Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number: 001-34146
CLEARWATER PAPER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
20-3594554
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
 
 
601 W. Riverside Avenue, Suite 1100
 
 
Spokane, Washington
 
99201
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (509) 344-5900
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
 
NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock ($0.0001 par value per share)
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨ Yes    ý No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨ Yes    ý No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý Yes    ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý Yes    ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨

    
Accelerated filer 
 
x
Non-accelerated filer 
 
¨ (Do not check if a smaller reporting company)
    
Smaller reporting company 
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨ Yes    ý No
As of June 30, 2018 (the last business day of the registrant’s most recently completed second quarter), the aggregate market value of the common stock held by non-affiliates of the registrant was $373.9 million. Shares of common stock beneficially held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 11, 2019, 16,515,156 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed on or about April 2, 2019, with the Securities and Exchange Commission in connection with the registrant’s 2019 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.



CLEARWATER PAPER CORPORATION
Index to 2018 Form 10-K
 
  
  
PAGE
NUMBER
 
PART I
 
ITEM 1.
Business
ITEM 1A.
Risk Factors
ITEM 1B.
Unresolved Staff Comments
ITEM 2.
Properties
ITEM 3.
Legal Proceedings
ITEM 4.
Mine Safety Disclosures
 
PART II
 
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
  Purchases of Equity Securities
ITEM 6.
Selected Financial Data
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of
  Operations
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risks
ITEM 8.
Financial Statements and Supplementary Data
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial
  Disclosure
ITEM 9A.
Controls and Procedures
91-92
ITEM 9B.
Other Information
 
PART III
 
ITEM 10.
Directors, Executive Officers and Corporate Governance
ITEM 11.
Executive Compensation
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related
  Stockholder Matters
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
ITEM 14.
Principal Accounting Fees and Services
 
PART IV
 
ITEM 15.
Exhibits, Financial Statement Schedules
ITEM 16.
Form 10-K Summary
SIGNATURES
 



Part I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Our disclosure and analysis in this report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding production quality and quantity, costs and timing associated with the expansion of our Shelby, North Carolina facility; our strengths and related benefits; our strategy; pulp production and the continuous digester at our Idaho facility; competitive market conditions, raw materials and input usage and costs, including energy costs and usage; sellling, general and administrative cost reduction benefits; strategic projects and related costs and benefits; energy conservation; cash flows; capital expenditures; return on investment from capital projects; tax rates; operating costs; selling, general and administrative expenses; timing of and costs related to major maintenance and repairs; liquidity; benefit plan funding levels; capitalized interest; and interest expenses. Words such as “anticipate,” “expect,” “intend,” “plan,” “target,” “project,” “believe,” “schedule,” “estimate,” “may,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are based on management’s current expectations, estimates, assumptions and projections that are subject to change. Our actual results of operations may differ materially from those expressed or implied by the forward-looking statements contained in this report. Important factors that could cause or contribute to such differences in operating results include those risks discussed in Item 1A of this report, as well as the following:
competitive pricing pressures for our products, including as a result of increased capacity as additional manufacturing facilities are operated by our competitors;
the loss of, changes in prices in regard to, or reduction in, orders from a significant customer;
changes in customer product preferences and competitors' product offerings;
our ability to complete construction of our new tissue manufacturing operations in Shelby, North Carolina on time and within current cost expectations;
customer acceptance and timing and quantity of purchases of our tissue products, including the existence of sufficient demand for and the quality of tissue produced by our expanded Shelby, North Carolina operations when they are completed;
consolidation and vertical integration of converting operations in the paperboard industry;
our ability to successfully implement our operational efficiencies and cost savings strategies, along with related capital projects, and achieve the expected operational or financial results of those projects, including from the continuous digester at our Lewiston, Idaho facility;
changes in the cost and availability of wood fiber and wood pulp;
changes in transportation costs and disruptions in transportation services;
labor disruptions;
changes in the U.S. and international economies and in general economic conditions in the regions and industries in which we operate;
manufacturing or operating disruptions, including IT system and IT system implementation failures, equipment malfunctions and damage to our manufacturing facilities;
changes in costs for and availability of packaging supplies, chemicals, energy and maintenance and repairs;
larger competitors having operational and other advantages;
cyclical industry conditions;
changes in expenses, required contributions and potential withdrawal costs associated with our pension plans;
environmental liabilities or expenditures;
cyber-security risks;
reliance on a limited number of third-party suppliers for raw materials;
our ability to attract, motivate, train and retain qualified and key personnel;
material weaknesses in our internal control over financial reporting;
our substantial indebtedness and ability to service our debt obligations;
restrictions on our business from debt covenants and terms; and
changes in laws, regulations or industry standards affecting our business.
Forward-looking statements contained in this report present management’s views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management’s views to reflect events or circumstances occurring after the date of this report. You are advised, however, to consult any further disclosures we make on related subjects in our quarterly reports on Form 10-Q and current reports on Form 8-K filed with the Securities and Exchange Commission, or SEC.

1


ITEM 1.
 
Business
GENERAL
Clearwater Paper manufactures quality consumer tissue, away-from-home (or AFH) tissue, parent roll tissue, bleached paperboard and pulp at manufacturing facilities across the nation. The Company is a premier supplier of private label tissue to major retailers and wholesale distributors, including grocery, drug, mass merchants and discount stores. In addition, the company produces bleached paperboard used by quality-conscious printers and packaging converters, and offers services that include custom sheeting, slitting and cutting. Clearwater Paper's employees build shareholder value by developing strong customer relationships through quality and service.
On December 16, 2016, we acquired Manchester Industries, or Manchester, an independently-owned paperboard sales, sheeting and distribution supplier to the packaging and commercial print industries. The addition of Manchester's customers to our paperboard business extended our reach and service platform to small and mid-sized folding carton plants, as we now offer a range of converting services that include custom sheeting, slitting and cutting. These converting operations include five strategically located facilities in Virginia, Pennsylvania, Indiana, Texas and Michigan.
On March 31, 2017, we permanently closed our Oklahoma City, Oklahoma converting facility.
On August 21, 2018, we completed the sale of our Ladysmith, Wisconsin tissue manufacturing facility to a private buyer.
Company Strengths
Leading private label tissue manufacturer with a broad U.S. footprint. Our Consumer Products business is a premier private label tissue manufacturer. We have through-air-dried, or TAD, tissue manufacturing facilities in Shelby, North Carolina and Las Vegas, Nevada, and non-TAD manufacturing facilities located in Lewiston, Idaho and Neenah, Wisconsin, as well as converting operations strategically located across the United States. In addition, in 2019 we expect to complete construction of a new NTT machine at our Shelby facility that will produce a variety of high-quality ultra-premium and premium bath, paper towel and napkin products. We believe we were the seventh largest tissue manufacturer in the North American tissue market as of December 31, 2018, based on tissue parent roll capacity. Our broad manufacturing footprint allows us to service a diverse customer base, on a cost effective basis, including major grocery store chains and retailers across the U.S.
High quality brand-equivalent tissue and other products to meet retailers' private label strategies. Our Consumer Products business produces high-quality products that match the quality of the leading national brands. We focus on high value tissue products across a wide variety of categories and retail channels. We also manufacture a broad range of cost-competitive consumer tissue products, as well as recycled tissue and tissue parent rolls.
High quality premium bleached paperboard products. Our Pulp and Paperboard business produces premium paperboard products with ultra-smooth print surfaces, superior cleanliness, and excellent forming and sealing characteristics. Products are available in several thicknesses to provide the level of rigidity and strength needed for a wide range of applications. The high quality of our paperboard allows buyers to use our products for packaging where branding and quality are critical, such as ice cream containers, drink cups, health and beauty packaging, pharmaceutical packaging, and point of purchase displays.
Long-standing customer relationships. Our Consumer Products business supplies private label tissue products to several of the largest national retail chains. Our top 10 Consumer Products customers in 2018 accounted for approximately 80% of our total consumer products net sales. The average tenure of these customer relationships was approximately 12 years. Our Consumer Products business served 69 customers in 2018 across a broad geographic area. We also have long-standing customer relationships with our paperboard customers. Our top 10 paperboard customers in 2018 accounted for approximately 40% of our total paperboard net sales. The average tenure of these customer relationships was approximately 30 years.
Strategically positioned Pulp and Paperboard facilities. Our Pulp and Paperboard mill in Lewiston, Idaho is one of only two solid bleach sulfate, or SBS, paperboard mills, and the only coated SBS paperboard mill, in the Western U.S. to offer a full range of specialized products to meet the needs of customers for traditional folding carton, plates, cups and liquid packaging products. This facility's geographic location reduces transportation costs to customers in North America as well as Asia, which allows us to compete on a cost-advantaged basis relative to East Coast producers. Our Cypress Bend, Arkansas mill is centrally located, which reduces transportation costs to the Midwestern and Eastern U.S. and complements the Lewiston mill in shipping to customers nationwide.

2


Largely integrated pulp and tissue operations. Our Consumer Products business sources a significant portion of its pulp supply internally from our pulp and paperboard operations in Idaho. This relationship provides our Consumer Products business with a secure pulp supply as well as significant transportation and drying cost savings, provides our pulp and paperboard business with a steady demand source and helps mitigate input cost volatility associated with purchasing external pulp.
Strategy
Our long-term strategy is to expand our business to meet the needs of our customers and optimize the profitability of both our consumer products business and our paperboard business. In the near-term, our focus is on successfully completing strategic capital projects, optimizing the operating efficiency and cost effectiveness of both segments of our company and reducing debt.

ORGANIZATION
Our businesses are organized into two operating segments: Consumer Products and Pulp and Paperboard. Additional information relating to the amounts of net sales, operating income, depreciation and amortization, identifiable assets and capital expenditures attributable to each of our operating segments for 2016-2018, as well as geographic information regarding our net sales, is set forth in Note 19, "Segment Information" to our consolidated financial statements included under Part II, Item 8 of this report.
Consumer Products Segment
Our Consumer Products segment manufactures and sells a complete line of at-home tissue products as well as AFH products. Our integrated manufacturing and converting operations and geographic footprint enable us to deliver a broad range of cost-competitive products with brand equivalent quality to our customers. In 2018, our Consumer Products segment had net sales of $884.8 million. A listing of our Consumer Products segment facilities is included under Part I, Item 2 of this report.
Tissue Industry Overview
The U.S. tissue market can be divided into two market segments: the at-home or consumer retail purchase segment, which represented approximately two-thirds of our U.S. tissue sales in 2018; and the AFH segment, which represents the remaining one-third of U.S. tissue market sales and includes tissue for locations such as restaurants, hotels and office buildings.
The U.S. at-home tissue segment consists of bath, paper towels, facial and napkin products categories. Each category is further distinguished according to quality segments: ultra, premium, value and economy. As a result of manufacturing process improvements and consumer preferences, the majority of at-home tissue sold in the U.S. is ultra and premium quality.
At-home tissue producers are comprised of companies that manufacture branded tissue products, private label tissue products, or both. Branded tissue suppliers manufacture, market and sell tissue products under their own nationally branded labels. Private label tissue producers manufacture tissue products for retailers to sell as their store brand.
In the U.S., at-home tissue is primarily sold through grocery stores, mass merchants, warehouse clubs, drug stores and discount dollar stores. Tissue has historically been one of the strongest segments of the paper industry due to its steady demand growth largely due to population growth in the U.S., that occur in a number of other paper industry segments. In addition to economic and demographic drivers, tissue demand is affected by product innovations and shifts in distribution channels.
Our Consumer Products Business
We believe that we are the only U.S. consumer tissue manufacturer that solely produces a full line of quality private label tissue products for large retail trade channels. Most U.S. tissue producers manufacture only branded products, or both branded and private label products, or in the case of certain smaller or midsize manufacturers, only produce a limited range of tissue products or quality segments. Because we do not mass produce and market branded tissue products, we believe we are able to offer products that match the quality of leading national brands, but generally at lower prices. We utilize independent companies to routinely test our product quality.

3


In bathroom tissue, the majority of our sales are high quality two-ply ultra and premium products. In paper towels, we produce and sell ultra quality towels as well as premium and value towels. In the facial category, we sell ultra-lotion three-ply and a complete line of two-ply premium products, as well as value facial tissue. In napkins, we manufacture ultra two- and three-ply dinner napkins, as well as premium and value one-ply luncheon napkins. Value grade products utilizing recycled fiber are also produced for customers who wish to further diversify their product portfolio. We compete primarily in the at-home portion of the U.S. tissue market, which made up approximately 90% of our Consumer Products segment sales in 2018.
We manufacture and sell a line of AFH products to customers with commercial and industrial tissue needs. Products include conventional one- and two-ply bath tissue, two-ply paper towels, hard wound towels and dispenser napkins.
As of December 31, 2018, our consumer products were manufactured on 8 paper machines at four facilities located throughout the U.S. Parent rolls from our paper machines are then converted and packaged at our converting facilities located across the U.S. Two of our paper machines, located in Las Vegas, Nevada and Shelby, North Carolina, produce TAD tissue that we convert into national brand comparable, ultra quality towels and bath tissue. Our new paper machine in Shelby, which we expect to be completed in early 2019 and will be fully operational in 2020, will provide national brand comparable ultra-premium and premium quality towels and bath tissue.
We had one customer in the Consumer Products segment, the Kroger Company, that accounted for approximately 11.1% of our total consolidated net sales in 2018, approximately 15.3%, of our total consolidated net sales in 2017, and approximately 13.4%, of our total company net sales in 2016.
We sell private label tissue products through our own sales force and compete based on product quality, customer service and price. We deliver customer-focused business solutions by assisting in managing product assortment, category management, and pricing and promotion optimization.
Pulp and Paperboard Segment
Our Pulp and Paperboard segment manufactures and markets bleached paperboard for the high-end segment of the packaging industry and is a leading producer of SBS paperboard. It also offers services that include custom sheeting, slitting and cutting of paperboard. This segment also produces hardwood and softwood pulp, which is primarily used as the basis for our paperboard products, and slush pulp, which supplies to our Consumer Products segment. In 2018, our Pulp and Paperboard segment had net sales of $839.4 million. A listing of our Pulp and Paperboard segment facilities is included under Part I, Item 2 of this report.
Pulp and Paperboard Industry Overview
SBS paperboard is a premium paperboard grade that is most frequently used to produce folding cartons, liquid packaging, cups and plates, blister and carded packaging, top sheet, and commercial printing items. SBS paperboard is used for such products because it is manufactured using virgin fiber combined with the kraft bleaching process, which results in superior cleanliness, brightness and consistency. SBS paperboard is often manufactured with a clay coating to provide superior surface printing qualities. We also have the capability to produce targeted grades with a percentage of post-consumer furnish. SBS paperboard can also be extrusion coated with a barrier film to provide moisture protection for some uses.
In general, the process of making paperboard begins by chemically cooking wood fibers to make pulp. The pulp is bleached to provide a white, bright pulp, which is formed into paperboard. Bleached pulp that is to be used as market pulp is dried and baled on a pulp drying machine, bypassing the paperboard machines. The various grades of paperboard are wound into rolls for converting to final end users. Liquid packaging and cup stock grades are often coated with polyethylene, a plastic coating, in a separate operation to create a resistant and durable liquid barrier.
Folding Carton Category. Folding carton is the largest portion of the SBS category of the U.S. paperboard industry, comprising approximately 40% of the category in 2018. Within the folding carton segment there are varying qualities of SBS paperboard. The high end of the folding carton category in general requires a premium print surface and includes uses such as packaging for pharmaceuticals, cosmetics and other premium retail goods. SBS paperboard is also used in the packaging of frozen foods, beverages and baked goods.
Liquid Packaging and Cup Category. SBS liquid packaging paperboard is primarily used in the U.S. for the packaging of juices. In Japan and other Asian countries, SBS liquid packaging paperboard is primarily used for the packaging of milk and a wide range of consumable liquids, including alcoholic beverages. The cup segment of the market consists primarily of hot and cold drink cups and food packaging. The hot and cold cups are primarily used to serve beverages in quick-service restaurants, while round food containers are often used for packaging premium ice-cream, hot noodle and dry food products.

4


Commercial Printing Category. Commercial printing applications use bleached bristols, which are heavyweight paper grades, to produce postcards, signage and promotional literature. Bristols can be clay coated on one side or both sides for applications such as brochures, presentation folders and paperback book covers. Customers in this segment are accustomed to high-quality paper grades, which possess superior printability and brightness compared to most paperboard packaging grades. Suppliers to this segment must be able to deliver small volumes, often within 24 hours.
Market Pulp. The majority of the pulp manufactured worldwide is used in paper and paperboard production, usually at the same mill location. In those cases where a paper mill is not paired with pulp production operations or requires pulp with different production qualities, it must purchase pulp on the open market. Market pulp is defined as pulp produced for sale to these customers and it excludes tonnage consumed by the producing mill or shipped to any of its affiliated mills within the same company.
Our Pulp and Paperboard Business
Our Pulp and Paperboard segment operates pulp and paperboard facilities in Idaho, which has two paperboard machines, and Arkansas, which has one paperboard machine. As of December 31, 2018, we were one of the four largest producers of bleached paperboard in North America with approximately 14% of the available production capacity. Additionally, we provide custom sheeting, slitting, and cutting of paperboard products from five converting facilities.
Our overall pulp and paperboard production consists primarily of folding carton, liquid packaging, cup and plate products, blister and carded packaging, top sheet, commercial printing grades and hardwood and softwood pulp.
Folding carton board used in pharmaceuticals, cosmetics and other premium packaging, such as those that incorporate foil and holographic lamination, accounts for the largest portion of our total paperboard sales. We focus on high-end folding carton applications where the heightened product quality requirements provide for differentiation among suppliers, generally resulting in margins that are more attractive than less demanding packaging applications.
Our liquid packaging paperboard is known for its cleanliness and printability, and is engineered for long-lived performance due to its three-ply, softwood construction. Our reputation for producing liquid packaging meeting the most demanding standards for paperboard quality and cleanliness has resulted in meaningful sales in Japan, where consumers have a particular tendency to associate blemish-free, vibrant packaging with the cleanliness, quality and freshness of the liquids contained inside.
We also sell cup stock and plate stock grades for use in standard food service products.
With the exception of our capability to supply just-in-time sheeting and narrow rolls, we do not produce converted paperboard end-products, so we are not simultaneously a supplier of and a competitor to our customers in key market segments, notably folding carton and cup. Of the five largest SBS paperboard producers in the U.S., we are the only producer that does not convert SBS paperboard into folding cartons, cups, plates, or liquid packaging end-use products. We position our independent status to attract a diverse group of loyal customers because when there is increased market demand for paperboard, we do not divert our production to internal uses.
We can convert paperboard parent rolls to flat sheets and narrow rolls, which expands our in-market service capabilities and allows us to support small and mid-sized folding carton converters that buy sheeted paperboard to convert into packaging end-products. Providing a service platform in this way expands the key folding carton segment of our business and does not compete with our customers in other key market segments.
At our Idaho facility we produce bleached softwood pulp primarily for internal use, including in our Consumer Products segment.
With the recent installation of a continuous pulp digester at our Idaho facility, our pulp mills are capable of producing approximately 904,000 tons of pulp on an annual basis. We completed the continuous pulp digester installation at our Idaho facility at the end of the third quarter of 2017. In 2018, we produced approximately 838,000 tons of pulp in the aggregate and utilized approximately 81% of that production, or approximately 680,000 tons, to produce approximately 810,000 tons of paperboard. The increase in tonnage from pulp to paperboard production is due to the addition of coatings and other manufacturing processes. We also used approximately 19% of our pulp production, or approximately 156,000 tons, in our Consumer Products segment to produce tissue products. The remaining pulp production of less than 1%, or approximately 2,000 tons, was sold externally by our Consumer Products segment.
We utilize various methods for the sale and distribution of our paperboard and softwood pulp. The majority of our paperboard is sold to packaging converters domestically through sales managers located throughout the U.S., with a smaller percentage channeled through distribution to commercial printers. Additionally, we directly sell sheeted paperboard products to folding carton converters, merchants and commercial printers. The majority of our international paperboard sales are conducted through sales agents and are primarily denominated in U.S. dollars. Our principal methods of competing are product quality, customer service and price.

5


RAW MATERIALS AND INPUT COSTS
For our manufacturing operations, the principal raw material used is wood fiber, which consists of purchased pulp and chips, sawdust and logs. In 2018, our Consumer Products segment sourced approximately 51% of its total pulp supply internally, with the remainder purchased from external suppliers. We own and operate a wood chipping facility located in Clarkston, Washington, near our Lewiston, Idaho, facility, which we believe bolsters our wood fiber position and provides short-term and long-term cost savings.
We utilize a significant amount of chemicals in the production of pulp and paper, including caustic, polyethylene, starch, sodium chlorate, latex and specialty process paper chemicals. A portion of the chemicals used in our manufacturing processes, particularly in the pulp-making process, are petroleum-based or are impacted by petroleum prices.
Transportation is a significant cost input for our business. Fuel prices, mileage driven and line-haul rates impact our transportation costs for delivery of raw materials to our manufacturing facilities, internal inventory transfers and delivery of our finished products to customers.
We consume substantial amounts of energy, such as electricity, hog fuel, steam and natural gas. We purchase a significant portion of our natural gas and electricity under supply contracts, most of which are between a specific facility and a specific local provider. Under most of these contracts, the providers have agreed to provide us with our requirements for a particular type of energy at a specific facility. Most of these contracts have pricing mechanisms that adjust or set prices based on current market prices. In addition, we use firm-price contracts to mitigate price risk for certain of our energy requirements.
As a significant producer of private label consumer tissue products, we also incur expenses related to packaging supplies used for retail chains, wholesalers and cooperative buying organizations.
Our maintenance and repairs are expensed as incurred. We perform routine maintenance on our machines and equipment and periodically replace a variety of parts such as motors, pumps, pipes and electrical parts.
We also record depreciation expense associated with our plant and equipment.
Further information regarding our raw material and input costs is included under "Operating Costs" within Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report.
SEASONALITY
Our Consumer Products segment experiences a decrease in shipments during the fourth quarter generally as a result of decreased consumer demand, retail brand holiday promotions, and end of year inventory management by non-retail customers.  In addition, customer buying patterns for our paperboard generally result in lower sales for certain grades of our Pulp and Paperboard segment during the first and fourth quarters, when compared to the second and third quarters of a given year.
ENVIRONMENTAL
Information regarding environmental matters is included under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report, and is incorporated herein by reference.
WEBSITE
Interested parties may access our periodic and current reports filed with the SEC, at no charge, by visiting our website, www.clearwaterpaper.com. In the menu select “Investor Relations,” then select “Financial Information & SEC Filings.” Information on our website is not part of this report.
EMPLOYEES
As of December 31, 2018, we had approximately 3,130 employees, of which approximately 1,750 were employed by our Consumer Products segment, approximately 1,230 were employed by our Pulp and Paperboard segment, and approximately 150 were corporate administration employees. This workforce consisted of approximately 710 salaried employees and approximately 2,420 hourly and fixed rate employees. As of December 31, 2018, approximately 48% of our workforce was covered under collective bargaining agreements.

6


Unions represent hourly employees at three of our manufacturing sites. We had three hourly union labor contracts that expired in 2017 and 2018 and are currently being renegotiated:
CONTRACT
EXPIRATION
DATE
DIVISION AND LOCATION
UNION
APPROXIMATE
NUMBER OF HOURLY
EMPLOYEES
August 31, 2017
Consumer Products Division & Pulp & Paperboard Division -
Lewiston, Idaho
United Steel Workers (USW)
855

August 31, 2017
Consumer Products Division & Pulp & Paperboard Division -
Lewiston, Idaho
International Brotherhood of Electrical Workers (IBEW)
60

May 31, 2018
Pulp & Paperboard Division -
Lewiston, Idaho,
No. 4 Power Boiler Unit
International Association of Machinists (IAM)
30


The following hourly union labor contract expires in 2019:
CONTRACT
EXPIRATION
DATE
DIVISION AND LOCATION
UNION
APPROXIMATE
NUMBER OF HOURLY
EMPLOYEES
July 31, 2019
Pulp & Paperboard Division -
Cypress Bend, Arkansas
United Steel Workers (USW)
260






7


EXECUTIVE OFFICERS OF THE REGISTRANT
The following individuals are deemed our “executive officers” under the Securities Exchange Act of 1934 as of December 31, 2018. Executive officers of the company are generally appointed as such at the annual meeting of our board, and each officer holds office until the officer’s successor is duly elected and qualified or until the earlier of the officer’s death, resignation, retirement, removal by the board or as otherwise provided in our bylaws. There are no arrangements or understandings between any of our executive officers and any other persons pursuant to which they were selected as officers. No family relationships exist among any of our executive officers.
Linda K. Massman (age 52), has served as President and Chief Executive Officer, as well as a director, since January 2013. Ms. Massman served as President and COO from November 2011 to December 2012. She served as CFO and Senior Vice President, Finance from May 2011 to November 2011, and as CFO and Vice President, Finance from December 2008 to May 2011. From September 2008 to December 2008, Ms. Massman served as Vice President of Potlatch Corporation pending completion of the spin-off of Clearwater Paper Corporation. From May 2002 to August 2008, Ms. Massman was Group Vice President, Finance and Corporate Planning, for SUPERVALU Inc., a grocery retail company. In 2017, Ms. Massman served in the position of board chair for the American Forest & Paper Association (AF&PA), the national trade association of the forest products industry. Ms. Massman has served as a director of TreeHouse Foods, Inc. (NYSE:THS) since July 2016 and is a member of its Audit Committee. She served as a member of their Nominating and Governance Committee from 2016 to 2018. Ms. Massman also served as a director of Black Hills Corporation (NYSE: BKH), an energy company, from January 2015 to July 2018 and was a member of its Compensation Committee.
John D. Hertz (age 52) joined the company in June 2012 as Senior Vice President, and has served as Senior Vice President, Finance and Chief Financial Officer since August 2012. From June 2010 to June 2012, Mr. Hertz was the Vice President and Chief Financial Officer of Novellus Systems, Inc. From October 2007 to June 2010, he served as Novellus' Vice President of Corporate Finance and Principal Accounting Officer and as Vice President and Corporate Controller from June 2007 to October 2007. From 2000 to 2007, Mr. Hertz worked for Intel Corporation where he held a number of positions, including Central Finance Controller of the Digital Enterprise Group, Finance Controller of the Enterprise Platform Services Division and Accounting Policy Controller. Prior to that, Mr. Hertz was a Senior Manager with KPMG LLP.
Steve M. Bowden (age 55) has served as Senior Vice President, General Manager, Pulp and Paperboard Division since October 1, 2018. Prior to joining the company, from September 2016 to November 2017, Mr. Bowden was the North American Region Vice President - Labels for Constantia Fleibles, which was subsequently acquired by the Multi-Color Corporation at which he served as President, North America Food and Beverage Division from November 2017 to September 2018. From March 2013 to September 2016, Mr. Bowden was President and COO of Quality Associates, a contract packager. From March 2010 to September 2013, Mr. Bowden was the Executive Vice President, Marketing and Strategy of xpedx, a division of International Paper focused on the print, packaging, and facility supplies product segments.  Mr. Bowden worked for International Paper for more than twenty-six years, including in sales management and as a manager of a coated paperboard mill. 
Michael S. Gadd (age 54) has served as Senior Vice President since May 2011 and General Counsel and Corporate Secretary since December 2008. He served as Vice President from December 2008 to May 2011. From March 2006 to December 2008, Mr. Gadd served as Associate General Counsel of Potlatch Corporation, and served as Corporate Secretary of Potlatch from July 2007 to December 2008. From January 2001 to January 2006, Mr. Gadd was an attorney with Perkins Coie, LLP in Portland, Oregon.
Arsen S. Kitch (age 37) has served as Senior Vice President, General Manager, Consumer Products Division since May 2018 and served as Vice President, General Manager, Consumer Products Division from January 2018 to May 2018. He served as Vice President, Finance from January 2015 through December 2017, and served as Senior Director, Strategy and Planning from August 2013 through December 2014. Mr. Kitch was with Nestlé, a food manufacturer, from 2011 to 2013 including as a Finance Director in his final position.
Kari G. Moyes (age 51) has served as Senior Vice President, Human Resources since February 2015, and served as Vice President, Labor Relations from July 2013 through January 2015. From November 2010 through June 2013, Ms. Moyes served as National Director of Human Resources for Nestlé. Prior to her tenure with Nestle, Ms. Moyes spent 10 years with Pepsico in various capacities.


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ITEM 1A.
 
Risk Factors
Our business, financial condition, results of operations and liquidity are subject to various risks and uncertainties, including those described below, and as a result, the trading price of our common stock could decline.
Increases in tissue supply, particularly in the premium and ultra categories, could adversely affect our operating results and financial condition.
Over the past few years, several new or refurbished premium and ultra-quality tissue paper machines have been completed or announced by us and by our competitors, including private label competitors, which will result in a substantial increase in the supply of premium and ultra-quality tissue in the North American market. Additionally, several new or refurbished conventional tissue machines have been installed or announced, including as a result of foreign competitors increasing their presence and operations in North America. We believe that increasing tissue capacity, together with intensifying competition experienced by our retail customers, has made it difficult for us to pass through to our customers the significant increases in input costs we have experienced in the last several years. If demand for tissue products in the North American market does not increase or consumer purchasing of premium and ultra-quality tissue do not increase commensurate with the increased capacity, the increase in supply of ultra-quality tissue products could have a material adverse affect on the price of premium and ultra-quality tissue products. In addition, increased supply of premium and ultra-quality tissue may adversely affect the market prices for such tissue and result in the displacement of demand for conventional tissue, which could adversely affect the market price for conventional tissue products, which will continue to represent a significant portion of our total production for the foreseeable future.
The loss of, or a significant reduction in, orders from, or changes in prices in regards to, any of our large customers could adversely affect our operating results and financial condition.
We derive a substantial amount of revenues from a concentrated group of customers. For example, our top 10 consumer products customers in 2018 accounted for approximately 80% of our total consumer products net sales. We have experienced increased price and promotion competition in our consumer products business, particularly in regards to ultra-quality products, and this competition has decreased our gross margins and adversely affected our financial condition. Our paperboard sales are also concentrated, with the top 10 paperboard customers in 2018 accounting for approximately 40% of our total paperboard net sales. If we lose any of these customers or a substantial portion of their business or if the terms of our relationship with any of them becomes less favorable to us, our net sales would decline, which would harm our results of operations and financial condition. Some of our customers have the capability to produce the parent rolls or products that they purchase from us.
We generally do not have long-term contracts with many of our customers that ensure a continuing level of business from them. In addition, our agreements with our customers, including our largest customers, are not exclusive and generally do not contain minimum volume purchase commitments. Our relationship with our largest and most important customers will depend on our ability to continue to meet their needs for quality products and services at competitive prices. If we lose one or more of these customers or if we experience a significant decline in the level of purchases by any of them, we may not be able to quickly replace the lost business volume and our operating results and business could be harmed. In the third quarter of 2017, our largest tissue customer made the decision to go from a single source model to a multi-source model for its private label tissue supply beginning in the first quarter of 2018, which significantly affected sales volumes for our conventional tissue in 2018.
Competitors' branded products and private label products could have an adverse effect on our financial results.
Our consumer products compete with well-known, branded products, as well as other private label products. Our business may be harmed by new product offerings by competitors, the effects of consolidation within retailer and distribution channels, and price competition from companies that may have greater financial resources than we do. If we are unable to offer our existing customers, or new customers, tissue products comparable to branded products or other companies' private label products in terms of quality, customer service, and/or price, we may lose business or we may not be able to grow our existing business and be forced to sell lower-margin products, all of which could negatively affect our financial condition and results of operations.
Changing retail purchasing patterns have increased the need to increase operating efficiencies and diversify our customer base and sales channels.
We have historically sold a majority of our consumer tissue products through retail grocery stores.  These and other traditional retail outlets are facing increasingly intense competition from supercenters, club stores, wholesale grocers, and drug, dollar, variety and specialty stores, as well as competitors who have incorporated the internet as a direct-

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to-consumer channel and internet-only providers that sell tissue and other grocery products.  The intense competition faced by our customers has resulted in increased efforts by them to reduce costs from suppliers like us and requires that we become more cost efficient in order to maintain our market share and profitability.  The changing retail landscape also requires that we develop and maintain relationships with a wider variety of retailers and retail channels to succeed in this dynamic environment. 
The expansion of our business through the construction of new tissue making and converting facilities may not proceed as anticipated.
In connection with our long-term expansion strategy, we are adding a paper machine capable of producing certain premium and ultra-premium quality tissue products, and have added converting facilities to our Shelby, North Carolina site. The tissue machine being installed in North Carolina is highly complex and costly and it can be manufactured by only one company in the world. Installing this machine and building the supporting facilities entails numerous risks, including difficulties in completing the project on time due to construction or permitting issues, cost overruns, difficulties in integrating the new operations and personnel, and uncertainties regarding the existence of sufficient customer demand and acceptance of the quality of the tissue produced once the new paper machine becomes operational. Any of these risks, if realized, could have a material adverse effect on our business, financial condition, results of operations and liquidity. In addition, such events could also divert management’s attention from other business concerns. We did experience significant cost overruns for the Shelby expansion in 2018.
Consolidation in the North American paperboard and converting industry may adversely affect our business.
The ongoing consolidation of paperboard and paperboard converting businesses, including through the acquisition and integration of such converting businesses by larger competitors of ours, could result in a loss of customers and sales in our pulp and paperboard business. A loss of paperboard customers or sales as a result of consolidations and integrations could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our operational efficiency optimization and cost-saving goals may not be fully achieved or may not support the level of investment or commitment we are making.
Our near term strategy of improving our competitive position by investing to achieve increased operational efficiencies and implementing cost control measures may not be fully achieved. Those goals, along with the capital projects we have invested in or are investing in to help achieve these goals, including the recently installed continuous digester at our Lewiston facility and warehouse automation at several facilities, may not achieve expected operational or financial results in the time frames we anticipate, or at all. Such delays or failures could materially affect our business, cash flows and financial condition. The continuous digester in Lewiston is currently delivering significantly less in expected financial benefits and we continue to work to achieve the expected operational and financial benefits of the digester project.
Our business and financial performance may be harmed by future labor disruptions.
As of December 31, 2018, approximately 48% of our full-time employees were represented by unions under collective bargaining agreements. As these agreements expire, we may not be able to negotiate extensions or replacement agreements on terms acceptable to us. In 2018 and 2017, collective bargaining agreements for hourly employees at our Lewiston, Idaho facility, which affects approximately 945 employees, expired and are currently being re-negotiated. Any failure to reach an agreement with one of the unions may result in strikes, lockouts, work slowdowns, stoppages or other labor actions, any of which could have a material adverse effect on our operations and financial results.
We depend on external sources of wood pulp and wood fiber for a significant portion of our tissue production, which subjects our business and results of operations to potentially significant fluctuations in the price of market pulp and wood fiber.
Our Consumer Products segment sources a significant portion of its wood pulp requirements from external suppliers, which exposes us to price fluctuation. In 2018, we sourced approximately 49% of our pulp requirements for tissue manufacturing externally, comprising approximately 10.9% of our consolidated net sales.
Pulp prices can, and have, changed significantly from one period to the next. The volatility of pulp prices can adversely affect our earnings if we are unable to pass cost increases on to our customers or if the timing of any price increases for our products significantly trails the increases in pulp prices. In 2018, we were largely unable to pass on these pulp price increases to our customers due to competitive conditions in the consumer tissue industry.

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Wood fiber is the principal raw material used to create wood pulp, which in turn is used to manufacture our pulp and paperboard products and consumer products. In 2018, our wood fiber costs were 9.6% of our consolidated net sales. Wood fiber pricing is subject to regional market influences, and our cost of wood fiber may increase in the areas our pulp and paperboard facilities are located due to market shifts in those regions. For example, much of the wood fiber we use in our pulp manufacturing process in Lewiston, Idaho, is the by-product of sawmill operations. As a result, the price of these residual wood fibers is affected by operating levels in the lumber industry. Significant reductions in home building during the past decade resulted in the closure or curtailment of operations at many sawmills and consolidation amongst suppliers. Further, the expansion of operations and production of other paper mills and wood pellet manufacturers in the Inland Northwest region of the United States has increased the demand and price for wood fiber. Additionally, the ability of paper and wood pellet mills in British Columbia to acquire wood fiber from the U.S. Inland Northwest region with limited to no reciprocal ability by U.S. mills to acquire wood fiber from British Columbia, reduces the supply of, and increases the costs, for wood fiber. The price of wood fiber is expected to remain volatile.

The primary source for wood fiber is timber, the availability of which may be limited by adverse weather, fire, insect infestation, disease, ice storms, wind storms, flooding and other natural and man-made causes, thereby reducing supply and increasing prices. For example, our Arkansas pulp and paperboard facility relies on whole log chips for a significant portion of its wood fiber, and in the past this facility has experienced increases in the costs for wood fiber due to extremely wet conditions in the Southeastern U.S. that limited accessibility and availability.
The effects on market prices for wood fiber resulting from various governmental programs involving tax credits or payments related to biomass and other renewable energy projects or from environmental litigation or regulation are uncertain and could result in a reduction in the supply of wood fiber available for our pulp and paperboard manufacturing operations. Additionally, wood pellet facilities or fluff pulp facilities, can increase demand and prices for wood fiber. If we and our pulp suppliers are unable to obtain wood fiber at favorable prices or at all, our costs will increase and our operations and financial results may be harmed.
Disruptions in transportation services or increases in our transportation costs could have a material adverse effect on our business.
Our business, particularly our consumer products business, is dependent on transportation services to deliver our products to our customers and to deliver raw materials to us as well as for intercompany shipments of parent rolls. Shipments of products and raw materials may be delayed or disrupted due to weather conditions, labor shortages or strikes, regulatory actions or other events. If our transportation providers are unavailable or fail to deliver our products in a timely manner, we may incur increased costs and we may be unable to manufacture and deliver our products on a timely basis.
The costs of these transportation services are also affected by geopolitical and economic events. In 2018, our transportation costs were 11.9% of our consolidated net sales, with those costs spiking in the second half of 2018 as the result of higher line haul rates, diesel prices and weather related events. We have not been able in the past, and may not be able in the future, to pass along part or all of any fuel price increases to customers. If we are unable to increase our prices as a result of increased fuel or transportation costs, our gross margins may be materially adversely affected.
United States and global economic conditions could have adverse effects on the demand for our products and financial results.
U.S. and global economic conditions and currency exchange rates have a significant impact on our business and financial results. Recessed global economic conditions and a strong U.S. dollar can affect our business in a number of ways, including causing declines in global demand for consumer tissue and paperboard, and increased competition from foreign manufacturers in the U.S. market.
We incur significant expenses to maintain our manufacturing equipment and any interruption in the operations of our facilities may harm our operating performance.
We regularly incur significant expenses to maintain our manufacturing equipment and facilities. The machines and equipment that we use to produce our products are complex, have many parts and some are run on a continuous basis. We must perform routine maintenance on our equipment and will have to periodically replace a variety of parts such as motors, pumps, pipes and electrical parts. In addition, our pulp and paperboard facilities require periodic shutdowns to perform major maintenance. These scheduled shutdowns of facilities result in decreased sales and increased costs in the periods in which they occur and could result in unexpected operational issues in future periods as a result of changes to equipment and operational and mechanical processes made during the shutdown period. We had two scheduled major maintenance shutdowns in 2017, which occurred during the second quarter at our Arkansas facility and the third quarter at our Lewiston, Idaho pulp and paperboard facility. We did not have any major

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maintenance shutdowns in 2018, but in 2019 we expect to have scheduled major maintenance at our Arkansas facility in the fourth quarter and at our Idaho facility in the third quarter.
Unexpected production disruptions could cause us to shut down or curtail operations at any of our facilities. For example, we had a fire at our Shelby, North Carolina facility in the first quarter of 2017 and the impregnation vessel that feeds our continuous digester at our Idaho facility plugged in the fourth quarter of 2018. Disruptions could occur due to any number of circumstances, including prolonged power outages, mechanical or process failures, shortages of raw materials, natural catastrophes, disruptions in the availability of transportation, labor disputes, terrorism, changes in or non-compliance with environmental or safety laws and the lack of availability of services from any of our facilities' key suppliers. Any facility shutdowns may be followed by prolonged startup periods, regardless of the reason for the shutdown. Those startup periods could range from several days to several weeks, depending on the reason for the shutdown and other factors. Any prolonged disruption in operations at any of our facilities could cause significant lost production, which would have a material adverse effect on our results of operations.
The cost of chemicals and energy needed for our manufacturing processes significantly affects our results of operations and cash flows.
We use a variety of chemicals in our manufacturing processes, including petroleum-based polyethylene and certain petroleum-based latex chemicals. In 2018, our chemical costs were 10.0% of our consolidated net sales. Prices for these chemicals have been and are expected to remain volatile. In addition, chemical suppliers that use petroleum-based products in the manufacture of their chemicals may, due to supply shortages and cost increases, ration the amount of chemicals available to us, and therefore we may not be able to obtain at favorable prices the chemicals we need to operate our business, if we are able to obtain them at all.
Our manufacturing operations also utilize large amounts of electricity and natural gas. In 2018, our energy costs were 4.9% of our consolidated net sales. Energy prices have fluctuated widely over the past decade, which in turn affects our cost of sales. For example, we experienced a dramatic spike in prices for natural gas at our Lewiston, Idaho facility in the first quarter of 2019 due to frigid temperatures in the Pacific Northwest as well as due to limited capacity on a major pipeline that supplies the Pacific Northwest resulting from damage to that pipeline that occurred in Canada. We purchase on the open market a substantial portion of the natural gas necessary to produce our products, and, as a result, the price and other terms of those purchases are subject to change based on factors such as worldwide supply and demand, geopolitical events, government regulation, weather, interruptions in pipeline and other delivery systems and natural disasters. Our energy costs in future periods will depend principally on our ability to produce a substantial portion of our electricity needs internally, on changes in market prices for natural gas and on reducing energy usage. Any significant energy shortage or significant increase in our energy costs in circumstances where we cannot raise the price of our products could have a material adverse effect on our results of operations. Any disruption in the supply of energy could also affect our ability to meet customer demand in a timely manner and could harm our reputation and our business.
Larger competitors have operational and other advantages over our operations.
The markets for our products are highly competitive, and companies that have substantially greater financial resources compete with us in each market. Some of our competitors have advantages over us, including lower raw material and labor costs and better access to the inputs of our products.
Our consumer products business faces competition from companies that produce the same type of products that we produce or that produce alternative products that customers may use instead of our products. Our consumer products business competes with the branded tissue products producers, such as Procter & Gamble, and branded label producers who manufacture branded and private label products, such as Georgia-Pacific and Kimberly-Clark. These companies are far larger than us, have more sales, marketing and research and development resources than we do, and enjoy significant cost advantages due to economies of scale. In addition, because of their size and resources, these companies may foresee market trends more accurately than we do and develop new technologies that render our products less attractive or obsolete.

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Our ability to successfully compete in the pulp and paperboard industry is influenced by a number of factors, including manufacturing capacity, general economic conditions and the availability and demand for paperboard substitutes. Our pulp and paperboard business competes with WestRock, Georgia-Pacific, and international producers, most of whom are much larger than us. Any increase in manufacturing capacity by any of these or other producers could result in overcapacity in the pulp and paperboard industry, which could cause downward pressure on pricing. For example, several newer facilities in China have large paperboard manufacturing capacities, the output of which increases paperboard supplies on the international market. Also, a large European manufacturer recently completed a paperboard facility that exports into the North American market and a another has converted a U.S. facility into a facility that produces SBS paperboard for the North American market. Increased production by foreign manufacturers may result in increased competition in the North American paperboard markets from direct sales by foreign competitors into these markets or increased competition in the U.S. as domestic manufacturers seek increased U.S. sales to offset displaced overseas sales caused by increased sales by foreign suppliers into Asia and European markets. Furthermore, customers could choose to use types of paperboard that we do not produce or could rely on alternative materials, such as plastic, for their products. An increased supply of any of these products could cause us to lower our prices or lose sales to competitors, either of which could have a material adverse effect on our results of operations and cash flows.

Cyclical industry conditions have in the past affected and may continue to adversely affect the operating results and cash flows of our pulp and paperboard business.
Our pulp and paperboard business has historically been affected by cyclical market conditions. We may be unable to sustain pricing in the face of weaker demand, and weaker demand may in turn cause us to take production downtime. In addition to lost revenue from lower shipment volumes, production downtime causes unabsorbed fixed manufacturing costs due to lower production levels. Our results of operations and cash flows may be materially adversely affected in a period of prolonged and significant market weakness. We are not able to predict market conditions or our ability to sustain pricing and production levels during periods of weak demand.
We rely on information technology in critical areas of our operations, and a disruption relating to such technology could harm our financial condition.
We use information technology, or IT, systems in various aspects of our operations, including enterprise resource planning, or ERP, management of inventories and customer sales. Some of these systems have been in place for long periods of time. We have different legacy IT systems that we are continuing to integrate. If one of these systems was to fail or cause operational or reporting interruptions, or if we decide to change these systems or hire outside parties to provide these systems, we may suffer disruptions, which could have a material adverse effect on our manufacturing and sales operation, results of operations and financial condition. In addition, we may underestimate the costs and expenses of developing and implementing new systems.
We may be required to pay material amounts under multiemployer pension plans; one of the plans in which we participate is in “critical and declining” financial status and this subjects us to potential liabilities, particularly if we withdraw from this plan.
We contribute to two multiemployer pension plans. The amount of our annual contributions to these plans is negotiated with the union representing our employees covered by the plan. In 2018, we contributed approximately $6 million to these plans. If in future years we continue to participate in these plans, we may be required to make increased annual contributions, which would reduce the cash available for business and other needs. The decision whether to continue to participate in these multiemployer plans does not rest solely with us; rather, it is negotiated as part of the collective bargaining agreements with labor unions that participate in these plans. There are risks associated with both continuing to participate in multiemployer plans and with withdrawing from multiemployer plans.
If we were to withdraw partially or completely from a multiemployer plan that is underfunded, we would be liable for a proportionate share of that plan's unfunded vested benefits as required by law. This is called a withdrawal liability.
If we continue to participate in a multiemployer pension plan, the future increases in annual contributions are difficult to predict and largely beyond our control. For example, if any other contributing employer withdraws from a multiemployer plan that is underfunded, and the withdrawing employer cannot satisfy its withdrawal liability, then the proportionate share of the plan’s unfunded vested benefits that would be allocable to us and to the other remaining contributing employers would increase.
One of the multiemployer pension plans to which we contribute, the PACE Industry Union-Management Pension Fund, or PIUMPF, was certified to be in “critical status” for the plan year beginning January 1, 2010 and continued to be in critical status through the plan year beginning January 1, 2014. For the plan years beginning January 1, 2015 through

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January 1, 2018, PIUMPF was certified to be in "critical and declining status" under the Multiemployer Pension Reform Act of 2014. The number of employers participating in PIUMPF fell from 135 during 2012 to 78 during 2017 and the ratio of inactive participants to active employees participating in PIUMPF has increased from 3.4 inactive participants per each active employee at the end of 2013 to 10.1 inactive participants per each active employee at the end of 2017. PIUMPF predicts it will become insolvent in 2031. We believe we are now the largest contributing employer remaining in PIUMPF. We therefore expect that if we remain in PIUMPF our annual contributions could increase, although we have no way of knowing by how much.
If instead we were to withdraw from PIUMPF, either completely or partially, we would incur a statutory withdrawal liability based on our proportionate share of PIUMPF’s unfunded vested benefits. Based on information available to us, as well as information provided by PIUMPF, and reviewed by our actuarial consultant, we estimate that, as of December 31, 2018, the withdrawal liability payments that we would be required to make to PIUMPF were we to completely withdraw in 2019 would be approximately $5.7 million per year on a pretax basis. These payments would continue for 20 years with an estimated present value in excess of $78 million on a pre-tax basis. If we were deemed to be included in a “mass withdrawal” from PIUMPF, these payments could continue indefinitely.
Were we voluntarily to withdraw from PIUMPF in 2019 or later, we could be subject to substantial payments in addition to the withdrawal liability payments described above. As a plan in critical and declining status, PIUMPF has adopted a rehabilitation plan. That plan purports to require a withdrawing employer to make an additional, lump-sum payment - above and beyond the statutory withdrawal liability - based on PIUMPF’s accumulated funding deficiency, or AFD. We do not believe PIUMPF’s purported imposition of the AFD on withdrawing employers is legally enforceable. However, we are aware that one large employer that withdrew from PIUMPF has recognized a liability for payment of an AFD amount and that other withdrawing employers may have paid some amounts in respect to the AFD. There have been and continue to be lawsuits in federal courts challenging PIUMPF’s AFD. Some of this litigation has ended without resolving the issue. At least one lawsuit currently pending in the United States District Court for the District of Idaho challenges the legality of the AFD; certain claims made in that suit have been dismissed but the court has allowed the plaintiff to amend its complaint to allege claims that the imposition of the AFD assessment did not constitute a reasonable measure under a rehabilitation plan. There are also efforts underway in the United States Congress intended to address the financial situation of multiemployer plans, like PIUMPF, that are in critical and declining status. It is uncertain whether such efforts will result in new legislation or if any new legislation will affect PIUMPF’s financial status.
If the AFD were held to be legally enforceable, and if we were to elect to withdraw in some future year, the amount of our AFD liability at the time of our withdrawal would be material and subject to a variety of factors including without limitation the nature and timing of a withdrawal, the solvency or insolvency of PIUMPF at the time of the withdrawal, the level of contributions to the plan made by other contributing employers before our withdrawal, whether any employers that had withdrawn in the intervening years had made AFD payments, and the effect of any Congressional action to assist the funding of multiemployer plans.
We believe that the AFD, if held to be lawful, would be assessed only if an employer voluntarily withdraws from PIUMPF and that plan insolvency or any other circumstance that does not involve a voluntary withdrawal by us would not require us to make a payment in respect of the AFD. Therefore, since we currently have no plans to withdraw from PIUMPF, we have not recognized any liability associated with a withdrawal from PIUMPF in our consolidated financial statements.
If we were to decide to withdraw voluntarily from PIUMPF in the future, and if the AFD were held to be enforceable against us, the resulting liabilities would have a material adverse effect on our results of operations, financial position, liquidity and cash flows. Similarly, if, in the absence of a voluntary withdrawal by us, our understandings (stated above) are incorrect regarding the unenforceability of the AFD or the inapplicability of the AFD to us in the event of plan insolvency or other circumstances not involving a voluntary withdrawal by us, the resulting liabilities would have a material adverse effect on our results of operations, financial position, liquidity and cash flows.
Adverse changes to, or requirements under, pension laws and regulations or adverse changes, requirements or claims pursuant to PIUMPF’s rehabilitation plan, such as the AFD, could increase the likelihood and amount of our liabilities. Were PIUMPF to fail, or were we to withdraw from PIUMPF, these liabilities would be in addition to the pension contributions we would have to make to any new pension plan adopted or contributed to by us to replace PIUMPF. All of this could materially reduce the cash we would have available for business and other needs.

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Our company-sponsored pension plans are currently underfunded, and we may be required to make cash payments to the plans, reducing cash available for our business.
We have company-sponsored pension plans covering certain of our salaried and hourly employees. The volatility in the value of equity and fixed income investments held by these plans, coupled with a low interest rate environment resulting in higher liability valuations, has caused these plans to be underfunded as the projected benefit obligation has exceeded the aggregate fair value of plan assets by varying year-end amounts since 2008. At December 31, 2018, and 2017, our company sponsored pension plans were underfunded in the aggregate by $25.3 million and $6.8 million, respectively. As a result of underfunding, we may be required to make contributions to our qualified pension plans in future years, which would reduce the cash available for business and other needs. In 2018, we made no contributions to these pension plans, and we are not required to make contributions in 2019.
We are subject to significant environmental regulation and environmental compliance expenditures, which could increase our costs and subject us to liabilities.
We are subject to various federal, state and foreign environmental laws and regulations concerning, among other things, water discharges, air emissions, hazardous material and waste management and environmental cleanup. Environmental laws and regulations continue to evolve and we may become subject to increasingly stringent environmental standards in the future, particularly under air quality and water quality laws and standards related to climate change issues, such as reporting of greenhouse gas emissions. Increased regulatory activity at the state, federal and international level is possible regarding climate change as well as other emerging environmental issues associated with our manufacturing sites, such as water quality standards based on elevated fish consumption rates. Compliance with regulations that implement new public policy in these areas might require significant expenditures on our part or even the curtailment of certain of our manufacturing operations.
We are required to comply with environmental laws and the terms and conditions of multiple environmental permits. In particular, the pulp and paper industry in the United States is subject to several performance based rules associated with effluent and air emissions as a result of certain of its manufacturing processes. Federal, state and local laws and regulations require us to routinely obtain authorizations from and comply with the evolving standards of the appropriate governmental authorities, which have considerable discretion over the terms of permits. Failure to comply with environmental laws and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing our operations or requiring us to take corrective measures, install pollution control equipment, or take other remedial actions, such as product recalls or labeling changes. We also may be required to make additional expenditures, which could be significant, relating to environmental matters on an ongoing basis. There can be no assurance that future environmental permits will be granted or that we will be able to maintain and renew existing permits, and the failure to do so could have a material adverse effect on our results of operations, financial condition and cash flows.
We own properties, conduct or have conducted operations at properties, and have assumed indemnity obligations for properties or operations where hazardous materials have been or were used for many years, including during periods before careful management of these materials was required or generally believed to be necessary. Consequently, we will continue to be subject to risks under environmental laws that impose liability for historical releases of hazardous substances and to liability for other potential violations of environmental laws or permits at existing sites or ones for which we have indemnity obligations.
Our pension and health care costs are subject to numerous factors that could cause these costs to change.
In addition to our pension plans, we provide health care benefits to certain of our current and former salaried and hourly employees. There is a risk of increased costs due to the Affordable Care Act’s individual mandate and required coverage. Our health care costs vary with changes in health care costs generally, which have significantly exceeded general economic inflation rates for many years. Our pension costs are dependent upon numerous factors resulting from actual plan experience and assumptions about future investment returns. Pension plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns as well as changes in general interest rates may result in increased pension costs in future periods. Likewise, changes in assumptions regarding current discount rates, expected rates of return on plan assets and mortality rates could also increase pension costs. Significant changes in any of these factors may adversely impact our cash flows, financial condition and results of operations.

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We face cyber-security risks.
Our business operations rely upon secure information technology systems for data capture, processing, storage and reporting. Despite careful security and controls design, implementation and updating, our information technology systems could become subject to cyber-attacks. Network, system, application and data breaches could result in operational disruptions or information misappropriation, which could result in lost sales, business delays, negative publicity and could have a material adverse effect on our business, results of operations and financial condition.
We rely on a limited number of third-party suppliers for certain raw materials required for the production of our products.
Our dependence on a limited number of third-party suppliers, and the challenges we may face in obtaining adequate supplies of raw materials, involve several risks, including limited control over pricing, availability, quality, and delivery schedules. We cannot be certain that our current suppliers will continue to provide us with the quantities of these raw materials that we require or will continue to satisfy our anticipated specifications and quality requirements. Any supply interruption in limited raw materials could materially harm our ability to manufacture our products until a new source of supply, if any, could be identified and qualified. Although we believe there are other suppliers of these raw materials, we may be unable to find a sufficient alternative supply channel in a reasonable time or on commercially reasonable terms. Any performance failure on the part of our suppliers could interrupt production of our products, which would have a material adverse effect on our business.
We May Fail to Attract, Motivate, Train and Retain Qualified Personnel, Including Key Personnel
Our ability to effectively run our business depends on our ability to attract, motivate, train and retain employees with the skills necessary to understand and adapt to the competitive markets in which we operate. The increasing demand for qualified personnel makes it more difficult for us to attract and retain employees with requisite skill sets, particularly employees with specialized technical and trade experience. Changing demographics and labor work force trends also may result in a loss of knowledge and skills as experienced workers retire. If we fail to attract, motivate, train and retain qualified personnel, or if we experience excessive turnover, we may experience declining sales, manufacturing delays or other inefficiencies, increased recruiting, training and relocation costs and other difficulties, and our results of operations, cash flows and financial condition.
In addition, we rely on key executive and management personnel to manage our business efficiently and effectively.  The loss of any of our key personnel could adversely affect our results of operations, cash flows and financial condition. Effective succession planning is also important to our long-term success. Our failure to identify candidates with the leadership skills to manage our organization, and our failure to ensure effective transfers of knowledge and smooth transitions involving key executives, could hinder our strategic planning and execution.
Expansion of our business through construction of new facilities or acquisitions may not proceed as anticipated.
In the future, we may build other converting and papermaking facilities, pursue acquisitions of existing facilities, or both. In addition, we may be unable to achieve anticipated benefits or cost savings from construction projects or acquisitions in the timeframe we anticipate, or at all. Any inability by us to integrate and manage any new or acquired facilities or businesses in a timely and efficient manner, any inability to achieve anticipated cost savings or other anticipated benefits from these projects or acquisitions in the time frame we anticipate or any unanticipated required increases in promotional or capital spending could adversely affect our business, financial condition, results of operations or liquidity. Large construction projects or acquisitions can result in a decrease in our cash and short-term investments, an increase in our indebtedness, or both, and also may limit our ability to access additional capital when needed and divert management's attention from other business concerns.
We have identified material weaknesses in our internal control over financial reporting and such weaknesses have led to a conclusion that our disclosure controls and procedures were not effective as of December 31, 2018.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on their systems of internal control over financial reporting. In addition, our independent registered public accounting firm must report on its evaluation of those controls. As disclosed in more detail under “Controls and Procedures” in Part II, Item 9A of this Report, we have identified material weaknesses as of December 31, 2018 in our internal control over financial reporting. Due to these material weaknesses, we have also concluded our disclosure controls and procedures were not effective as of December 31, 2018.
 
Failure to have effective internal control over financial reporting and ineffectiveness of disclosure controls and procedures could impair our ability to produce accurate financial statements on a timely basis and could lead to a

16


restatement of our financial statements. If, as a result of deficiencies in our internal control over financial reporting and ineffectiveness of our disclosure controls and procedures, we cannot provide reliable financial statements, our business decision processes may be adversely affected, our business and results of operations could be harmed, investors could lose confidence in our reported financial information and our ability to obtain additional financing, or additional financing on favorable terms, could be adversely affected. In addition, failure to maintain effective internal control over financial reporting could result in investigations or sanctions by regulatory authorities.
  
If we fail to remediate these material weaknesses and maintain an effective system of disclosure controls or internal control over financial reporting, we may not be able to rely on the integrity of our financial results, which could result in inaccurate or late reporting of our financial results, as well as the inability to meet on a timely basis our reporting obligations or to comply with SEC rules and regulations. Any of these could result in delisting actions by the New York Stock Exchange, investigation and sanctions by regulatory authorities, or an event of default under our debt instruments, and adversely affect our business and the trading price of our common stock.
To service our substantial indebtedness, we must generate significant cash flows. Our ability to generate cash depends on many factors beyond our control.
As of December 31, 2018, we had approximately $796 million of outstanding indebtedness, and we could incur substantial additional indebtedness in the future. Our ability to make payments on and to refinance our indebtedness, including our outstanding notes, and to fund planned capital expenditures, will depend on our ability to generate cash from our operations. This, to a significant extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our senior secured revolving credit facilities in an amount sufficient to enable us to pay our indebtedness, including our outstanding notes, or to fund our other liquidity needs. We cannot assure you that we will be able to refinance any of our indebtedness, including our senior secured revolving credit facilities and our outstanding notes, on commercially reasonable terms or at all.
The indenture for our outstanding notes that we issued in 2013 and the credit agreements governing our senior secured revolving credit facilities, contain various covenants that limit our discretion in the operation of our business.
The indenture governing our outstanding notes that we issued in 2013 and the credit agreements governing our senior secured revolving credit facilities, contain various provisions that limit our discretion in the operation of our business by restricting our ability to:
undergo a change in control;
sell assets;
pay dividends and make other distributions;
make investments and other restricted payments;
redeem or repurchase our capital stock;
incur additional debt and issue preferred stock;
create liens;
consolidate, merge, or sell substantially all of our assets;
enter into certain transactions with our affiliates;
engage in new lines of business; and
enter into sale and lease-back transactions.
These restrictions on our ability to operate our business at our discretion could seriously harm our business by, among other things, limiting our ability to take advantage of financing, merger and acquisition and other corporate opportunities, or to borrow in order to fund further capital expenditures. In addition, our senior secured revolving credit facilities require, among other things, that we maintain a maximum consolidated secured leverage ratio of 2.00 to 1.00 through December 31, 2019 and of 1.50 to 1.00 from March 31, 2020 and thereafter, a minimum consolidated interest coverage ratio of 1.25 to 1.00, and a minimum consolidated asset coverage ratio of 1.00 to 1.00. Events beyond our control could affect our ability to meet these financial tests, and we cannot assure you that we will meet them.
Our failure to comply with the covenants contained in our senior secured revolving credit facilities or the indentures governing our outstanding notes, including as a result of events beyond our control, could result in an event of default that could cause repayment of the debt to be accelerated.
If we are not able to comply with the covenants and other requirements contained in the indentures governing our outstanding notes, our senior secured revolving credit facilities or our other debt instruments, an event of default under the relevant debt instrument could occur. If an event of default does occur, it could trigger a default under our other

17


debt instruments, prohibit us from accessing additional borrowings, and permit the holders of the defaulted debt to declare amounts outstanding with respect to that debt to be immediately due and payable. Our assets and cash flow may not be sufficient to fully repay borrowings under our outstanding debt instruments. In addition, we may not be able to refinance or restructure the payments on the applicable debt. Even if we were able to secure additional financing, it may not be available on favorable terms.
Certain provisions of our certificate of incorporation and bylaws and Delaware law may make it difficult for stockholders to change the composition of our Board of Directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial.
Certain provisions of our certificate of incorporation and bylaws and Delaware law may have the effect of delaying or preventing changes in control if our Board of Directors determines that such changes in control are not in the best interests of the company and our stockholders. The provisions in our certificate of incorporation and bylaws include, among other things, the following:
a classified Board of Directors with three-year staggered terms;
the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval;
stockholder action can only be taken at a special or regular meeting and not by written consent;
advance notice procedures for nominating candidates to our Board of Directors or presenting matters at stockholder meetings;
removal of directors only for cause;
allowing only our Board of Directors to fill vacancies on our Board of Directors; and
supermajority voting requirements to amend our bylaws and certain provisions of our certificate of incorporation.
While these provisions have the effect of encouraging persons seeking to acquire control of the company to negotiate with our Board of Directors, they could enable the Board of Directors to hinder or frustrate a transaction that some, or a majority, of the stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. We are also subject to Delaware laws that could have similar effects. One of these laws prohibits us from engaging in a business combination with a significant stockholder unless specific conditions are met.


18


ITEM 1B.
 
Unresolved Staff Comments
None.

19


ITEM 2.
 
Properties
FACILITIES
We own and operate facilities located throughout the United States. The following table lists, as of December 31, 2018, each of our existing facilities and its location, use, and 2018 capacity and production: 
 
 
USE
 
LEASED OR OWNED
 
CAPACITY1
 
PRODUCTION1
CONSUMER PRODUCTS
 
 
 
 
 
 
 
 
 
 
Tissue Manufacturing Facilities:
 
 
 
 
 
 
 
 
 
 
Las Vegas, Nevada
 
TAD tissue
 
Owned
 
39,000

tons
 
36,000

tons
Lewiston, Idaho
 
Tissue
 
Owned
 
190,000

tons
 
187,000

tons
Neenah, Wisconsin
 
Tissue
 
Owned
 
54,000

tons
 
52,000

tons
Shelby, North Carolina3
 
TAD tissue
 
Owned/Leased
 
77,000

tons
 
72,000

tons
 
 
 
 
 
 
360,000

tons
 
347,000

tons
Tissue Converting Facilities:
 
 
 
 
 
 
 
 
 
 
Elwood, Illinois2
 
Tissue converting
 
Owned/Leased
 
73,000

tons
 
66,000

tons
Las Vegas, Nevada
 
Tissue converting
 
Owned
 
64,000

tons
 
60,000

tons
Lewiston, Idaho
 
Tissue converting
 
Owned
 
90,000

tons
 
62,000

tons
Neenah, Wisconsin
 
Tissue converting
 
Owned
 
70,000

tons
 
55,000

tons
Shelby, North Carolina3
 
Tissue converting
 
Owned/Leased
 
108,000

tons
 
72,000

tons
 
 
 
 
 
 
405,000

tons
 
315,000

tons
PULP AND PAPERBOARD
 
 
 
 
 
 
 
 
 
 
Pulp Mills:
 
 
 
 
 
 
 
 
 
 
Cypress Bend, Arkansas
 
Pulp
 
Owned
 
314,000

tons
 
303,000

tons
Lewiston, Idaho
 
Pulp
 
Owned
 
590,000

tons
 
535,000

tons
 
 
 
 
 
 
904,000

tons
 
838,000

tons
Bleached Paperboard Mills:
 
 
 
 
 
 
 
 
 
 
Cypress Bend, Arkansas
 
Paperboard
 
Owned
 
360,000

tons
 
335,000

tons
Lewiston, Idaho
 
Paperboard
 
Owned
 
480,000

tons
 
475,000

tons
 
 
 
 
 
 
840,000

tons
 
810,000

tons
Sheeted Paperboard Facilities:
 
 
 
 
 
 
 
 
 
 
Mendon, Michigan2
 
Paperboard sheeting
 
Owned/Leased
 
50,000

tons
 
36,000

tons
Wilkes-Barre, Pennsylvania2
 
Paperboard sheeting
 
Owned/Leased
 
40,000

tons
 
23,000

tons
Dallas, Texas2
 
Paperboard sheeting
 
Owned/Leased
 
36,000

tons
 
16,000

tons
Richmond, Virginia2
 
Paperboard sheeting
 
Owned/Leased
 
35,000

tons
 
20,000

tons
Hagerstown, Indiana2
 
Paperboard sheeting
 
Owned/Leased
 
32,000

tons
 
26,000

tons
 
 
 
 
 
 
193,000

tons
 
121,000

tons
 
 
 
 
 
 
 
 
 
 
 
Columbia City, Oregon
 
Chip shipment
 
Leased
 
 
N/A
 
 
N/A
Clarkston, Washington
 
Wood chipping
 
Owned
 
 
N/A
 
 
N/A
 
 
 
 
 
 
 
 
 
 
 
CORPORATE
 
 
 
 
 
 
 
 
 
 
Alpharetta, Georgia
 
Operations and administration
 
Leased
 
 
N/A
 
 
N/A
Spokane, Washington
 
Corporate headquarters
 
Leased
 
 
N/A
 
 
N/A
1 
Production amounts are approximations for full year 2018 and capacity amounts represent permitted capacities as of December 31, 2018. Annual capacity is an estimate based on assumptions and judgments concerning, among other things, both market demand and product mix, which change from time-to-time.
2 
The buildings located at these facilities are leased by Clearwater Paper or a wholly-owned subsidiary, and the operating equipment located within the buildings are owned by Clearwater Paper or a wholly-owned subsidiary.
3 
Some of the buildings located at the Shelby, North Carolina facility are leased by Clearwater Paper or a wholly-owned subsidiary, some buildings are owned, and the operating equipment located within the buildings is owned by Clearwater Paper or a wholly-owned subsidiary.


20


ITEM 3.
 
Legal Proceedings
We may from time to time be involved in claims, proceedings and litigation arising from our business and property ownership. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition, results of operations and cash flows.

ITEM 4.
 
Mine Safety Disclosures
Not applicable.

21


Part II
ITEM 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
MARKET FOR OUR COMMON STOCK
Our common stock is traded on the New York Stock Exchange under the symbol "CLW."
HOLDERS
On March 11, 2019, the last reported sale price for our common stock on the New York Stock Exchange was $26.74 per share. As of March 11, 2019, there were approximately 740 registered holders of our common stock.
ISSUER PURCHASES OF EQUITY SECURITIES
Please see Part II, Note 2, "Summary of Significant Accounting Policies" of this report for information relating to our purchases of equity securities.

ITEM 6.
 
Selected Financial Data
All of the data listed below has been derived from our audited financial statements. Our historical financial and other data is not necessarily indicative of our future performance. Amounts for 2014 forward reflect the sale of our specialty business and mills on December 30, 2014.
(In thousands, except net
earnings (loss) per share amounts)
 
2018
 
2017
 
2016
 
2015
 
2014
Net sales
 
$
1,724,218

 
$
1,730,408

 
$
1,734,763

 
$
1,752,401

 
$
1,967,139

(Loss) income from operations1
 
(97,909
)
 
71,185

 
114,764

 
123,670

 
79,811

Net (loss) earnings1,2
 
(143,767
)
 
97,339

 
49,554

 
55,983

 
(2,315
)
Working capital3
 
(5,348
)
 
33,537

 
79,975

 
199,010

 
302,069

Long-term debt, net of current portion
 
671,292

 
570,524

 
569,755

 
568,987

 
568,221

Stockholders’ equity
 
426,396

 
575,434

 
469,873

 
474,866

 
497,537

Capital expenditures
 
337,950

 
198,685

 
155,677

 
134,104

 
99,600

Property, plant and equipment, net
 
1,269,271

 
1,050,982

 
945,328

 
866,538

 
810,987

Total assets
 
1,788,118

 
1,802,252

 
1,684,342

 
1,527,369

 
1,579,149

Net (loss) earnings per basic common
  share1
 
$
(8.72
)
 
$
5.91

 
$
2.91

 
$
2.98

 
$
(0.11
)
Average basic common shares
  outstanding
 
16,487

 
16,464

 
17,001

 
18,762

 
20,130

Net earnings (loss) per diluted common
  share1
 
$
(8.72
)
 
$
5.88

 
$
2.90

 
$
2.97

 
$
(0.11
)
Average diluted common shares
  outstanding
 
16,487

 
16,556

 
17,106

 
18,820

 
20,130

1 
Loss from operations and net loss for the twelve months ended December 31, 2018 includes a non-cash goodwill impairment charge associated with our Consumer Products segment of $195.1 million. For additional information, refer to Note 7 "Goodwill and Intangible Assets."
2 
Net earnings and net earnings per basic and diluted common share for the twelve months ended December 31, 2017 reflect a $70 million tax benefit resulting from the remeasurement of the company's net deferred tax liabilities following passage of the Tax Cuts and Jobs Act signed into law on December 22, 2017.
3 
Working capital is defined as our current assets less our current liabilities, as presented on our Consolidated Balance Sheets.



22


ITEM 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto that appear elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk Factors” and elsewhere in this report.
Unless the context otherwise requires or unless otherwise indicates, references in this report to “Clearwater Paper Corporation,” “we,” “our,” “the company” and “us” refer to Clearwater Paper Corporation and its subsidiaries.
OVERVIEW
Recent Events
Asset Divestiture
On August 21, 2018, we sold our Ladysmith, Wisconsin manufacturing facility for net cash proceeds of approximately $71 million and recorded a related gain on divested assets of $24.0 million. Among other offsets, the net gain on divested assets includes $34.0 million of assets sold and a $14.0 million goodwill write-off.
Shelby Expansion Project
We are nearing completion of building a new tissue machine and related converting equipment at a site adjacent to our existing facility in Shelby, North Carolina. The new tissue machine will produce a variety of high-quality private label ultra and premium bath, paper towel and napkin products. At full production capacity, the new tissue machine is expected to produce approximately 70,000 tons of tissue products annually. The estimated cost for the project includes approximately $360 million for the tissue machine, converting equipment and buildings, and approximately $60 million for warehouse expansion that will consolidate all southeastern warehousing in Shelby. The total estimated cost of the project has increased by approximately $80 million from our original estimates due to the combination of external and internal factors, including acceleration of the startup of our converting operation in Shelby to help improve the Consumer Products segment's operating model by lowering transportation costs. The external and internal factors include a very tight construction labor market, additional engineering requirements, weather-related delays and significantly higher material costs, including steel costs that were exacerbated by tariffs first imposed in 2018. To partially offset the increased cost for the Shelby expansion, we elected to reduce approximately $30 million in other capital expenditures originally forecasted for 2018.

We project that the construction of the new facility will be completed in early 2019 and will be fully operational in 2020. As of December 31, 2018, we have incurred a total of $371.8 million on construction related activities and the new tissue machine in Shelby, of which $295.7 million was incurred in 2018. We also capitalized $8.9 million of interest as of December 31, 2018, related to the Shelby expansion, of which $7.7 million was incurred in 2018.
Selling, General and Administrative Cost Structure Changes
In the second half of 2017, we examined our selling, general and administrative, or SG&A, cost structure as part of our effort to maintain our longer-term competitiveness.  As a result of this review, in the fourth quarter of 2017 we began executing on a plan that is expected to result in lower SG&A expenses beginning in 2018.  In 2018, we incurred $6.9 million of expenses associated with these efforts, which consisted primarily of severance and professional services expenses. As of December 31, 2018, we had achieved approximately $13 million in cost reductions, compared to 2017 SG&A expenses, as a result of these changes.
Goodwill Impairment
We conducted our annual impairment test as of the November 1, 2018 measurement date and concluded, in connection with the preparation of our 2018 financial statements, that the estimated fair value of the Consumer Products reporting unit was below the carrying value of the reporting unit, resulting in a non-cash impairment charge of $195.1 million. This amount represents the remaining goodwill associated with our Consumer Products reporting unit that was originally recorded as the result of our acquisition of Cellu Tissue Holdings, Inc. in 2010.

23



Developments and Trends in our Business
Net Sales
Prices for our consumer tissue products are affected by competitive conditions and the prices of branded tissue products. Tissue has historically been one of the strongest segments of the paper and forest products industry due to its steady demand growth. Our Consumer Products segment competes based on product quality, customer service and price. We deliver customer-focused business solutions by assisting in managing product assortment, category management, and pricing and promotion optimization.
In recent years, the industry has seen an increase in premium and ultra tissue products as industry participants have added or improved through-air-dried, or TAD, or equivalent production capacity as well as added conventional tissue capacity. Demand and pricing for consumer tissue products is currently being affected by the increased capacity, as well as changing dynamics in the at-home tissue segment as a result of changing consumer purchasing habits, consolidations and new entrants in the consumer retail channel, and new and evolving sales and distribution channels. These changing conditions contributed to a very competitive environment for consumer tissue in 2018, and we expect these conditions to continue in 2019. Reflecting these increasingly competitive conditions, in the third quarter of 2017, our largest tissue customer made the decision to go from a single source model to a multisource model for its private label tissue supply beginning in the first quarter of 2018. This significantly affected sales volumes for our conventional tissue in 2018.
Our pulp and paperboard business is affected by macro-economic conditions around the world and has historically experienced cyclical market conditions. As a result, historical prices for our products and sales volumes have been volatile. Product pricing is significantly affected by the relationship between supply and demand for our products. Product supply in the industry is influenced primarily by fluctuations in available manufacturing production, which tends to increase during periods when prices remain strong. In addition, currency exchange rates affect U.S. supplies of paperboard, as non-U.S. manufacturers are more attracted to the U.S. market when the dollar is relatively strong. Paperboard pricing increased in 2018 compared to 2017.
The markets for our products are highly competitive. Our business is capital intensive, which leads to high fixed costs and large capital outlays and generally results in continued production as long as prices are sufficient to cover variable costs. These conditions have contributed to substantial price competition, particularly during periods of reduced demand. Some of our competitors have lower production costs, greater buying power and are integrated, and, as a result, may be less adversely affected than we are by price decreases.
Net sales consist of sales of consumer tissue, paperboard, and to a lesser extent pulp, net of discounts, returns and allowances and any sales taxes collected.

24


Operating Costs
Prices for our principal operating cost items are variable and directly affect our results of operations. In a strong economy, we normally would expect at least some upward pressure on our operating costs. Competitive market conditions, however, can limit our ability to pass cost increases through to our customers. The following table shows our principal operating cost items and associated percentage of net sales for each of the past three years:
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
(Dollars in thousands)
 
Cost3
 
Percentage of Net Sales
 
Cost3
 
Percentage of Net Sales
 
Cost
 
Percentage of Net Sales
Wages and benefits4
 
$
283,138

 
16.4
%
 
$
278,622

 
16.1
%
 
$
295,209

 
17.1
%
Transportation1
 
204,848

 
11.9

 
200,177

 
11.6

 
182,145

 
10.5

Purchased pulp
 
187,790

 
10.9

 
193,358

 
11.2

 
196,848

 
11.3

Chemicals
 
173,082

 
10.0

 
165,328

 
9.5

 
166,954

 
9.6

Chips, sawdust and logs
 
165,305

 
9.6

 
135,802

 
7.8

 
148,583

 
8.6

Depreciation
 
87,723

 
5.1

 
91,312

 
5.3

 
80,652

 
4.6

Packaging supplies
 
86,668

 
5.0

 
88,245

 
5.1

 
86,273

 
5.0

Energy
 
84,035

 
4.9

 
87,287

 
5.0

 
87,163

 
5.0

Maintenance and repairs2
 
71,786

 
4.2

 
88,221

 
5.1

 
95,800

 
5.5

 
 
1,344,375

 
78.0

 
1,328,352

 
76.7

 
1,339,627

 
77.2

Other operating costs
 
193,637

 
11.2

 
201,989

 
11.7

 
153,932

 
8.9

Total cost of sales4
 
$
1,538,012

 
89.2
%
 
$
1,530,341

 
88.4
%
 
$
1,493,559

 
86.1
%
1 
Includes internal and external transportation costs.
2 
Excluding related labor costs.
3 
Costs for Manchester operations, which we acquired in December 16, 2016, are included from that acquisition date forward.
4 
In 2018, we adopted a new accounting standard, ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs, which resulted in a change in the presentation of pension and postretirement benefit (costs) income other than service costs on a line outside of “Income from operations.” The corresponding prior period amounts have been reclassified to conform with the current period presentation.

Wages and benefits. Costs related to our employees primarily consist of wages and related benefit costs and payroll taxes. Wage and benefit costs for 2018 increased compared to 2017 primarily due to severance related costs associated with our SG&A cost structure changes and the impact of annual wage increases, in addition to costs for hiring and training new employees for the Shelby expansion project.
Transportation. Fuel prices, mileage driven and line-haul rates largely impact transportation costs for the delivery of raw materials to our manufacturing facilities, internal inventory transfers and delivery of our finished products to customers. Changing fuel prices particularly affect our margins for consumer products because we supply customers throughout the U.S. and transport unconverted parent rolls from our tissue mills to our tissue converting facilities. Our transportation costs for 2018 increased compared to 2017 due primarily to increased paperboard shipments and higher line haul rates on both internal and external shipments.
Purchased pulp. We purchase a significant amount of the pulp needed to manufacture our consumer products, and to a lesser extent our paperboard, from external suppliers. For 2018, although pulp prices remained high, our total purchased pulp costs decreased compared to 2017, due primarily to no planned major maintenance outages at our pulp and paperboard facilities in 2018 and lower tissue shipments in our Consumer Products segment.
Chemicals. We consume a substantial amount of chemicals in the production of pulp and paperboard, as well as in the production of TAD tissue. The chemicals we generally use include polyethylene, caustic, starch, sodium chlorate, latex and paper processing chemicals. A portion of the chemicals used in our manufacturing processes, particularly in the paperboard extrusion process, are petroleum-based and are impacted by petroleum prices. In 2018, our chemical costs increased compared to 2017 due to higher prices and higher paperboard production.
Chips, sawdust and logs. We purchase chips, sawdust and logs that we use to manufacture pulp. We source residual wood fibers under both long-term and short-term supply agreements, as well as in the spot market. Chips, sawdust

25


and log costs increased in 2018 compared to 2017 due to increased paperboard production and higher prices for these materials at both of our pulp and paperboard locations.
Depreciation. We record substantially all of our depreciation expense associated with our plant and equipment in "Cost of Sales" on our Consolidated Statements of Operations. Depreciation expense for 2018 decreased compared to 2017, primarily due to accelerating depreciation in 2017 on certain Oklahoma City assets in connection with the March 2017 closure of this facility, partially offset by increased depreciation as a result of higher capital spending.
Packaging supplies. As a significant producer of private label consumer tissue products, we package to order for retail chains, wholesalers and cooperative buying organizations. Under our agreements with those customers, we are responsible for the expenses related to the unique packaging of our products for direct retail sale to their consumers. For 2018, packaging costs decreased compared to 2017, primarily due to reduced tissue finished good case shipments, which were partially offset by higher pricing for packaging materials.
Energy. We use energy in the form of electricity, hog fuel, steam and natural gas to operate our mills. Energy prices may fluctuate widely from period-to-period due primarily to volatility in weather and electricity and natural gas rates. We generally strive to reduce our exposure to volatile energy prices through conservation. In addition, a cogeneration facility that produces steam and electricity and the recently installed continuous digester at our Lewiston, Idaho manufacturing site helps to lower our energy costs.
Energy costs for 2018 decreased compared to 2017 due to favorable natural gas and electricity prices in our pulp and paperboard segment, as well as lower natural gas usage at our Idaho pulp and paperboard facility.
To help mitigate our exposure to changes in natural gas prices, we use firm-price contracts to supply a portion of our natural gas requirements. As of December 31, 2018, these contracts covered approximately 14% of our expected average monthly natural gas requirements for 2019, which includes approximately 12% of the expected average monthly requirements for the first quarter of 2019. Our energy costs in future periods will depend principally on our ability to produce a substantial portion of our electricity needs internally, on changes in market prices for natural gas and on our ability to reduce our energy usage through conservation.
Maintenance and repairs. We regularly incur significant costs to maintain our manufacturing equipment. We perform routine maintenance on our machines and periodically replace a variety of parts such as motors, pumps, pipes and electrical parts.
Major equipment maintenance and repairs in our Pulp and Paperboard segment also require maintenance shutdowns approximately every 18 to 24 months at both our Idaho and Arkansas facilities, which increase costs and may reduce net sales in the quarters in which the major maintenance shutdowns occur. In 2018, maintenance costs decreased compared to 2017, due to no planned major maintenance at our pulp and paperboard facilities in 2018. In 2019, we expect to have shutdowns for major maintenance at our Idaho facility in the third quarter and at our Arkansas facility in the fourth quarter.
Other. Other costs consist of miscellaneous operating costs, which decreased for the year ended December 31, 2018 compared to 2017 primarily due to lower costs for temporary employees, operating supplies, property taxes and purchased paper. These decreases were partially offset by a lower amount of insurance recoveries in 2018, compared to 2017, which included claim settlements for fires at our Las Vegas and Shelby facilities.
Selling, general and administrative expenses
Selling, general and administrative expenses primarily consist of compensation and associated expenses for sales and administrative personnel, as well as commission expenses related to sales of our products.
Interest expense
Interest expense is comprised of interest on our $275 million aggregate principal amount of 4.5% senior notes issued January 2013 and due 2023, which we refer to as the 2013 Notes, and interest on our $300 million aggregate principal amount of 5.375% senior notes issued in 2014 and due in 2025, which we refer to as the 2014 notes. Interest expense also includes interest on the amount drawn under our revolving credit facilities and amortization of deferred issuance costs associated with all of our notes and revolving credit facilities. These interest expense amounts are partially offset by capitalized interest associated with major capital project spending.
Income taxes
Income taxes are based on reported earnings and tax rates in jurisdictions in which our operations occur and offices are located, adjusted for available credits, changes in valuation allowances and differences between reported earnings and taxable income using current tax laws and rates.

26


The following table details our tax provision and effective tax rates for the years ended December 31, 2018, 2017 and 2016:
(Dollars in thousands)
2018
 
2017
 
2016
Income tax provision (benefit)
$
10,305

 
$
(56,385
)
 
$
31,112

Effective tax rate
7.7
%
 
(137.7
)%
 
38.6
%

The rate for 2018 includes a $10.0 million benefit from Federal tax credits for alternative energy production related to our Lewiston pulp optimization project. The benefit for 2017 was primarily driven by a $70 million tax benefit resulting from the remeasurement of our net deferred tax liabilities following passage of the Tax Cuts and Jobs Act in December 2017.

The estimated annual effective tax rate for 2019 is expected to be approximately 25%.






27


RESULTS OF OPERATIONS
Our business is organized into two reporting segments: Consumer Products and Pulp and Paperboard. Intersegment costs for pulp transferred from our Pulp and Paperboard segment to our Consumer Products segment are recorded at cost, and thus no intersegment sales or cost of sales for these transfers are included in our segments' results. Our financial and other data are not necessarily indicative of our future performance.
YEAR ENDED DECEMBER 31, 2018 COMPARED TO YEAR ENDED DECEMBER 31, 2017
The following table sets forth data included in our Consolidated Statements of Operations as a percentage of net sales.
 
 
Years Ended December 31,
(Dollars in thousands)
 
2018
 
2017
Net sales
 
$
1,724,218

 
100.0
%
 
$
1,730,408

 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales1
 
(1,538,012
)
 
89.2

 
(1,530,341
)
 
88.4

Selling, general and administrative expenses1
 
(112,988
)
 
6.6

 
(128,882
)
 
7.4

Goodwill impairment
 
(195,079
)
 
11.3

 

 

Gain on divested assets, net
 
23,952

 
1.4

 

 

Total operating costs and expenses
 
(1,822,127
)
 
105.7

 
(1,659,223
)
 
95.9

(Loss) income from operations
 
(97,909
)
 
5.7

 
71,185

 
4.1

Interest expense, net
 
(30,620
)
 
1.7

 
(31,374
)
 
1.8

Non-operating pension and other postretirement benefit (costs) income1
 
(4,933
)
 
0.3

 
1,143

 
0.1

(Loss) earnings before income taxes
 
(133,462
)
 
7.7

 
40,954

 
2.4

Income tax (provision) benefit
 
(10,305
)
 
0.6

 
56,385

 
3.3

Net (loss) earnings
 
$
(143,767
)
 
8.3
%
 
$
97,339

 
5.6
%
1 
In 2018, the Company adopted a new accounting standard, ASU 2017-07, which resulted in a change in the presentation of pension and postretirement benefit (costs) income other than service costs on a line outside of “Income from operations.” The corresponding prior period amounts have been reclassified to conform with the current period presentation.
Net sales—Net sales for 2018 decreased by $6.2 million, or less than 1.0%, compared to 2017, primarily due to the August 2018 sale of our Ladysmith facility, as well as decreased shipments and a lower average selling price during 2018 in our Consumer Products segment, partially offset by increased shipments and a favorable sales mix in our Pulp and Paperboard segment.
Cost of sales—Cost of sales was 89.2% of net sales for 2018 compared to 88.4% of net sales for 2017. Cost of sales was $7.7 million higher in 2018 due primarily to increased costs for wood fiber, chemicals, transportation and wages and benefits. These cost increases were partially offset by lower maintenance, energy and packaging costs, as well as lower depreciation expense.
Selling, general and administrative expenses—Selling, general and administrative expenses decreased $15.9 million during 2018 compared to 2017. The decrease was due in part to lower commission and marketing expense, reduced travel expenses and lower profit dependent accruals, which were partially offset by higher severance and professional services expenses related to cost structure changes. Selling, general and administrative expenses for 2017 included $4.3 million of asset write-downs to held for sale value on certain assets at our former Oklahoma City facility and $3.2 million of expenses associated with the execution of a sublease for the Oklahoma City facility.
Goodwill impairment—In the fourth quarter of 2018, we recorded a non-cash goodwill impairment charge associated with our Consumer Products segment of $195.1 million. See Item 8, Financial Statements and Supplementary Data under Note 7 "Goodwill and Intangible Assets" and "Critical Accounting Policies and Estimates - Goodwill" included on page 40 for further information.
Gain on divested assets, net—On August 21, 2018, we sold our Ladysmith facility for net cash proceeds of approximately $71 million. In total, $24.0 million of gain was recorded on the sale, which included $34.0 million of net assets sold, $14.0 million of goodwill write-off and other expenses related to the sale.
Interest expense—Interest expense decreased $0.8 million during 2018, compared to 2017 as higher interest expense associated with a larger average balance on our revolving credit facilities was more than offset by higher capitalized interest of $9.0 million in 2018 compared to capitalized interest of $4.6 million in 2017.

28


Income tax provision—We recorded income tax expense of $10.3 million in 2018, compared to an income tax benefit of $56.4 million in 2017. The rate determined under generally accepted accounting principles, or GAAP, for 2018 was a provision of approximately 8% compared to a benefit in 2017 of approximately 138%. The net change to our effective tax rate in 2018 was primarily the result of recognizing benefits related to tax reform in 2017 and current year goodwill impairment expense which did not have a corresponding tax impact.

During 2018 and 2017, there were a number of items that were included in the calculation of our income tax provision that we do not believe were indicative of our core operating performance. Excluding these items, the tax rates for 2018 and 2017 would have been approximately 5% and 34%, respectively. See the section entitled "Non-GAAP Measures" on pages 34-36 of this report for a reconciliation of these adjusted income tax benefit and provision amounts to the comparable income tax provision amounts.

29


DISCUSSION OF BUSINESS SEGMENTS
Consumer Products
 
Years Ended December 31,
(Dollars in thousands - except per ton amounts)
2018
 
2017
Net sales
$
884,812

 
$
941,907

Operating (loss) income1
(173,858
)
 
28,973

Percent of net sales
(19.6
)%
 
3.1
%
 
 
 
 
Shipments (short tons)
 
 
 
 
 
 
 
Retail
293,856

 
309,067

Non-retail
58,577

 
55,562

Total tissue tons
352,433

 
364,629

Converted products cases (in thousands)
48,699

 
51,221

 
 
 
 
Sales price (per short ton)
 
 
 
 
 
 
 
Retail
$
2,703

 
$
2,775

Non-retail
1,506

 
1,440

Total tissue
$
2,504

 
$
2,572

1 
In 2018, the Company adopted a new accounting standard, ASU 2017-07, which resulted in a change in the presentation of pension and postretirement benefit (costs) income other than service costs on a line outside of “Income from operations.” The corresponding prior period amounts have been reclassified to conform with the current period presentation.
Net sales for our Consumer Products segment decreased by $57.1 million, or 6.1%, in 2018 compared to 2017, due to the sale of our Ladysmith facility in the third quarter of 2018, lower average retail tissue net selling prices and decreased converted case shipments. These unfavorable comparisons were partially offset by higher average net selling prices and increased shipments for non-retail tissue products.
The segment had an operating loss of $173.9 million in 2018, which included the $195.1 million non-cash goodwill impairment charge and a gain of $24.0 million on the sale of the Ladysmith facility. Excluding the goodwill impairment charge and the gain on the sale of the Ladysmith facility, the segment had an operating loss of $2.8 million compared to operating income of $29.0 million in 2017. The loss was due primarily to the decreased sales, higher pulp and transportation costs, as well as higher wage and benefit costs associated with an increase in employees related to the expansion of our Shelby facility project and the effect of annual wage increases. Operating income for 2017 also included $14.7 million of costs associated with the closure of our former Oklahoma City facility, which included expenses associated with the execution of a sublease for that facility.
Pulp and Paperboard
 
Years Ended December 31,
(Dollars in thousands - except per ton amounts)
2018
 
2017
Net sales
$
839,406

 
$
788,501

Operating income1
130,426

 
97,360

Percent of net sales
15.5
%
 
12.3
%
 
 
 
 
Paperboard shipments (short tons)
859,348

 
828,201

Paperboard sales price (per short ton)
$
975

 
$
952

1 
In 2018, the Company adopted a new accounting standard, ASU 2017-07, which resulted in a change in the presentation of pension and postretirement benefit (costs) income other than service costs on a line outside of “Income from operations.” The corresponding prior period amounts have been reclassified to conform with the current period presentation.
Net sales for our Pulp and Paperboard segment increased by $50.9 million, or 6.5%, in 2018 compared to 2017. The increase was due primarily to strong production and sales volume increases in addition to paperboard net price increases.

30


Operating income for the segment increased $33.1 million, or 34.0%, during 2018 compared to 2017, due primarily to increased sales and lower maintenance costs due to no planned major maintenance in 2018. These favorable impacts were partially offset by higher chip, sawdust and log costs, as well as higher chemical and transportation costs and increased depreciation expense.
YEAR ENDED DECEMBER 31, 2017 COMPARED TO YEAR ENDED DECEMBER 31, 2016
The following table sets forth data included in our Consolidated Statements of Operations as a percentage of net sales.
 
 
Years Ended December 31,
(Dollars in thousands)
 
2017
 
2016
Net sales
 
$
1,730,408

 
100.0
%
 
$
1,734,763

 
100.0
%
Costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales1
 
(1,530,341
)
 
88.4

 
(1,493,559
)
 
86.1

Selling, general and administrative expenses1
 
(128,882
)
 
7.4

 
(128,195
)
 
7.4

Gain on divested assets, net
 

 

 
1,755

 
0.1

Total operating costs and expenses
 
(1,659,223
)
 
95.9

 
(1,619,999
)
 
93.4

Income from operations
 
71,185

 
4.1

 
114,764

 
6.6

Interest expense, net
 
(31,374
)
 
1.8

 
(30,651
)
 
1.8

Non-operating pension and other postretirement benefit (costs) income1
 
1,143

 
0.1

 
(3,447
)
 
0.2

Earnings before income taxes
 
40,954

 
2.4

 
80,666

 
4.6

Income tax benefit (provision)
 
56,385

 
3.3

 
(31,112
)
 
1.8

Net earnings
 
$
97,339

 
5.6
%
 
$
49,554

 
2.9
%
1 
In the first quarter of 2018, the Company adopted a new accounting standard, ASU 2017-07, which resulted in a change in the presentation of pension and postretirement benefit (costs) income other than service costs on a line outside of “Income from operations.” The corresponding prior period amounts above have been reclassified to conform with the 2018 presentation.

Net sales—Net sales for 2017 decreased by $4.4 million, or less than 1.0%, compared to 2016, primarily due to decreased shipments during 2017 in our Consumer Products segment largely offset by increased shipments in our Pulp and Paperboard segment, as a result of the inclusion of Manchester Industries, which was acquired in December 2016, and a favorable sales mix in both segments. These items are further discussed below under “Discussion of Business Segments."

Cost of sales—Cost of sales was 88.4% of net sales for 2017 compared to 86.1% of net sales for 2016. Cost of sales was $36.8 million higher in 2017 due primarily to increased transportation costs caused by major weather related events, additional internal case shipments as a result of the closure of our Oklahoma City facility, and higher transportation rates. Furthermore, this increase in cost of sales was impacted by higher pulp pricing, higher depreciation expense, higher costs associated with the inclusion of Manchester Industries, and higher inventory costs in the fourth quarter of 2016 that flowed through cost of sales in first quarter of 2017. These cost increases were partially offset by lower wage and benefit costs resulting from the implementation of our warehouse automation project at several of our Consumer Products segment facilities, the shutdown of two paper machines at our Neenah facility in the fourth quarter of 2016 and the closure of our Oklahoma City facility in March 2017.

Selling, general and administrative expenses—Selling, general and administrative expenses increased $0.7 million during 2017 compared to 2016. The higher expense was primarily a result of $4.3 million of asset write-downs to their held for sale value on certain Oklahoma City assets, $3.2 million of expenses associated with the execution of a sublease for the Oklahoma City facility, $3.0 million of increased amortization of intangibles resulting from our acquisition of Manchester Industries and $2.3 million of reorganization related expenses associated with cost control measures. These cost increases were partially offset by $2.8 million of mark-to-market benefit in 2017 related to our directors' common stock units, which will ultimately be settled in cash, compared to $4.8 million of mark-to-market expense in 2016, lower profit dependent accruals, and a $1.6 million pension settlement charge in 2016.

Gain on divested assets—During 2016, we recognized a net gain of $1.8 million as a result of the release to us of $2.3 million from an indemnity escrow account related to the December 2014 sale of our former specialty business and mills, less $0.5 million of other related settlement costs.

31



Interest expense—Interest expense increased $0.7 million during 2017, compared to 2016. The increase was driven by a larger average balance on our revolving credit facilities during 2017 compared to 2016, partially offset by capitalized interest of $4.6 million in 2017 compared to $2.3 million in 2016.

Income tax provision—We recorded an income tax benefit of $56.4 million in 2017, compared to income tax expense of $31.1 million in 2016. The benefit in 2017 was primarily the result of a $70 million tax benefit resulting from the remeasurement of our net deferred tax liabilities following the passage of the Tax Cuts and Jobs Act. During 2017 and 2016, there were a number of items that were included in the calculation of our income tax benefit and expense that we do not believe were indicative of our core operating performance. Excluding these items, the tax rates for 2017 and 2016 would have been approximately 34% and 38%, respectively. See the section entitled "Non-GAAP Measures" on pages 34-36 of this report for a reconciliation of these adjusted income tax benefit and provision amounts to the comparable income tax provision amounts.

32


DISCUSSION OF BUSINESS SEGMENTS
Consumer Products
 
Years Ended December 31,
(Dollars in thousands - except per ton amounts)
2017
 
2016
Net sales
$
941,907

 
$
988,380

Operating income1
28,973

 
67,919

Percent of net sales
3.1
%
 
6.9
%
 
 
 
 
Shipments (short tons)
 
 
 
 
 
 
 
Retail
309,067

 
314,042

Non-retail
55,562

 
81,952

Total tissue tons
364,629

 
395,994

Converted products cases (in thousands)
51,221

 
52,875

 
 
 
 
Sales price (per short ton)
 
 
 
 
 
 
 
Retail
$
2,775

 
$
2,757

Non-retail
1,440

 
1,480

Total tissue
$
2,572

 
$
2,493

1 
In 2018, the Company adopted a new accounting standard, ASU 2017-07, which resulted in a change in the presentation of pension and postretirement benefit (costs) income other than service costs on a line outside of “Income from operations.” The corresponding prior period amounts above have been reclassified to conform with the 2018 presentation.
Net sales for our Consumer Products segment decreased by $46.5 million, or 4.7%, in 2017 compared to 2016, due to lower overall sales volume in both finished goods cases and parent rolls. The decreased parent roll sales were primarily the result of the shutdown of two paper machines at our Neenah facility in the fourth quarter of 2016. This decrease in volume was partially offset by a favorable sales mix as increased TAD bathroom tissue and household towel sales, combined with reduced parent roll sales, resulted in a 3.2% average price increase.
Segment operating income decreased $38.9 million, or 57.3%, in 2017 compared to 2016 due primarily to increased costs for transportation, pulp and packaging, higher depreciation expense, costs associated with the closure of our Oklahoma City facility, and higher inventory costs in the fourth quarter of 2016 that flowed through cost of sales in the first quarter of 2017. These cost increases were partially offset by reduced wage and benefit costs resulting from the implementation of our warehouse automation project, the shutdown of the two paper machines at our Neenah facility in the fourth quarter 2016 and the closure of our Oklahoma City facility in the first quarter of 2017, which also resulted in favorable maintenance cost comparisons in 2017.
Pulp and Paperboard
 
Years Ended December 31,
(Dollars in thousands - except per ton amounts)
2017
 
2016
Net sales
$
788,501

 
$
746,383

Operating income1
97,360

 
112,700

Percent of net sales
12.3
%
 
15.1
%
 
 
 
 
Paperboard shipments (short tons)
828,201

 
796,158

Paperboard sales price (per short ton)
$
952

 
$
937

1 
In 2018, the Company adopted a new accounting standard, ASU 2017-07, which resulted in a change in the presentation of pension and postretirement benefit (costs) income other than service costs on a line outside of “Income from operations.” The corresponding prior period amounts have been reclassified to conform with the current period presentation.
Net sales for our Pulp and Paperboard segment increased by $42.1 million, or 5.6%, in 2017 compared to 2016. The increase was primarily due to the inclusion of Manchester and incremental volumes with a higher net selling price resulting from a favorable sales mix.

33


Operating income for the segment decreased $15.3 million, or 13.6%, during 2017 compared to 2016, due primarily to increased costs for purchased pulp, higher natural gas prices and increased electrical usage due to extended turbine generator outages at our Arkansas and Idaho facilities. Additionally, depreciation and amortization costs increased as a result of the acquisition of Manchester Industries and the installation of the continuous pulp digester at our Idaho facility. These cost increases were partially offset by improved pulp yields and reduced wood fiber prices at our Arkansas facility.
NON-GAAP MEASURES
We use earnings before interest (including debt retirement costs), taxes, depreciation and amortization, or EBITDA, and EBITDA adjusted for certain items, or Adjusted EBITDA, and Adjusted income tax provision as supplemental performance measures that are not required by, or presented in accordance with GAAP. EBITDA and Adjusted EBITDA should not be considered as alternatives to net earnings, operating income or any other performance measure derived in accordance with GAAP, or as alternatives to cash flows from operating activities or a measure of our liquidity or profitability. In addition, our calculation of EBITDA and Adjusted EBITDA may or may not be comparable to similarly titled measures used by other companies.
EBITDA and Adjusted EBITDA have important limitations as analytical tools, and should not be considered in isolation, or as a substitute for any of our results as reported under GAAP. Some of these limitations are:
EBITDA and Adjusted EBITDA do not reflect our cash expenditures for capital assets;
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital requirements;
EBITDA and Adjusted EBITDA do not include cash pension payments;
EBITDA and Adjusted EBITDA exclude certain tax payments that may represent a reduction in cash available to us;
EBITDA and Adjusted EBITDA do not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and
other companies, including other companies in our industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure.
We present EBITDA, Adjusted EBITDA and Adjusted income tax provisions because we believe they assist investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use EBITDA and Adjusted EBITDA: (i) as factors in evaluating management’s performance when determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies, and (iii) because our credit agreement and the indenture governing the 2013 Notes uses metrics similar to EBITDA to measure our compliance with certain covenants.

34


The following table provides our EBITDA and Adjusted EBITDA for the periods presented, as well as a reconciliation to net earnings: 
 
 
Years Ended December 31,
(In thousands)
 
2018
 
2017
 
2016
Net (loss) earnings
 
$
(143,767
)
 
$
97,339

 
$
49,554

Interest expense, net 1
 
30,620

 
31,374

 
30,651

Income tax provision (benefit)
 
10,305

 
(56,385
)
 
31,112

Depreciation and amortization expense2
 
101,953

 
104,990

 
91,090

EBITDA
 
$
(889
)
 
$
177,318

 
$
202,407

Directors' equity-based compensation (benefit) expense
 
(2,340
)
 
(2,833
)
 
4,779

Goodwill impairment3
 
195,079

 

 

Gain associated with the sale of the Ladysmith facility, net
 
(23,952
)
 

 

Reorganization related expenses associated with SG&A cost control measures
 
6,935

 
2,263

 

Consumer products reorganization related expenses
 
1,048

 

 

Other
 
844

 

 

Costs associated with Oklahoma City facility closure4
 

 
11,055

 
318

Costs associated with Long Island facility closure
 

 
1,443

 
1,891

Manchester Industries acquisition related expenses
 

 
220

 
2,665

Write-off of assets as a result of Warehouse Automation project
 

 
41

 

Gain associated with the sale of the specialty mills, net
 

 

 
(1,755
)
Pension settlement expense
 

 

 
3,482

Costs associated with Neenah paper machines shutdown
 

 

 
1,049

Adjusted EBITDA
 
$
176,725

 
$
189,507

 
$
214,836

1 
Interest expense, net for the year ended December 31, 2016 includes debt retirement costs of $0.4 million.
2 
Depreciation and amortization expense for the years ended December 31, 2017 and 2016 includes $3.7 million and $1.3 million, respectively, of accelerated depreciation associated with the Oklahoma City facility closure.
3 
During the fourth quarter of 2018, we recognized non-cash goodwill impairment of $195.1 million associated with our Consumer Products segment. See Item 8, Financial Statements and Supplementary Data under Note 7 "Goodwill and Intangibles Assets" for more information.
4 
Costs associated with the Oklahoma City facility closure for the twelve months ended December 31, 2017 include $4.3 million of loss on the write-down of assets to their held for sale value and $3.2 million of expenses associated with the execution of a sublease for the facility.

35


The following table provides our Adjusted income tax provisions for the years ended December 31, 2018, 2017 and 2016, as well as a reconciliation to income tax benefit (provision):
 
Years Ended December 31,
(In thousands)
2018
 
2017
 
2016
GAAP income tax (provision) benefit1
$
(10,305
)
 
$
56,385

 
$
(31,112
)
Adjustments, tax impact:
 
 
 
 
 
Directors' equity-based compensation
523

 
952

 
(1,693
)
Gain associated with the sale of the Ladysmith facility, net
10,444

 

 

Reorganization related expenses associated with SG&A cost control measures
(1,721
)
 
(757
)
 

Impact of state tax reform
(676
)
 

 

Consumer products reorganization related expenses
(274
)
 

 

Other
(151
)
 

 

Federal tax rate change1

 
(70,055
)
 

Costs associated with Oklahoma City facility closure

 
(4,977
)
 
(589
)
Costs associated with Long Island facility closure

 
(686
)
 
(672
)
Accelerated depreciation of assets as a result of warehouse automation project

 
(121
)
 

Manchester Industries acquisition related expenses

 
(74
)
 
(465
)
Write-off of assets as a result of warehouse automation project

 
(14
)
 

Gain associated with the sale of the specialty mills, net
 
 
 
 
626

Costs associated with Neenah paper machines shutdown

 

 
(371
)
Pension settlement expense

 

 
(1,242
)
Adjusted income tax provision
$
(2,160
)
 
$
(19,347
)
 
$
(35,518
)
1 
The benefit in 2017 is primarily due to the remeasurement of deferred tax liabilities as a result of the Act signed into law on December 22, 2017. The resulting net tax benefit is excluded from our adjusted non-GAAP earnings.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents information regarding our cash flows for the years ended December 31, 2018, 2017 and 2016.
Cash Flows Summary 
 
 
Years Ended December 31,
(In thousands)
 
2018
 
2017
 
2016
Net cash flows from operating activities1
 
$
168,899

 
$
178,670

 
$
172,751

Net cash flows from investing activities
 
(223,971
)
 
(198,797
)
 
(222,506
)
Net cash flows from financing activities
 
63,281

 
13,864

 
67,146

1 
In 2018, we adopted a new accounting standard, ASU 2016-18, which required a change in the presentation of cash, cash equivalents, and restricted cash in the statement of cash flows. As a result of adopting this standard, the net cash flows from operating activities increased by $1.0 million for 2017. There were no changes to the 2016 presentation as previously reported.
Operating Activities—Net cash flows from operating activities for 2018 decreased by $9.8 million compared to 2017. The decrease in operating cash flows was driven by a $27.7 million decrease in earnings, after adjusting for non cash related items, as well as a decrease of $5.6 million in cash flows generated from changes in working capital in 2018 compared to the same period in 2017. This decrease in net cash flows from operating activities was partially offset by a net $14.0 million decrease in taxes receivable in 2018, as a result of cash received from income tax refunds, compared to a $10.6 million increase in taxes receivable in 2017.
Net cash flows from operating activities for 2017 increased by $5.9 million compared to 2016. The increase in operating cash flows was driven by $21.8 million of positive cash flows generated from changes in working capital in 2017, largely

36


due to an increase in accounts payable and accrued liabilities, compared to $3.5 million of negative cash flows for changes in working capital in 2016. This increase in net cash flows from operating activities was partially offset by a net $10.6 million increase in taxes receivable in 2017, compared to a $5.1 million decrease in taxes receivable in 2016. The change in the taxes receivable balance for 2017 was due to increased tax depreciation relating to our strategic capital projects, which lessened our tax burden and increased the amount of refund we expected to receive.
Investing Activities—Net cash flows used for investing activities increased $25.2 million in 2018 compared to 2017. This increase was largely driven by a $96.0 million increase in cash paid for plant and equipment in 2018, driven largely by spending on our new tissue machine and related converting equipment in Shelby, North Carolina. That increase in cash used for investing activities was partially offset by $70.9 million of net cash proceeds from divested assets, which resulted from the sale of our Ladysmith facility in the third quarter of 2018. In addition to cash paid for plant and equipment, we also incurred $42.2 million of non-cash additions related to accrued payables for plant and equipment in 2018, which is also largely associated with our Shelby expansion project.
Net cash flows used for investing activities decreased $23.7 million in 2017 compared to 2016. This decrease was largely driven by the acquisition of Manchester Industries in 2016 for $67.4 million, net of cash acquired, partially offset by a $44.4 million increase in cash spent for plant and equipment in 2017, which increased due to our investments in strategic capital projects, including a continuous pulp digester project at our Lewiston, Idaho facility and our Shelby expansion project.
Financing Activities—Net cash flows from financing activities were $63.3 million for 2018, and were largely driven by net borrowings on short-term debt of $65.8 million primarily used to fund the expansion of our Shelby, North Carolina facility.
Net cash flows from financing activities were $13.9 million for 2017, and were largely driven by net borrowings on our revolving credit facilities of $20.0 million, partially offset by $4.9 million in repurchases of our outstanding common stock pursuant to our stock repurchase program.

Capital Resources
Due to the competitive and cyclical nature of the markets in which we operate, there is uncertainty regarding the amount of cash flows we will generate during the next twelve months. However, we believe that our cash flows from operations, our cash on hand and our borrowing capacity under our senior secured revolving credit facilities will be adequate to fund debt service requirements and provide cash required to support our ongoing operations, capital expenditures and working capital needs for the next twelve months.
We may choose to refinance all or a portion of our indebtedness on or before maturity. We cannot be certain that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.
At December 31, 2018 and 2017, our financial position included gross debt of $795.8 million and $730.0 million, respectively. Stockholders’ equity at December 31, 2018 was $426.4 million, compared to $575.4 million at the end of 2017. Our total debt to total capitalization, excluding accumulated other comprehensive loss, was 61.6% at December 31, 2018, compared to 53.9% at December 31, 2017.
Capital Expenditures
In addition to ongoing maintenance and repair costs, we make capital expenditures to increase our operating capacity and efficiency, improve safety at our facilities and comply with environmental laws. In 2018, we incurred $328.9 million in capital expenditures, excluding capitalized interest of $9.0 million, which included $311.1 million of capital spending on strategic projects and other projects designed to reduce future manufacturing costs and provide a positive return on investment. These strategic projects in 2018 and 2017 consist primarily of the expansion of our Shelby, North Carolina facility and the continuous pulp digester at our Idaho pulp and paperboard facility. During 2017, excluding capitalized interest of $4.6 million, we spent $194.0 million on capital expenditures, which included $152.6 million of strategic capital spending. In 2019, we expect cash paid for capital expenditures to be approximately $130 to $140 million.
Debt Arrangements
$300 Million Senior Notes Due 2025
On July 29, 2014, we issued $300 million aggregate principal amount of Senior Notes due 2025, which we refer to as the 2014 Notes, that mature on February 1, 2025, have an interest rate of 5.375% and were issued at their face value.
Our 2019 expected debt service obligation related to the 2014 Notes, consisting of cash payments for interest, is $16.1 million.

37


$275 Million Senior Notes Due 2023
On February 22, 2013, we issued $275 million aggregate principal amount of 4.5% senior notes due 2023, which we refer to as the 2013 Notes.
Our 2019 expected debt service obligation related to the 2013 Notes, consisting of cash payments for interest, is $12.4 million.
Revolving Credit Facilities
After giving effect to a revolving commitment increase described below, our senior secured revolving credit facilities provide in the aggregate, on a combined basis, for the extension of up to $400 million in revolving loans under: (i) a $200 million credit agreement with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (the “Commercial Credit Agreement”); and (ii) a $200 million credit agreement with Northwest Farm Credit Services, PCA, as administrative agent, and the lenders party thereto (the “Farm Credit Agreement”).  These revolving credit facilities were initially entered into on October 31, 2016 and we refer to them collectively as the “Credit Agreements.”  In August, 2018, we entered into an agreement with a lender to the Farm Credit Agreement to provide an incremental revolving loan commitment, which increased the size of the Farm Credit Agreement from $100 million to $200 million. The revolving credit facilities provided under the Credit Agreements mature on October 31, 2021.
We may separately request incremental commitments under either Credit Agreement to increase the amount of revolving loans or to provide term loans under such Credit Agreement. After obtaining the $100 million incremental revolving commitment to the Farm Credit Agreement in August 2018, the aggregate amount of incremental commitments we may request may not exceed $100 million (on a combined basis under both Credit Agreements), plus an additional amount, not to exceed $100 million (also on a combined basis under both Credit Agreements), such that our first lien leverage ratio on a pro forma basis, as defined, does not exceed 3.00 to 1.00, subject to certain customary conditions and receipt of commitments by existing or additional lenders. In addition, after giving effect to the amount of any incremental borrowing under the Farm Credit Agreement, the principal amount of all unfunded revolving loan commitments and the outstanding amount of any term loans provided under the Farm Credit Agreement (if any) cannot exceed 50% of the sum of the outstanding principal amount of the loans and unfunded commitments under the Farm Credit Agreement and the Commercial Credit Agreement on a combined basis.
Revolving Loans borrowed under the Credit Agreements bear interest, at our option, at a LIBOR rate, a base rate, or, in the case of the Farm Credit Agreement, a one-, two-, three-, four-, or five-year fixed rate, plus, in each case, an applicable margin. Prior to an amendment to each Credit Agreement in November 2018, the per annum margin applicable to LIBOR rate loans could range from 1.25% to 2.00% under the Commercial Credit Agreement, and from 1.50% to 2.25% under the Farm Credit Agreement, in each case, depending on changes to our consolidated leverage ratio. Following the amendment in November 2018, the per annum margin applicable to LIBOR rate loans can now range from 1.25% to 2.50% under the Commercial Credit Agreement, and from 1.50% to 3.50% under the Farm Credit Agreement. The margin applicable to fixed rate loans under the Farm Credit Agreement is the same as the margin applicable to LIBOR rate loans under the Farm Credit Agreement. The margin applicable to base rate loans under both Credit Agreements is always 1.00% per annum less than the corresponding margin for LIBOR rate loans. We also pay commitment fees on the unused portion of the revolving loan commitments under the Credit Agreements, which range from 0.20% per annum to 0.40% per annum, depending on changes to our consolidated leverage ratio. Prior to the November 2018 amendment, this commitment fee could not exceed 0.35% per annum.
The Credit Agreements are secured by substantially all of the personal property of the Company and its domestic subsidiaries through separate liens granted under each Credit Agreement for the benefit of each secured party thereunder on an equal and ratable basis. The Company’s obligations under the Credit Agreements are guaranteed by the Company’s domestic subsidiaries.
The Credit Agreements contain various loan covenants that restrict the ability of the Company and its subsidiaries to take certain actions, including, incurrence of indebtedness, creation of liens, mergers or consolidations, dispositions of assets, repurchase or redemption of capital stock, making certain investments, entering into certain transactions with affiliates or changing the nature of their business. In addition, the Credit Agreements contain financial covenants that require the Company to maintain a consolidated secured leverage ratio in an amount not to exceed 2.00 to 1.00 in 2019, and 1.50 to 1.00 thereafter, a consolidated interest coverage ratio in an amount not less than 1.25 to 1.00, and a consolidated asset coverage ratio of not less than 1.00 to 1.00.
Each Credit Agreement also contains customary events of default, including failure to make payments under such Credit Agreement, breach of any representation or warranty or covenant under such Credit Agreement, default under or acceleration of other indebtedness for borrowed money in excess of an agreed amount, any change in control of the Company based upon a third party acquiring more than 35% of the equity interests of the Company, bankruptcy events, invalidity of such credit agreement, the incurrence of certain liabilities, termination events or withdrawals from specified benefit plans, and unpaid or uninsured judgments in excess of an agreed amount.

38



We are members of the Northwest Farm Credit Services, PCA system which entitles us to patronage refunds and other distributions on account of our equity interests in the Northwest Farm Credit Services, PCA, as well as our patronage with Northwest Farm Credit Services. Patronage refunds are distributions of profits from member banks in the United States Farm Credit System, like Northwest Farm Credit Services, which are cooperatives (member owned) that distribute profits to their members in the form of patronage dividends, which are accrued as earned and recorded as offsets to interest expense under the Farm Credit Agreement.
As of December 31, 2018, there was an aggregate of $200 million of borrowings outstanding under the Credit Agreements and we were in compliance with the covenants contained in the Credit Agreements. In addition, $7.6 million of the credit facilities was being used to support outstanding standby letters of credit. The borrowings outstanding under the Credit Agreements as of December 31, 2018, consisted of a combination of short-term base and LIBOR rate loans which are classified as current liabilities in our Consolidated Balance Sheet, and a $100.0 million fixed rate, three-year borrowing under the Farm Credit Agreement that is included in "Long-term debt," in our Consolidated Balance Sheet. As of December 31, 2018, we would have been permitted to draw an additional $192.4 million of revolving loans under the Credit Agreements.
Please see Part II, Note 10, "Debt" of this report for information relating to our senior notes and revolving credit facilities.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of December 31, 2018. Portions of the amounts shown are reflected in our financial statements and accompanying notes, as required by GAAP. See the footnotes following the table for information regarding the amounts presented and for references to relevant financial statement notes that include a detailed discussion of the item.
 
 
Payments Due by Period
(In thousands)
 
Total
 
2019
 
2020-2021
 
2022-2023
 
Thereafter
Short-term debt
 
$
120,833

 
$
120,833

 
$

 
$

 
$

Long-term debt1
 
675,000

 

 
100,000

 

 
575,000

Interest on long-term debt1
 
187,663

 
33,230

 
63,307

 
50,813

 
40,313

Capital leases2
 
36,785

 
3,093

 
6,174

 
5,808

 
21,710

Operating leases2
 
74,811

 
12,038

 
21,845

 
16,652

 
24,276

Purchase obligations3
 
391,532

 
358,368

 
20,745

 
8,311

 
4,108

Other obligations4,5
 
226,615

 
160,659

 
13,114

 
10,398

 
42,444

Total
 
$
1,713,239

 
$
688,221

 
$
225,185

 
$
91,982

 
$
707,851

1 
Included above are the principal and interest payments that were due, as of December 31, 2018, on our 2013 and 2014 Notes and our fixed-rate, three-year borrowings under our credit facilities. For more information regarding specific terms of our long-term debt, see Note 10, “Debt,” in the notes to the consolidated financial statements.
2 
These amounts represent our minimum capital lease payments, including amounts representing interest, and our minimum operating lease payments. See Note 17, “Commitments and Contingencies,” in the notes to the consolidated financial statements.
3 
Purchase obligations consist primarily of contracts for the purchase of raw materials (primarily pulp) from third parties, trade accounts payable as of December 31, 2018, contracts for outside wood chipping and contracts with natural gas and electricity providers.
4 
Included in other obligations are accrued liabilities and accounts payable (other than certain trade accounts payable balances included as "purchase obligations" above) as of December 31, 2018, liabilities associated with supplemental pension and deferred compensation arrangements, and estimated payments on postretirement employee benefit plans.
5 
Total excludes $2.8 million of unrecognized tax benefits due to the uncertainty of timing of payment. See Note 8, “Income Taxes,” in the notes to the consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on our financial conditions or consolidated financial statements.
ENVIRONMENTAL
Our operating facilities are subject to rigorous federal and state environmental regulation governing air emissions, wastewater discharges, and solid and hazardous waste management. Our goal is continuous compliance with all

39


environmental regulations and we regularly monitor our activities to ensure compliance with all pertinent rules and requirements. Compliance with environmental regulations is a significant factor in our business and requires periodic capital expenditures as well as additional operating costs as rules change.
Concern over climate change, including the impact of global warming, may lead to future regulations. We believe there are no U.S. rules currently proposed that would have a material impact on our operations.
Our facilities are currently in substantial compliance with applicable environmental laws and regulations. We cannot be certain, however, that situations that may give rise to material environmental liabilities will not be discovered or that the enactment of new environmental laws or regulations or changes in existing laws or regulations will not require significant expenditures by us.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP requires our management to select and apply accounting policies that best provide the framework to report the results of operations and financial position. The selection and application of those policies requires management to make difficult, subjective and complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. As a result, it is possible that materially different amounts would be reported under different conditions or using different assumptions.
See Note 3, “Recently Adopted and New Accounting Standards” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information regarding recently adopted and new accounting pronouncements.
Goodwill.
As of December 31, 2018 and December 31, 2017, we had $35.1 million and $244.2 million, respectively, of goodwill included on our Consolidated Balance Sheet. Goodwill is not amortized but tested for impairment annually as of each November 1st and at any time when events suggest impairment may have occurred, such as a significant adverse change in the business climate or a sustained drop in the company’s market capitalization. If the carrying amount of a reporting unit exceeds the estimated fair value of that reporting unit, a goodwill impairment loss is recognized equal to the excess of the reporting unit’s carrying amount over its estimated fair value.

In late April 2018, we experienced a significant decrease in our market capitalization after announcing lower first quarter financial results and a reduced second quarter sales outlook for our Consumer Products reporting unit. We identified this as a triggering event and tested the goodwill allocated to this reporting unit for impairment as of May 31, 2018. To determine the fair value of the Consumer Products reporting unit, we used a discounted cash flow methodology utilizing our most recent financial projections that take into account a variety of factors including industry and market conditions. Compared to the previous projections utilized during the November 1, 2017 impairment test, our estimates as of May 31, 2018 did not show significant adverse changes to the reporting unit’s projected operating results for future periods. As a result, we determined that the fair value of the reporting unit exceeded its carrying value as of that testing date.
In August 2018, we sold our Ladysmith, Wisconsin tissue manufacturing facility for net cash proceeds of approximately $71 million. In connection with the sale, we recorded a $14.0 million write-off of goodwill of the Consumer Products reporting unit. Consistent with authoritative guidance, the goodwill was allocated to our divested assets by estimating the fair value of the Ladysmith facility compared to the estimated fair value of the Consumer Products reporting unit, which was then used to estimate the amount of goodwill to allocate to the sold business.
We conducted our annual impairment test as of the November 1, 2018 measurement date and concluded, in connection with the preparation of our 2018 financial statements, that the estimated fair value of the Consumer Products reporting unit was below the carrying value of the reporting unit, resulting in a non-cash impairment charge of $195.1 million. This amount represents the remaining goodwill associated with our Consumer Products reporting unit that was originally recorded as the result of our acquisition of Cellu Tissue Holdings, Inc. in 2010.
To determine the fair value of the Consumer Products reporting unit, we used the same discounted cash flow methodology utilized in the May 2018 and November 2017 goodwill impairment tests. Our most recent estimates for 2019 and future years were based on market data obtained in the fall of 2018 indicating that in 2019 and future years, we expect lower pricing for certain tissue products, lower converted case sales volumes, a higher mix of parent roll sales, and increased transportation and pulp costs compared to the financial projections used in May 2018. In light of the weakened market outlook, our forecast yielded a fair value less than the carrying value of the Consumer Products reporting unit, resulting in the impairment of goodwill. We also performed an overall reconciliation to corroborate the

40


estimated fair value from the income approach to our overall market capitalization as of the November 1, 2018 measurement date.
As of the November 1, 2018 measurement date, the fair value of our Pulp and Paperboard reporting unit was clearly in excess of its carrying value, so no goodwill associated with this reporting unit has been written down. Refer to Note 7, “Goodwill and Intangible Assets” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information.
Pension and postretirement employee benefits. The determination of pension plan expense and the requirements for funding our pension plans are based on a number of actuarial assumptions. Note 13, "Savings, Pension and Other Postretirement Employee Benefit Plans," in the notes to the consolidated financial statements includes information for the three years ended December 31, 2018, 2017 and 2016, on the components of pension expense and other postretirement employee benefit, or OPEB, expense and income and the underlying actuarial assumptions used to calculate periodic expense, as well as the funded status for our pension and OPEB plans as of December 31, 2018 and 2017.
The assumption that has the largest impact on the determination of plan expense and the funded status of our pension and OPEB plans is the discount rate. The discount rate used in the determination of pension benefit obligations and pension expense is determined based on a review of long-term high-grade bonds and management’s expectations. At December 31, 2018, we calculated obligations using a 4.40% discount rate. The discount rates used at December 31, 2017 and 2016 were 3.90% and 4.45%, respectively. An increase in the discount rate, all other assumptions remaining the same, would decrease pension plan expense, and conversely, a decrease would increase plan expense. As an indication of the sensitivity that pension expense has to the discount rate assumption, a 25 basis point change in the discount rate would affect annual plan expense by approximately $0.5 million. Additionally, a 25 basis point decrease in the discount rate would increase the pension benefit obligation by approximately $8.0 million.
The discount rates used to calculate OPEB obligations, which were determined using the same methodology we used for our pension plans, were 4.55%, 3.95% and 4.30% at December 31, 2018, 2017 and 2016, respectively. As an indication of the sensitivity that OPEB income has to the discount rate assumption, a 25 basis point change in the discount rate would affect plan income by approximately $0.1 million. Additionally, a 25 basis point decrease in the discount rate would increase the OPEB benefit obligation by approximately $1.4 million.
Our company-sponsored pension plans were underfunded by a net $25.3 million at December 31, 2018 and $6.8 million at December 31, 2017. Our OPEB plans are unfunded and represent a liability of $60.3 million and $65.1 million as of December 31, 2018 and 2017, respectively.


41


ITEM 7A.
 
Quantitative and Qualitative Disclosures About Market Risks
Interest Rate Risk
Our exposure to market risks on financial instruments includes interest rate risk on our secured revolving credit facilities. As of December 31, 2018, there were $200.0 million in borrowings outstanding under our revolving credit facilities. The interest rates applied to borrowings under the credit facilities are adjusted often and therefore react quickly to any movement in the general trend of market interest rates. For example, a one percentage point increase or decrease in interest rates, based on assumed outstanding credit facilities' borrowings of $200.0 million, would have a $2.0 million annual effect on interest expense. During 2018, we reduced our short-term interest rate risk through the use of a short-term LIBOR Rate option for $100.0 million and negotiated a fixed, long-term rate on the remaining $100 million, of our total outstanding credit facilities' borrowings balance of $200.0 million, reducing the Company's exposure to variable rate debt.
We currently do not attempt to alleviate the effects of short-term interest rate fluctuations on our credit facilities' borrowings through the use of derivative financial instruments.
Commodity Risk
We are exposed to market risk for changes in natural gas commodity pricing, which we partially mitigate through the use of firm price contracts for a portion of the natural gas requirements of our manufacturing facilities. As of December 31, 2018, these contracts covered approximately 14% of our expected average monthly requirements for 2019, including approximately 12% of the expected average monthly requirements for the first quarter of 2019.
Foreign Currency Risk
We have minimal foreign currency exchange risk. Nearly all of our international sales are denominated in U.S. dollars. 
Quantitative Information about Market Risks
 
 
Expected Maturity Date
(Dollars in thousands)
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total 
Long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
$

 
$

 
$

 
$

 
$

 
$
575,000

 
$
575,000

Revolving credit facility
 

 

 
100,000

 

 

 

 
100,000

Average interest rate
 
%
 
%
 
4.730
%
 
%
 
%
 
4.957
%
 
4.923
%
Fair value at December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
$
612,546


42


ITEM 8.
 
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
  
PAGE
NUMBER
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017 and 2016
Consolidated Balance Sheets at December 31, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017
  and 2016
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
 
 
Financial Statement Schedules:
 
All schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the notes thereto.
 

43


CLEARWATER PAPER CORPORATION
Consolidated Statements of Operations
(Dollars in thousands – except per-share amounts) 
 
 
For The Years Ended December 31,
  
 
2018
 
2017
 
2016
Net sales
 
$
1,724,218

 
$
1,730,408

 
$
1,734,763

Costs and expenses:
 
 
 
 
 
 
Cost of sales
 
(1,538,012
)
 
(1,530,341
)
 
(1,493,559
)
Selling, general and administrative expenses
 
(112,988
)
 
(128,882
)
 
(128,195
)
Goodwill impairment
 
(195,079
)
 

 

Gain on divested assets, net
 
23,952

 

 
1,755

Total operating costs and expenses
 
(1,822,127
)
 
(1,659,223
)
 
(1,619,999
)
(Loss) income from operations
 
(97,909
)
 
71,185

 
114,764

Interest expense, net
 
(30,620
)
 
(31,374
)
 
(30,651
)
Non-operating pension and other post employment benefit
   (costs) income
 
(4,933
)
 
1,143

 
(3,447
)
(Loss) earnings before income taxes
 
(133,462
)
 
40,954

 
80,666

Income tax (provision) benefit
 
(10,305
)
 
56,385

 
(31,112
)
Net (loss) earnings
 
$
(143,767
)
 
$
97,339

 
$
49,554

Net (loss) earnings per common share:
 
 
 
 
 
 
Basic
 
$
(8.72
)
 
$
5.91

 
$
2.91

Diluted
 
(8.72
)
 
5.88

 
2.90

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

44


CLEARWATER PAPER CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
 
 
For The Years Ended December 31,
  
 
2018
 
2017
 
2016
Net (loss) earnings
 
$
(143,767
)
 
$
97,339

 
$
49,554

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
Defined benefit pension and other postretirement employee benefits:
 
 
 
 
 
 
Net (loss) gain arising during the period, net of tax
of $(5,717), $2,409, and $248
 
(16,036
)
 
6,745

 
379

Amortization of actuarial loss included in net periodic cost,
net of tax of $2,397, $1,305, and $1,576
 
6,759

 
1,951

 
2,321

Amortization of prior service credit included in net
periodic cost, net of tax of $(440), $(601), and $(669)
 
(1,236
)
 
(926
)
 
(1,021
)
    Settlement, net of tax of $-, $-, and $1,366
 

 

 
2,116

Other comprehensive (loss) income, net of tax
 
(10,513
)
 
7,770

 
3,795

Comprehensive (loss) income
 
$
(154,280
)
 
$
105,109

 
$
53,349

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

45


CLEARWATER PAPER CORPORATION
Consolidated Balance Sheets
(Dollars in thousands – except share data)
 
 
At December 31,
  
 
2018
 
2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
22,484

 
$
15,738

Receivables, net
 
145,519

 
142,065

Taxes receivable
 
6,301

 
20,282

Inventories
 
266,244

 
266,043

Other current assets
 
3,399

 
8,661

Total current assets
 
443,947

 
452,789

Property, plant and equipment, net
 
1,269,271

 
1,050,982

Goodwill
 
35,074

 
244,161

Intangible assets, net
 
24,080

 
32,542

Other assets, net
 
15,746

 
21,778

TOTAL ASSETS
 
$
1,788,118

 
$
1,802,252

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt
 
$
120,833

 
$
155,000

Accounts payable and accrued liabilities
 
321,032

 
256,621

Current liability for pensions and other postretirement employee benefits
 
7,430

 
7,631

Total current liabilities
 
449,295

 
419,252

Long-term debt
 
671,292

 
570,524

Liability for pensions and other postretirement employee benefits
 
78,191

 
72,469

Other long-term obligations
 
38,977

 
43,275

Accrued taxes
 
2,785

 
2,770

Deferred tax liabilities
 
121,182

 
118,528

TOTAL LIABILITIES
 
1,361,722

 
1,226,818

Stockholders’ equity:
 
 
 
 
Preferred stock, par value $0.0001 per share, 5,000,000 authorized shares,
  no shares issued
 

 

Common stock, par value $0.0001 per share, 100,000,000 authorized
  shares -16,482,345 and 16,447,898 shares issued
 
2

 
2

Additional paid-in capital
 
6,403

 
1,161

Retained earnings
 
487,339

 
618,254

Accumulated other comprehensive loss, net of tax
 
(67,348
)
 
(43,983
)
Total stockholders’ equity
 
426,396

 
575,434

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
1,788,118

 
$
1,802,252

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


46


CLEARWATER PAPER CORPORATION
Consolidated Statements of Cash Flows
(in thousands)
For The Years Ended December 31,
 
2018
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES