember 30, 2019 were essentially flatdecreased compared to the same period in 2018. These2018 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 sixnine months ended JuneSeptember 30, 2019, compared to the same period in 2018, primarily due to a shortage of natural gas supply in the Pacific Northwest resulting from aregional pipeline disruption in the first quarter of 2019 that caused natural gas priceprices to increase at our Lewiston, Idaho facility, combined with the increased natural gas usage at our Idaho pulp and paperboard facility as a resultrelated to the planned major maintenance, partially offset by the sale of a recovery boiler outageour Ladysmith facility in 2018 and colder weather in the same period.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 JuneSeptember 30, 2019, these contracts covered approximately 35%47% of our expected average monthly natural gas requirements for the remainder of 2019.2019, and a lesser amount for 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 JuneSeptember 30, 2019, maintenance and repair spending was higher than the same periodperiods in 2018 due to the planned major maintenance that took place at our Shelby consumer products facility and our Arkansas and Idaho pulp and paperboard facilitiesfacility in the secondthird quarter of 2019. Maintenance and repair costs were flat for2019, as well as increased maintenance associated with the six month period ended June 30, 2019, compared to the same periodstartup of our new tissue machine in 2018.North Carolina. We expect our fourth quarter 2019 planned major maintenance costs to be approximately $16$6 to $19 million at our Idaho facility during the third quarter of 2019, and approximately $7 to $8 million at our Arkansas facility during the fourth quarter of 2019.facility.
Other operating costs. Our other operating costs increased $11.9$9.7 million and $12.4$22.1 million, respectively, for the three and sixnine months ended JuneSeptember 30, 2019, compared to the same periods in 2018, due mainly to startup relatedramp-up costs and increased property taxes associated with the Shelby expansion project, increased purchased paper costs and 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 sixnine months ended JuneSeptember 30, 2019 and 2018 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. The annual effective tax rate is subject to variation due to several factors, including variability in pre-tax income (or loss), changes in tax credits, forecasted pre-tax income (or loss), changes in business practices and tax law developments.



RESULTS OF OPERATIONS
Three Months Ended JuneSeptember 30, 2019 Compared to Three Months Ended JuneSeptember 30, 2018
The following table sets forth data included in our Consolidated Statements of Operations as a percentage of net sales.
Three Months Ended June 30,Three Months Ended September 30,
(Dollars in thousands)2019 20182019 2018
Net sales$451,993
 100.0% $432,099
 100.0%$445,188
 100.0% $426,460
 100.0%
Costs and expenses:              
Cost of sales(409,825) 90.7
 (387,154) 89.6
(418,704) 94.1
 (376,221) 88.2
Selling, general and administrative expenses(26,827) 5.9
 (26,564) 6.1
(28,944) 6.5
 (26,283) 6.2
Gain on divested assets, net
 
 22,944
 5.4
Total operating costs and expenses(436,652) 96.6
 (413,718) 95.7
(447,648) 100.6
 (379,560) 89.0
Income from operations15,341
 3.4
 18,381
 4.3
(Loss) income from operations(2,460) 0.6
 46,900
 11.0
Interest expense, net(10,914) 2.4
 (7,723) 1.8
(13,077) 2.9
 (7,547) 1.8
Debt retirement costs(2,725) 0.6
 
 
Non-operating pension and other postretirement benefit costs(1,531) 0.3
 (1,187) 0.3
(1,421) 0.3
 (1,234) 0.3
Earnings before income taxes2,896
 0.6
 9,471
 2.2
Income tax provision(3,320) 0.7
 (2,510) 0.6
(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$(424) 0.1% $6,961
 1.6%$(10,973) 2.5% $34,444
 8.1%
Net salesSecondThird quarter 2019 net sales increased compared to the secondthird quarter of 2018, due to higher net paperboard and tissue prices and retail tissue shipments, as well as favorable pricing and product mix in both segments, partially offset by decreased parent roll sales volumes related tolower non-retail tissue 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 90.7%94.1% of net sales for the secondthird quarter of 2019 and 89.6%88.2% of net sales for the same period in 2018. Our overall cost of sales was $22.7$42.5 million higher than the secondthird quarter of 2018, primarily due to increased purchased pulp and maintenance costs, higher depreciation expense and costs associated with the startupplanned major maintenance at our Idaho pulp and paperboard facility in the third quarter of 2019, higher purchased pulp costs and increased depreciation expense and ramp-up costs associated with our new paper machine and two converting lines at our ShelbyNorth Carolina facility.
Selling, general and administrative expenses—Selling, general and administrative expenses for the secondthird quarter of 2019 were flatincreased compared to the secondthird quarter of 2018. A $2.0 million lower benefit from the mark-to-market adjustment for director's equity based compensationThe increase was primarily due to higher professional fees in the secondthird quarter of 2019 compared to the prior year comparable period, was offset by lower wage and benefit expensesthird quarter of 2018.
Gain on divested assets—On August 21, 2018, we sold our Ladysmith facility for net cash proceeds of approximately $71.0 million. In total, we recorded $22.9 million of gain on the sale in the secondthird quarter of 2019 and the absence of $1.02018, which included $34.0 million of reorganizationnet assets sold, $14.0 million of goodwill write-off and other expenses related expenses incurred into the second quarter of 2018.sale.
Interest expense—Interest expense for the secondthird quarter of 2019 was $3.2$5.5 million higher inthan the secondthird quarter of 2018 due to higher interest expense associated with a larger average balance on our revolving credit facilities. Capitalized interest remained flat compared tofacilities and lower capitalized interest.
Debt retirement costs—In association with the secondrefinancing 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 $3.3$8.7 million for the three months ended JuneSeptember 30, 2019, compared to $2.5a $3.7 million provision in the same period of 2018. The rate determined under generally accepted accounting principles, or GAAP, for the three months ended JuneSeptember 30, 2019 was a benefit of approximately 115%44%, compared to a provision of approximately 27%10% for the same period of 2018. Tax effected items reflectingThe rate for the cumulative impact of the estimated annual effective tax rate in the secondthird quarter of 2018 included the benefit of federal income tax credits while the tax benefit for 2019 have a greater impact on a percentage basis of our $2.9 million of earnings before taxes compared to $9.5 million inresulted from the pre-tax earnings inloss for the second quarter of 2018.quarter.








Discussion of Business Segments
Consumer Products
Three Months EndedThree Months Ended
June 30,September 30,
(Dollars in thousands - except per ton amounts)2019 20182019 2018
Net sales$224,340
 $221,585
$228,544
 $211,642
Operating loss(5,133) (3,604)
Operating (loss) income(4,438) 21,675
Percent of net sales(2.3)% (1.6)%(1.9)% 10.2%
      
Shipments (short tons)      
Retail76,175
 73,070
79,526
 70,335
Non-retail6,623
 17,316
6,882
 18,525
Total tissue tons82,798
 90,386
86,408
 88,860
Converted products cases (in thousands)12,488
 12,027
13,162
 11,789
      
Sales price (per short ton)      
Retail$2,764
 $2,707
$2,707
 $2,615
Non-retail1,851
 1,372
1,805
 1,491
Total tissue$2,691
 $2,451
$2,635
 $2,381
Net sales for the Consumer Products segment during the secondthird quarter of 2019 increased by $2.8$16.9 million compared to the secondthird quarter of 2018 due to higher retail tissue volumes sold, increased average selling prices for both retail and non-retail tissue products, and a favorable pricing and product mix shift to a higher percentage of retail shipments, partially offset by a reduction in non-retail sales volume resulting from the sale of our Ladysmith facility in August 2018.
The segment had an operating loss of $5.1$4.4 million for the secondthird quarter of 2019, compared to an operating lossincome of $3.6$21.7 million in the secondthird quarter of 2018. The unfavorable comparison2018 that included a gain of $22.9 million on the sale of our Ladysmith facility. Excluding this gain, the larger loss for the third quarter of 2019 was primarily attributable to higher purchased pulp costs and increased depreciation expense and startupramp-up costs associated with theour Shelby expansion project, partially offset by the increased net sales and lower transportation costs.project.
Pulp and Paperboard
Three Months EndedThree Months Ended
June 30,September 30,
(Dollars in thousands - except per ton amounts)2019 20182019 2018
Net sales$227,653
 $210,514
$216,644
 $214,818
Operating income33,587
 34,192
17,098
 38,280
Percent of net sales14.8% 16.2%7.9% 17.8%
      
Paperboard shipments (short tons)225,188
 216,582
214,537
 218,135
Paperboard sales price (per short ton)$1,004
 $972
$1,004
 $985
Net sales for the Pulp and Paperboard segment increased by $17.1$1.8 million during the secondthird quarter of 2019, compared to the secondthird quarter of 2018. The increase was due to increased shipments and higher average netpaperboard selling prices resulting from a favorable mix shift.previously announced price increases, partially offset by decreased shipment volumes.
Operating income for the segment decreased by $0.6$21.2 million during the secondthird quarter of 2019, compared to the secondthird quarter of 2018, primarily due to higher externalthe planned major maintenance at our Idaho pulp usage and higher maintenance and wage and benefit costs, partially offset bypaperboard facility in the increased sales.third quarter of 2019.



RESULTS OF OPERATIONS
SixNine Months Ended JuneSeptember 30, 2019 Compared to SixNine Months Ended JuneSeptember 30, 2018
The following table sets forth data included in our Consolidated Statements of Operations as a percentage of net sales.
Six Months Ended June 30,Nine Months Ended September 30,
(Dollars in thousands)2019 20182019 2018
Net sales$880,772
 100.0% $869,051
 100.0%$1,325,960
 100.0% $1,295,511
 100.0%
Costs and expenses:              
Cost of sales(794,071) 90.2
 (779,587) 89.7
(1,212,775) 91.5
 (1,155,808) 89.2
Selling, general and administrative expenses(56,998) 6.5
 (59,544) 6.9
(85,942) 6.5
 (85,827) 6.6
Gain on divested assets, net
 
 22,944
 1.8
Total operating costs and expenses(851,069) 96.6
 (839,131) 96.6
(1,298,717) 98.0
 (1,218,691) 94.1
Income from operations29,703
 3.4
 29,920
 3.4
27,243
 2.1
 76,820
 5.9
Interest expense, net(19,400) 2.2
 (15,743) 1.8
(32,477) 2.5
 (23,290) 1.8
Debt retirement costs(2,725) 0.2
 
 
Non-operating pension and other postretirement benefit costs(2,845) 0.3
 (2,466) 0.3
(4,266) 0.3
 (3,700) 0.3
Earnings before income taxes7,458
 0.8
 11,711
 1.3
Income tax provision(4,045) 0.5
 (2,150) 0.2
Net earnings$3,413
 0.4
 $9,561
 1.1
(Loss) earnings before income taxes(12,225) 0.9
 49,830
 3.8
Income tax benefit (provision)4,665
 0.3
 (5,825) 0.4
Net (loss) earnings$(7,560) 0.6
 $44,005
 3.4
Net sales—Net sales for the sixnine months ended JuneSeptember 30, 2019 increased by $11.7$30.4 million, or 1.3%2.4%, compared to the same period in 2018. The increase was primarily due to favorablehigher prices and sales volumes in our Pulp and Paperboard segment,for both segments, partially offset by 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 90%91.5% of net sales for both of the sixnine months ended JuneSeptember 30, 2019 and 89.2% of net sales for the same period in 2018. Our overall cost of sales was $57.0 million higher in the first sixnine months ofended September 30, 2019 compared to the same period of 2018, primarily due to increased costs for purchased pulp, maintenance and energy, as well as higher depreciation expense and startupramp-up costs associated with our Shelby expansion project, largelyproject. These unfavorable comparisons were partially offset by lower transportation and chemical costs.
Selling, general and administrative expenses—Selling, general and administrative expenses for the sixnine months ended JuneSeptember 30, 2019 decreased by $2.5 million comparedwere comparable to the same period in 2018. The decrease was primarily due to lowerLower wage and benefit expenses in the first half ofnine months ended September 30, 2019 and the absence of $6.0$6.2 million of reorganization related expenses incurred in the first halfnine months ended September 30, 2018 were offset primarily by $0.1 million of 2018. These favorable comparisons were partially offset by a $2.4 million lower benefit fromexpense related to the mark-to-market adjustment for director'sdirectors' equity based compensation infor the first half ofnine months ended September 30, 2019, compared to a $1.9 million benefit for the prior year comparablesame period in 2018, and increased legal and professional fees in the first halfnine months ended September 30, 2019.
Gain on divested assets—On August 21, 2018, we sold our Ladysmith facility for net cash proceeds of 2019.approximately $71.0 million. In total, we recorded $22.9 million of gain 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 sixnine months ended JuneSeptember 30, 2019 increased $3.7$9.2 million compared to the same period in 2018 driven by higher interest expense associated with a larger average balance on our revolving credit facilities. This increase in interest expense was partially offset by a $2.2 million increase infacilities and lower capitalized interest for the sixnine months ended JuneSeptember 30, 2019, compared to the sixsame period in 2018.
Debt retirement costs—In association with the refinancing of our prior revolving credit facilities in the third quarter of 2019, we incurred $2.7 million of debt retirement costs in the nine months ended JuneSeptember 30, 2018.2019, 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 $4.0$4.7 million in the sixnine months ended JuneSeptember 30, 2019, compared to $2.2a provision of $5.8 million in the same period of 2018. The rate determined under GAAP for the sixnine months ended JuneSeptember 30, 2019 was a benefit of approximately 54%38%, compared to 18%a provision of approximately 12% for the same period of 2018. Tax effected items reflectingThe rate for the cumulative impactnine months ended September 30, 2018 included the benefit of federal income tax credits while the estimated annual effective tax rate inbenefit for the first half ofnine months ended September 30, 2019 have a greater impact on a percentage basis of our $7.5 million of earnings before taxes, compared to $11.7 million of earnings before taxes inresulted from the first half of 2018.pre-tax loss for the period.





Discussion of Business Segments
Consumer Products
Six Months EndedNine Months Ended
June 30,September 30,
(Dollars in thousands - except per ton amounts)2019 20182019 2018
Net sales$447,676
 $460,427
$676,220
 $672,069
Operating loss(3,862) (1,975)
Operating (loss) income(8,300) 19,700
Percent of net sales(0.9)% (0.4)%(1.2)% 2.9%
      
Shipments (short tons)      
Retail149,531
 154,041
229,057
 224,376
Non-retail16,889
 28,552
23,771
 47,077
Total tissue tons166,420
 182,593
252,828
 271,453
Converted products cases (in thousands)24,808
 25,289
37,970
 37,078
      
Sales price (per short ton)      
Retail$2,776
 $2,711
$2,752
 $2,681
Non-retail1,819
 1,426
1,815
 1,452
Total tissue$2,679
 $2,510
$2,664
 $2,468
Net sales for our Consumer Products segment decreased $12.8increased $4.2 million for the sixnine months ended JuneSeptember 30, 2019, compared to the same period of 2018, due to decreasedhigher average net selling prices and a favorable mix shift resulting from a higher percentage of retail sales, volumes in retail andpartially offset by decreased non-retail sales partially due tovolume resulting primarily from the sale of our Ladysmith facility duringin the third quarter of 2018. These unfavorable impacts were partially offset by price increases and a favorable mix shift.
The segment had an operating loss of $3.9$8.3 million for the sixnine months ended JuneSeptember 30, 2019, compared to an operating lossincome of $2.0$19.7 million for the same period of 2018. The2018, which included a gain of $22.9 million on the sale of our Ladysmith facility. Excluding this gain, the unfavorable comparison was primarily due to decreased sales volumes, higher pulp costs startup-relatedand ramp-up costs, increased depreciation expense and higher wage and benefit expensescosts associated primarily with the Shelby expansion project, and higher depreciation expense, partially offset by decreasedlower transportation costs.
Pulp and Paperboard
Six Months EndedNine Months Ended
June 30,September 30,
(Dollars in thousands - except per ton amounts)2019 20182019 2018
Net sales$433,096
 $408,624
$649,740
 $623,442
Operating income62,975
 60,346
80,073
 98,626
Percent of net sales14.5% 14.8%12.3% 15.8%
      
Paperboard shipments (short tons)428,022
 422,891
642,559
 641,026
Paperboard sales price (per short ton)$1,003
 $966
$1,003
 $973
Net sales for the Pulp and Paperboard segment increased by $24.5$26.3 million during the sixnine months ended JuneSeptember 30, 2019, compared to the same period of 2018. The increase was2018, due to increased sales volumes and favorable pricing.
Operating income for the segment increased $2.6decreased $18.6 million during the sixnine months ended JuneSeptember 30, 2019, compared to the same period of 2018, primarily due to increased sales,the planned major maintenance at our Idaho pulp and paperboard facility in the third quarter of 2019, as well as higher energy costs. These unfavorable comparisons were partially offset by increased pulp, transportationlower chemical costs and energy costs.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, 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 and Adjusted EBITDA 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.
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, June 30,September 30, September 30,
(In thousands)2019 2018 2019 20182019 2018 2019 2018
Net (loss) earnings$(424) $6,961
 $3,413
 $9,561
$(10,973) $34,444
 $(7,560) $44,005
Interest expense, net10,914
 7,723
 19,400
 15,743
Income tax provision3,320
 2,510
 4,045
 2,150
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 expense28,517
 25,177
 54,353
 50,344
31,990
 25,342
 86,343
 75,686
EBITDA$42,327
 $42,371
 $81,211
 $77,798
$28,109
 $71,008
 $109,320
 $148,806
Directors' equity-based compensation expense (benefit)31
 (1,990) (319) (2,699)420
 769
 101
 (1,930)
Non-operating pension and other postretirement benefit costs1
1,531
 1,187
 2,845
 2,466
Other reorganization related expenses52
 792
 52
 792
Non-operating pension and other postretirement benefit costs2
1,421
 1,234
 4,266
 3,700
Reorganization related expenses934
 158
 986
 950
Gain on divested assets, net
 (22,944) 
 (22,944)
Reorganization related expenses associated with SG&A cost control measures
 1,076
 
 6,180

 210
 
 6,390
Other
 338
 
 338

 (338) 
 
Adjusted EBITDA$43,941
 $43,774
 $83,789
 $84,875
$30,884
 $50,097
 $114,673
 $134,972

1
Interest expense, net for the three and nine months ended September 30, 2019 includes debt retirement costs of $2.7 million.
2 
In 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 current period presentation.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents information regarding our cash flows for the sixnine months ended JuneSeptember 30, 2019 and 2018:
(In thousands)2019 20182019 2018
Net cash flows from operating activities$14,722
 $110,888
$(16,235) $121,099
Net cash flows from investing activities(108,415) (77,793)(125,780) (102,297)
Net cash flows from financing activities113,020
 4,457
127,363
 44,147
Cash Flows Summary
Net cash flows from operating activities for the sixnine months ended JuneSeptember 30, 2019 decreased by $96.2$137.3 million compared to the same period in 2018. The decrease in operating cash flows was largely driven by a decrease of $86.5 million from changes in working capital primarily due to increases in accounts receivable and inventory and a decrease in accounts payable and accrued liabilities. The increase in accounts receivable is largely related to a change in payment terms with a large customer. Subsequent to June 30, 2019, in the third quarterhigher cost of 2019, we entered into an agreement with an unrelated third party financial intermediary to sell receivables due from this customer to the third party financial intermediary in advance of the payment terms at a discounted rate. Assales as a result we expect our accounts receivable balance to decrease in the third quarter of 2019. The higher inventories were largely due to increased inventory levels at our Shelby facility in associationpurchased pulp, maintenance and energy costs, including higher production costs associated with the startupramp-up of the new paper machine.tissue machine at our North Carolina facility, as well as an $11.3 million increase in cash paid for interest for the nine months ended September 30, 2019.
Net cash flows used for investing activities for the sixnine months ended JuneSeptember 30, 2019 increased by $30.6$23.5 million compared to the prior year period primarily due to an increase in cash paid for plant and equipment, which was primarily related tothe completion of our Shelby expansion project.project in the first half of 2019.


Net cash flows provided by financing activities were $113.0$127.4 million for the sixnine months ended JuneSeptember 30, 2019 due to increased net borrowings. With the closing of our $300 million Term Loan Credit Agreement and were driven by net borrowings$250 million ABL Credit Agreement, of $114.2which $58 million was advanced, we repaid our $200.0 million outstanding credit agreement balance with Northwest Farm Credit Services and the $135.0 million outstanding balance on our short-term debt.credit agreement with Wells Fargo. Net cash flows provided by financing activities were $4.5$44.1 million for the same period of 2018, primarily due to net borrowings of $5.0$45.0 million on our 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 credit agreements, as discussed below under "Credit Arrangements,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. For the sixnine months ended JuneSeptember 30, 2019, excluding capitalized interest of $5.4$5.7 million, we incurred $64.6$73.6 million on capital expenditures, which included $57.6$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. Including $38.4$46.5 million of capital expenditures that were incurred in 2018 and paid in the first half of 2019, as well as the capitalized interest of $5.4$5.7 million, cash paid for capital expenditures in the first half ofnine months ended September 30, 2019 totaled $108.4$125.8 million. During the six months ended June 30, 2018, cashCash paid for capital expenditures in the first half ofnine months ended September 30, 2018 totaled $78.6$174.0 million, which included capitalized interest of $3.2$6.0 million and excluded $88.9$78.5 million of capital expenditures that had been accrued but not yet paid as of JuneSeptember 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 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
Through June 30, 2019, our revolving credit facilities contained various loan covenants that restricted our ability and thatCommencing March 31, 2020, we are required to make quarterly installment payments of approximately $0.8 million on the outstanding principal 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, the revolving credit facilities contained financial covenants that required us to maintain a consolidated secured leverage ratio in an amount not to exceed 2.00 to 1.00 in 2019, and 1.50 to 1.00 thereafter, a consolidated interest coverage ratio in an amount not less than 1.25 to 1.00, and a consolidated asset coverage ratio of not less than 1.00 to 1.00. As of both June 30, 2019 and December 31, 2018, we were in compliance with our debt covenants.
Following the end of the second quarter of 2019, on July 26, 2019, we entered into (a) a Term Loan Credit Agreement with the several lenders from time to time parties thereto and JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent (the “Term Loan Credit Agreement”), and (b) an asset based lending, or ABL, Credit Agreement with the several lenders from time to time parties thereto and JPMorgan, as administrative agent (the “ABL Credit Agreement” and, together withAgreement.

In addition, we must make mandatory prepayments of principal under the Term Loan Credit Agreement upon the “Credit Agreements”). Theoccurrence 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, includes a $300 million term loan commitment, which was fully advanced at closing. 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 based on a percentage of applicable eligible receivables and eligible inventory, of which $58.0 million was advanced at closing. The proceeds from the closing date borrowingslimitations. Borrowings under the Credit Agreements were used by us to refinance our existing credit facilities, to pay fees and expenses in connection with the Credit Agreements, and for working capital purposes.

The Term Loan Credit Agreement matures on July 26, 2026, and the ABL Credit Agreement terminates on July 26, 2024.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 Credit Agreements contain certain customary representations, warranties, and affirmative and negative covenants. The ABL Credit Agreement also contains a financial covenant, which requires us to maintain a consolidated fixed charge coverage ratio of not less than 1.10 to 1.00, provided that the financial covenant under the ABL Credit Agreement is only applicable when availability falls below a certain threshold. Based

At September 30, 2019, we were in compliance with the Credit Agreements, and based on our current financial projections, we expect to remain in compliance with this covenant.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 this covenant.our Credit


Agreements. If we are unable to do so, it would be necessary to seek an amendment to the covenant from our lenders, which, if obtained, could require payment of additional fees, increased interest rates or other conditions or restrictions.

See Note 8, "Debt," to the condensed notes to the consolidated financial statements included in this report for additional discussion of our credit 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 JuneSeptember 30, 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, 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 JuneSeptember 30, 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, 2018.
See Note 2, "Recently Adopted and New Accounting Standards,"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.



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 JuneSeptember 30, 2019, there were $335.0$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 $335.0$358.0 million, would have an approximate $3.4$3.6 million annual effect on interest expense. We currently do not attempt to alleviate the effects of short-term interest rate fluctuations on our credit facilities' borrowings through the use of derivative financial instruments.
Commodity Risk
We are exposed to market risk for changes in natural gas commodity pricing, which we partially mitigate through the use of firm price contracts for a portion of our natural gas requirements for our manufacturing facilities. As of JuneSeptember 30, 2019, these contracts covered approximately 35%47% of our expected average monthly natural gas requirements for the remainder of 2019.2019, and a lesser amount for 2020.
Foreign Currency Risk
We have minimal foreign currency exchange risk. Nearly all of our international sales are denominated in U.S. dollars.



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 secondthird quarter of 2019. Based on that evaluation, the CEO and CFO have concluded that, as of JuneSeptember 30, 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 JuneSeptember 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 subsequent 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 periods presented in accordance with U.S. generally accepted accounting principles.
Changes in Internal Controls
Other 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
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.

ITEM 1A. 
Risk Factors
There are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018. See Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, entitled “Risk Factors.”
ITEM 6.
Exhibits
 
EXHIBIT
NUMBER
 DESCRIPTION
10.1
10.2
10.3*10.1* 
   
10.4*10.2* 
   
(31) 
  
(32)** 
   
101.INS XBRL Instance Document
  
101.SCH XBRL Taxonomy Extension Schema.
  
101.CAL XBRL Taxonomy Extension Calculation Linkbase.
  
101.DEF XBRL Taxonomy Extension Definition Linkbase.
  
101.LAB XBRL Taxonomy Extension Label Linkbase.
  
101.PRE XBRL Taxonomy Extension Presentation Linkbase.
* 
Incorporated by reference.
  
** 
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.














SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
     
   CLEARWATER PAPER CORPORATION
   (Registrant)
   
     
August 8,November 5, 2019 By/s/ ROBERT G. HRIVNAK
    Robert G. Hrivnak
    Senior Vice President, Finance and
    Chief Financial Officer
    (Duly Authorized Officer; Principal
    Financial Officer)
August 8, 2019By/s/ ROBERT N. DAMMARELL
Robert N. Dammarell
Vice President, Corporate Controller
(Duly Authorized Officer;Officer and Principal
    Accounting Officer)
     
    
 

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