Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2019
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number: 001-34146
CLEARWATER PAPER CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
20-3594554
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
601 West Riverside, Suite 1100
Spokane, Washington
 
99201
(Address of principal executive offices)
 
(Zip Code)
(509) 344-5900
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ý     No  ¨    
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨  

  
Accelerated filer
 
ý

Non-accelerated filer
 
¨  
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý    
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
CLW
New York Stock Exchange
The number of shares of common stock of the registrant outstanding as of November 1, 2019 was 16,515,813.




CLEARWATER PAPER CORPORATION
Index to Form 10-Q
 
 
 
 
 
 
Page
Number
 
 
 
PART I.
 
 
 
 
ITEM 1.
 
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019                                                                                                                                                        
   and 2018
 
 
 
 
 
 
 
 
8 - 29
 
 
 
ITEM 2.
30 - 41
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II.
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 6.
 
 




Part I
ITEM 1.
 
Consolidated Financial Statements
Clearwater Paper Corporation
Consolidated Statements of Operations
Unaudited (Dollars in thousands - except per-share amounts)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Net sales
$
445,188

 
$
426,460

 
$
1,325,960

 
$
1,295,511

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
(418,704
)
 
(376,221
)
 
(1,212,775
)
 
(1,155,808
)
Selling, general and administrative expenses
(28,944
)
 
(26,283
)
 
(85,942
)
 
(85,827
)
Gain on divested assets, net

 
22,944

 

 
22,944

Total operating costs and expenses
(447,648
)
 
(379,560
)
 
(1,298,717
)
 
(1,218,691
)
(Loss) income from operations
(2,460
)
 
46,900

 
27,243

 
76,820

Interest expense, net
(13,077
)
 
(7,547
)
 
(32,477
)
 
(23,290
)
Debt retirement costs
(2,725
)
 

 
(2,725
)
 

Non-operating pension and other postretirement benefit costs
(1,421
)
 
(1,234
)
 
(4,266
)
 
(3,700
)
(Loss) earnings before income taxes
(19,683
)
 
38,119

 
(12,225
)
 
49,830

Income tax benefit (provision)
8,710

 
(3,675
)
 
4,665

 
(5,825
)
Net (loss) earnings
$
(10,973
)
 
$
34,444

 
$
(7,560
)
 
$
44,005

Net (loss) earnings per common share:
 
 
 
 
 
 
 
Basic
$
(0.66
)
 
$
2.09

 
$
(0.46
)
 
$
2.67

Diluted
(0.66
)
 
2.08

 
(0.46
)
 
2.66

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

2



Clearwater Paper Corporation
Consolidated Statements of Comprehensive Income
Unaudited (Dollars in thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Net (loss) earnings
$
(10,973
)
 
$
34,444

 
$
(7,560
)
 
$
44,005

Other comprehensive income:
 
 
 
 
 
 
 
Defined benefit pension and other postretirement employee benefits:
 
 
 
 
 
 
 
Amortization of actuarial loss included in net periodic cost, net of tax of $459, $602, $1,376 and $1,807
1,286

 
1,687

 
3,859

 
5,059

Amortization of prior service credit included in net periodic cost, net of tax of $-, $(110), $- and $(331)

 
(309
)
 

 
(926
)
Other comprehensive income, net of tax
1,286

 
1,378

 
3,859

 
4,133

Comprehensive (loss) income
$
(9,687
)
 
$
35,822

 
$
(3,701
)
 
$
48,138

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


3



Clearwater Paper Corporation
Consolidated Balance Sheets
Unaudited (Dollars in thousands – except per-share amounts)
 
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
7,815

 
$
22,484

Restricted cash
1,440

 

Receivables, net
157,929

 
145,519

Taxes receivable
6,721

 
6,301

Inventories
282,395

 
266,244

Other current assets
7,960

 
3,399

Total current assets
464,260

 
443,947

Property, plant and equipment, net
1,273,474

 
1,269,271

Operating lease right-of-use assets
74,503

 

Goodwill
35,074

 
35,074

Intangible assets, net
18,725

 
24,080

Other assets, net
15,041

 
15,746

TOTAL ASSETS
$
1,881,077

 
$
1,788,118

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
58,000

 
$
120,833

Accounts payable and accrued liabilities
229,563

 
321,032

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

 
7,430

Total current liabilities
294,993

 
449,295

Long-term debt
866,702

 
671,292

Operating lease liabilities
66,571

 

Liability for pension and other postretirement employee benefits
73,738

 
78,191

Other long-term obligations
33,990

 
38,977

Accrued taxes
3,070

 
2,785

Deferred tax liabilities
116,868

 
121,182

TOTAL LIABILITIES
1,455,932

 
1,361,722

Commitments and contingent liabilities

 

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

 

Common stock, par value $0.0001 per share, 100,000,000 authorized shares,
   16,515,337 and 16,482,345 shares issued
2

 
2

Additional paid-in capital
8,853

 
6,403

Retained earnings
479,779

 
487,339

Accumulated other comprehensive loss, net of tax
(63,489
)
 
(67,348
)
TOTAL STOCKHOLDERS' EQUITY
425,145

 
426,396

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,881,077

 
$
1,788,118

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

4



Clearwater Paper Corporation
Consolidated Statements of Cash Flows
Unaudited (Dollars in thousands)
 
Nine Months Ended
 
September 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net (loss) earnings
$
(7,560
)
 
$
44,005

Adjustments to reconcile net (loss) earnings to net cash flows from operating activities:
 
 
 
Depreciation and amortization
86,343

 
75,686

Equity-based compensation expense
2,959

 
2,845

Deferred taxes
(6,023
)
 
3,930

Employee benefit plans
1,006

 
102

Amortization of deferred issuance costs on debt
1,452

 
943

Loss on retirement of debt
2,725

 

Gain on divested assets

 
(25,510
)
       Other non-cash activity, net
724

 
84

Changes in working capital, net
(98,266
)
 
7,402

Changes in taxes receivable
(420
)
 
13,534

Other, net
825

 
(1,922
)
Net cash flows from operating activities
(16,235
)
 
121,099

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Additions to property, plant and equipment
(125,794
)
 
(174,034
)
Net proceeds from divested assets

 
70,930

Other, net
14

 
807

Net cash flows from investing activities
(125,780
)
 
(102,297
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Borrowings on long-term debt
296,146

 

Repayments of borrowings on long-term debt
(101,671
)
 

Borrowings on short-term debt
534,877

 
322,454

Repayments of borrowings on short-term debt
(598,715
)
 
(277,454
)
Payments for debt issuance costs
(1,844
)
 

Other, net
(1,430
)
 
(853
)
Net cash flows from financing activities
127,363

 
44,147

(Decrease) increase in cash, cash equivalents and restricted cash
(14,652
)
 
62,949

Cash, cash equivalents and restricted cash at beginning of period
24,947

 
16,738

Cash, cash equivalents and restricted cash at end of period
$
10,295

 
$
79,687

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid for interest, net of amounts capitalized
$
38,789

 
$
27,449

Cash paid for income taxes
2,202

 
1,665

Cash received from income tax refunds
238

 
13,483

(Decrease) increase in accrued property, plant and equipment
(46,454
)
 
78,465

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

5



CLEARWATER PAPER CORPORATION
Consolidated Statements of Stockholders’ Equity
Unaudited (In thousands)
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders'
Equity
 
 
Shares
 
Amount
 
Balance at December 31, 2017
 
16,448

 
$
2

 
$
1,161

 
$
618,254

 
$
(43,983
)
 
$
575,434

Net earnings
 

 

 

 
2,600

 

 
2,600

Performance share, restricted stock unit, and stock option awards
 
13

 

 
1,267

 

 

 
1,267

Reclassification of the income tax effects of the Tax Cuts and Jobs Act
 

 

 

 
12,852

 
(12,852
)
 

Pension and other postretirement employee benefit plans, net
  of tax of $507
 

 

 

 

 
1,419

 
1,419

Balance at March 31, 2018
 
16,461

 
$
2

 
$
2,428

 
$
633,706

 
$
(55,416
)
 
$
580,720

Net earnings
 

 

 

 
6,961

 

 
6,961

Performance share, restricted stock unit, and stock option awards
 

 

 
1,552

 

 
 
 
1,552

Pension and other postretirement employee benefit plans, net
  of tax of $477
 

 

 
 
 

 
1,336

 
1,336

Balance at June 30, 2018
 
16,461

 
$
2

 
$
3,980

 
$
640,667

 
$
(54,080
)
 
$
590,569

Net earnings
 

 

 

 
34,444

 

 
34,444

Performance share, restricted stock unit, and stock option awards
 

 

 
1,734

 

 
 
 
1,734

Pension and other postretirement employee benefit plans, net
  of tax of $492
 

 

 
 
 

 
1,378

 
1,378

Balance at September 30, 2018
 
16,461

 
$
2

 
$
5,714

 
$
675,111

 
$
(52,702
)
 
$
628,125





6




CLEARWATER PAPER CORPORATION
Consolidated Statements of Stockholders’ Equity
Unaudited (In thousands)

 
 
Common Stock
 
Additional Paid-In Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders'
Equity
 
 
Shares
 
Amount
 
Balance at December 31, 2018
 
16,482

 
$
2

 
$
6,403

 
$
487,339

 
$
(67,348
)
 
$
426,396

Net earnings
 

 

 

 
3,837

 

 
3,837

Performance share, restricted stock unit, and stock option awards
 
33

 

 
772

 

 

 
772

Pension and other postretirement employee benefit plans,
net of tax of $442
 

 

 

 

 
1,239

 
1,239

Balance at March 31, 2019
 
16,515

 
$
2

 
$
7,175

 
$
491,176

 
$
(66,109
)
 
$
432,244

Net loss
 

 

 

 
(424
)
 

 
(424
)
Performance share, restricted stock unit, and stock option awards
 

 

 
1,211

 

 

 
1,211

Pension and other postretirement employee benefit plans,
net of tax of $475
 

 

 

 

 
1,334

 
1,334

Balance at June 30, 2019
 
16,515

 
$
2

 
$
8,386

 
$
490,752

 
$
(64,775
)
 
$
434,365

Net loss
 

 

 

 
(10,973
)
 

 
(10,973
)
Performance share, restricted stock unit, and stock option awards
 

 

 
467

 

 

 
467

Pension and other postretirement employee benefit plans,
net of tax of $459
 

 

 

 

 
1,286

 
1,286

Balance at September 30, 2019
 
16,515

 
$
2

 
$
8,853

 
$
479,779

 
$
(63,489
)
 
$
425,145


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

7



Clearwater Paper Corporation
Condensed Notes to Consolidated Financial Statements
Unaudited
NOTE 1 Nature of Operations and Basis of Presentation
GENERAL
Clearwater Paper manufactures quality consumer tissue, away-from-home tissue, parent roll tissue, bleached paperboard and pulp at manufacturing facilities across the nation. The company is a premier supplier of private label tissue to major retailers and wholesale distributors, including grocery, drug, mass merchants and discount stores. In addition, the company produces bleached paperboard used by quality-conscious printers and packaging converters, and offers services that include custom sheeting, slitting and cutting. Clearwater Paper's employees build shareholder value by developing strong customer relationships through quality and service.
FINANCIAL STATEMENT PREPARATION AND PRESENTATION
The accompanying Consolidated Balance Sheets at September 30, 2019 and December 31, 2018, and the related Consolidated Statements of Operations, Comprehensive Income and Stockholders' Equity for the three and nine months ended September 30, 2019 and 2018, and Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018, have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. We believe that all adjustments necessary for a fair presentation of the results of the interim periods presented have been included. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission, or SEC, on March 18, 2019. Certain 2018 amounts have been reclassified to conform to the 2019 presentation.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods. Significant areas that may require the use of estimates and measurement of uncertainty include determination of net realizable value for deferred tax assets, uncertain income tax positions, assessment of impairment of long-lived assets and goodwill, assessment of environmental matters, equity-based compensation and pension and postretirement obligation assumptions. Actual results could differ from those estimates and assumptions.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
We consider all highly liquid instruments with maturities of three months or less at date of purchase to be cash equivalents. Cash that is held by a third party and has restrictions on its availability to us is classified as restricted cash. The following table provides details of cash, cash equivalents and restricted cash reported on the Consolidated Balance Sheets and Consolidated Statements of Cash Flows.
(In thousands)
September 30, 2019
 
December 31, 2018
 
September 30, 2018
Cash and cash equivalents
$
7,815

 
$
22,484

 
$
76,150

Restricted cash
1,440

 

 
1,080

Restricted cash included in other assets, net
1,040

 
2,463

 
2,457

Total cash, cash equivalents and restricted cash shown in the
   Consolidated Statements of Cash Flows
$
10,295

 
$
24,947

 
$
79,687


8



PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, including any interest costs capitalized, less accumulated depreciation. Depreciation of buildings, equipment and other depreciable assets is determined using the straight-line method. Assets we acquire through business combinations have estimated lives that are typically shorter than the assets we construct or buy new.
For the nine months ended September 30, 2019, we capitalized $4.9 million of interest expense associated with the construction of a paper machine at our Shelby, North Carolina consumer products facility and $0.8 million of interest expense associated with the construction of a continuous pulp digester at our Lewiston, Idaho pulp and paperboard facility. For the nine months ended September 30, 2018, we capitalized $5.1 million of interest expense associated with the Shelby paper machine and $0.9 million of interest expense associated with the continuous pulp digester project.
We review the carrying amount of long-lived assets with definite lives that are held-for-use and evaluate them for recoverability whenever events or changes in circumstances indicate that we may be unable to recover the carrying amount of the assets.
LEASES
All significant lease arrangements are generally recognized at lease commencement. Operating lease right-of-use, or ROU, assets and lease liabilities are recognized at commencement. An ROU asset and corresponding lease liability are not recorded for leases with an initial term of 12 months or less (short-term leases), and we recognize lease expense for these leases as incurred over the lease term.
ROU assets represent our right to use an underlying asset during the reasonably certain lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We primarily use our incremental borrowing rate, which is updated quarterly, based on the information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments related to initial direct cost and prepayments and excludes lease incentives. Refer to Note 4, "Leases," for additional information.
REVENUE RECOGNITION
We enter into contracts that can include various combinations of tissue and paperboard products, which are generally distinct and accounted for as separate performance obligations.
Revenue is recognized at a point in time upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Transfer of control typically occurs when the title and risk of loss passes to the customer. Shipping terms generally indicate when title and the risk of loss have passed. Revenue is recognized at shipment for sales when shipping terms are free on board, or FOB, shipping point. For sales where shipping terms are FOB destination, revenue is recognized when the goods are received by the customer. Revenue from both domestic and foreign sales of our products can involve shipping terms of either FOB shipping point or FOB destination or other shipping terms, depending upon the sales agreement with the customer. We have elected to treat shipping and handling costs for FOB shipping point contracts as a fulfillment cost, not as a separate performance obligation. No revenue is recognized over time. We typically expense incremental direct costs of obtaining a contract (sales commissions) when incurred because the amortization period is generally 12 months or less. We have also elected to use the practical expedient to not disclose unsatisfied or partially satisfied performance obligations as we have no unsatisfied contracts where the remaining portions are expected to be satisfied in a period greater than one year.
We provide for trade promotions, customer cash discounts, customer returns and other deductions as reductions to net sales, which are accounted for as variable consideration when estimating the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available. Revenue net of returns and credits is only recognized to the extent that it is probable that a significant reversal of any incremental revenue will not occur. Significant judgment is required to determine the most probable amount of variable consideration to apply as a reduction to net sales. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.
Payment terms and conditions vary by contract. Terms generally include a requirement of payment within 30 days, and do not include a significant financing component.
Trade accounts receivable are reported within Receivables, net, and are stated at the amount we expect to collect. Trade accounts receivable were $156.3 million and $142.8 million at September 30, 2019 and December 31, 2018, respectively. Trade accounts receivable do not bear interest. The allowance for doubtful accounts is our best estimate of the losses we expect will result from the inability of our customers to make required payments. We generally determine the allowance based on a combination of actual historical write-off experience and an analysis of specific customer accounts. As of September 30, 2019 and December 31, 2018, we had allowances for doubtful accounts of $1.4 million and $1.5 million, respectively.

9



Refer to Note 14, "Segment Information," for further information, including the disaggregation of revenue by segment, primary geographical market, and major product type.
ACCOUNTS RECEIVABLE ARRANGEMENTS
We had an Account Purchase Agreement ("APA") to sell, on a revolving and discounted basis, certain trade accounts receivable balances to an unrelated third-party financial institution. Under the APA, the maximum amount of receivables that could be sold and outstanding was $30.0 million. We retained no interest in the receivables sold under the APA, however, we did have servicing responsibilities for the sold receivables, such as collection. The fair value of the servicing arrangement was not material to our financial statements.
As of September 30, 2019, all amounts collected from customers under the APA had been remitted to the third-party financial institution. At December 31, 2018, we had collected $4.9 million of cash from customers that had not yet been remitted to the third-party financial institution.
During the third quarter of 2019, we entered into an uncommitted supply-chain financing program with a global financial institution under which trade accounts receivable with a large customer may be acquired, without recourse, by the financial institution at a discounted rate. Available capacity under this program is dependent on the level of our trade accounts receivable with this customer and the financial institution’s willingness to purchase such receivables. We have no servicing responsibilities under this agreement.
Receivables sold are de-recognized from our Consolidated Balance Sheet. As of September 30, 2019, we had no sold receivables outstanding being serviced by us. For the nine months ended September 30, 2019, we sold $159.3 million of receivables. The proceeds from these sales of receivables are included within the "Changes in working capital, net" line within operating activities of our Consolidated Statements of Cash Flows. For the nine months ended September 30, 2019, factoring expense on the sale of receivables was $0.7 million, which is included in the "Interest expense, net" line in the Consolidated Statement of Operations. For the nine months ended September 30, 2018, factoring expense was $0.1 million.
ACCOUNTS PAYABLE ARRANGEMENTS
We have entered into supply-chain financing programs with financial intermediaries, which provide certain of our vendors the option to be paid by the financial intermediaries on our trade payables earlier than the due date on the applicable invoice. When a vendor receives an early payment from a financial intermediary on a trade payable for which it invoiced us, we pay that financial intermediary the face amount of the invoice on the regularly scheduled due date. If we reimburse these vendors for certain fees they may incur in connection with receiving an early payment on an invoice, the amount of such invoice that would have otherwise been included in our trade payables is included in our short-term debt. As of December 31, 2018, $20.8 million was included in “Short-term debt” on our Consolidated Balance Sheets related to invoices for which we had reimbursed our vendors’ fees. There were no such amounts as of September 30, 2019.
DERIVATIVES
We had no activity during the three and nine months ended September 30, 2019 and 2018 that required hedge or derivative accounting treatment. To help mitigate our exposure to market risk for changes in utility commodity pricing, we use firm price contracts to supply a portion of the natural gas requirements for our manufacturing facilities, which were reported through "Cost of sales" on our Consolidated Statements of Operations. As of September 30, 2019, these contracts covered approximately 47% of our expected average monthly natural gas requirements for the remainder of 2019, and a lesser amount for 2020. These contracts qualify for treatment as “normal purchases or normal sales” under authoritative guidance and thus required no mark-to-market adjustment.


10



NOTE 2 Recently Adopted and New Accounting Standards
RECENTLY ADOPTED ACCOUNTING STANDARDS
On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842), and subsequent ASUs related to Topic 842. The new guidance increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The adoption of Topic 842 had a material impact on our Consolidated Balance Sheet due to the recognition of right-of-use assets of approximately $83 million and lease liabilities of approximately $88 million as of January 1, 2019. The difference between these lease assets and lease liabilities represents deferred rent balances that were reclassified on the balance sheet. The adoption of Topic 842 did not have a material impact on our Consolidated Statement of Operations or our Consolidated Statement of Cash Flows. We will continue to report periods prior to January 1, 2019 under prior guidance as outlined in Accounting Standards Codification Topic 840, "Leases". Refer to Note 4, "Leases", for further discussion.
NEW ACCOUNTING STANDARDS
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This ASU requires capitalization of certain implementation costs incurred in a cloud computing arrangement that is a service contract. This ASU is effective for fiscal years beginning after December 15, 2019 and for interim periods therein, with early adoption permitted. We do not believe this ASU will have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), which modifies the disclosure requirements for defined benefit and other postretirement plans. This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties and the effects of interest rate basis point changes on assumed health care costs, with other disclosures being added to address significant gains and losses related to changes in benefit obligations. This ASU also clarifies disclosure requirements for projected benefit and accumulated benefit obligations. The amendments in this ASU are effective for fiscal years ending after December 15, 2020, with early adoption permitted and adoption on a retrospective basis for all periods presented required. We are currently assessing the timing of our adoption of this ASU and do not believe it will have a material impact on our consolidated financial statements beyond updating footnote disclosures.
We reviewed all other new accounting pronouncements issued in the period and concluded that they are not applicable or not material to our business.
NOTE 3 Inventories & Property, Plant and Equipment
Inventories at the balance sheet dates consist of:
(In thousands)
September 30, 2019
 
December 31, 2018
Pulp, paperboard and tissue products
$
166,063

 
$
159,499

Materials and supplies
93,965

 
86,892

Logs, pulpwood, chips and sawdust
22,367

 
19,853

 
$
282,395

 
$
266,244


Property, Plant and Equipment at the balance sheet dates consist of:
(In thousands)
 
September 30, 2019
 
December 31, 2018
Machinery and equipment
 
$
2,341,596

 
$
2,161,306

Buildings and improvements
 
479,359

 
381,071

Land improvements
 
95,914

 
84,525

Office and other equipment
 
52,491

 
49,980

Land
 
10,756

 
10,756

Construction in progress
 
58,348

 
273,291

 
 
$
3,038,464

 
$
2,960,929

Less accumulated depreciation and amortization
 
(1,764,990
)
 
(1,691,658
)
 
 
$
1,273,474

 
$
1,269,271




11



NOTE 4 Leases

Our adoption of ASU 2016-02, Leases (Topic 842), and subsequent ASUs related to Topic 842, requires us to recognize substantially all leases on the balance sheet as a ROU asset and a corresponding lease liability. The new guidance also requires additional disclosures as detailed below. We adopted this standard on the effective date of January 1, 2019 and used this effective date as the date of initial application. Under this application method, we were not required to restate prior period financial information or provide Topic 842 disclosures for prior periods. We elected the ‘package of practical expedients’ which permitted us to not reassess our prior conclusions related to lease identification, lease classification and initial direct costs, as well as the practical expedient to not reassess certain land easements. We did not elect the use of hindsight. We combine ROU asset amortization and the change in the lease liability in the same line item on the Consolidated Statements of Cash Flows.

We have operating leases for manufacturing, office, warehouse and distribution space, paperboard sheeting and chipping facilities, equipment and vehicles. We also have finance leases related to our North Carolina converting and manufacturing facilities, as well as for certain office and other equipment. We determine if a contract is a lease at the inception of the arrangement. We review all options to extend, terminate or purchase the ROU assets, and when reasonably certain to exercise, we include the option in the determination of the lease term and lease liability. Our leases have remaining lease terms from less than one year to twelve years, and some of our leases include one or more options to renew.

Lease ROU assets and liabilities are recognized at the commencement date of the lease. Lease ROU assets and liabilities are measured based on the present value of lease payments over the lease term and are reduced by any lease incentives received. When readily determinable, we use the implicit rate in determining the present value of lease payments. When leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date, including the lease term.

Short-term leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheet. Lease expense for short-term leases is recognized on a straight-line basis over the lease term. As of September 30, 2019, our short-term leases were not material. Certain of our leases contain lease and non-lease components that are treated as a single lease component. Our variable lease costs consist primarily of taxes, insurance and common area maintenance. For the three and nine months ended September 30, 2019, sublease income was immaterial to the financial statements.

The tables below present financial information associated with our leases. This information is only presented as of, and for the three and six months ended, September 30, 2019. As noted above, we adopted Topic 842 using a transition method that does not require application to periods prior to adoption.

LEASE EXPENSE
 
Three Months Ended
 
Nine Months Ended
(In thousands)
September 30, 2019
 
 
 
 
Operating lease costs
$
4,062

 
$
11,071

 
 
 
 
Finance lease costs:
 
 
 
Amortization of right-of-use assets
395

 
1,273

Interest on lease liabilities
466

 
1,405

Total finance lease costs
861

 
2,678

 
 
 
 
Variable lease costs
290

 
846

 
 
 
 
Total lease costs
$
5,213

 
$
14,595



12



SUPPLEMENTAL CASH FLOW INFORMATION
 
Nine Months Ended
(In thousands)
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
12,635

Operating cash flows from finance leases
1,405

Financing cash flows from finance leases
1,023

 
 
Non-cash amounts for lease liabilities arising from obtaining right-of-use assets:
 
Operating leases
$
973

Finance leases
493


SUPPLEMENTAL BALANCE SHEET INFORMATION
(In thousands)
Classification
September 30, 2019
Lease ROU Assets
 
 
Operating lease assets
Operating lease right-of-use assets
$
74,503

Finance lease assets
Property, plant and equipment, net
15,837

Total lease ROU assets
 
$
90,340

 
 
 
Lease Liabilities
 
 
Current operating lease liabilities
Accounts payable and accrued liabilities
$
13,200

Current finance lease liabilities
Accounts payable and accrued liabilities
1,398

Total current lease liabilities
 
14,598

 
 
 
Non-current operating lease liabilities
Operating lease liabilities
66,571

Non-current finance lease liabilities
Other long-term obligations
20,929

Total non-current lease liabilities
 
87,500

 
 


Total operating lease liabilities
 
79,771

Total finance lease liabilities
 
22,327

Total lease liabilities
 
$
102,098


LEASE TERM AND DISCOUNT RATE
 
September 30, 2019
Weighted average remaining lease term (years)
 
Operating leases
6.9

Finance leases
10.9

 
 
Weighted average discount rate
 
Operating leases
4.9
%
Finance leases
8.3
%




13



MATURITY OF LEASE LIABILITIES

As of September 30, 2019, our future maturities of lease liabilities were as follows:
(In thousands)
Operating
 
Finance
2019
$
3,964

 
$
774

2020
16,727

 
3,175

2021
16,019

 
3,220

2022
15,081

 
3,128

2023
9,413

 
2,897

Thereafter
33,661

 
21,468

Total lease payments
$
94,865

 
$
34,662

Less interest portion
(15,094
)
 
(12,335
)
Total
$
79,771

 
$
22,327


As of December 31, 2018, as previously disclosed in our 2018 Annual Report on Form 10-K, and under the previous lease accounting standard, we had future minimum lease payments as follows:
(In thousands)
Operating
 
Capital
2019
$
12,038

 
$
3,093

2020
11,421

 
3,062

2021
10,424

 
3,112

2022
9,489

 
3,019

2023
7,163

 
2,789

Thereafter
24,276

 
21,710

Total future minimum lease payments
$
74,811

 
$
36,785

Less interest portion
 
 
(13,887
)
Present value of future minimum lease payments
 
 
$
22,898


NOTE 5 Intangible Assets
Intangible assets at the balance sheet dates comprise the following:
 
September 30, 2019
(Dollars in thousands, lives in years)
Weighted Average Useful
Life
 
Historical
Cost
 
Accumulated
Amortization
 
Net
Balance
Customer relationships
9.4
 
$
56,453

 
$
(39,995
)
 
$
16,458

Trade names and trademarks
7.4
 
6,786

 
(4,800
)
 
1,986

Other intangibles
6.0
 
572

 
(291
)
 
281

 
 
 
$
63,811

 
$
(45,086
)
 
$
18,725

 
 
 
 
 
 
 
 
  
December 31, 2018
(Dollars in thousands, lives in years)
Weighted Average Useful
Life
 
Historical
Cost
 
Accumulated
Amortization
 
Net
Balance
Customer relationships
9.4
 
$
56,453

 
$
(35,469
)
 
$
20,984

Trade names and trademarks
7.4
 
6,786

 
(4,029
)
 
2,757

Other intangibles
6.0
 
572

 
(233
)
 
339

 
 
 
$
63,811

 
$
(39,731
)
 
$
24,080



14



As of September 30, 2019, estimated future annual amortization is as follows:
(In thousands)
 
For the Years Ending
December 31,
2019
 
$
1,785

2020
 
3,246

2021
 
2,917

2022
 
2,217

2023
 
2,140

Thereafter
 
6,420

Total
 
$
18,725


For the three months ended September 30, 2019 and 2018, intangible assets amortization expense was $1.8 million and $1.9 million, respectively. For the nine months ended September 30, 2019 and 2018, intangible assets amortization expense was $5.4 million and $5.8 million, respectively.
NOTE 6 Income Taxes
Consistent with authoritative guidance, our estimated annual effective tax rate is used to allocate expected annual income tax expense to interim periods. The rate is the ratio of estimated annual income tax expense to estimated pre-tax ordinary income, and excludes "discrete items," which are significant, unusual or infrequent items reported separately net of their related tax effect. The estimated annual effective tax rate is applied to the current interim period's ordinary income to determine the income tax expense allocated to the interim period. The income tax effects of discrete items are then determined separately and recognized in the interim period in which the income or expense items arise.

Our estimated annual effective tax rate for the third quarter of 2019 is approximately 34%, compared with approximately 32% for the comparable interim period in 2018. The annual effective tax rate in 2019 is subject to variation due to several factors, including variability in pre-tax income (or loss), forecasted pre-tax income (or loss), changes in business practices, changes in tax credits and tax law developments. The rate in 2018 reflected the Federal rate reduction enacted by the Tax Cuts and Jobs Act offset by an increase in the rate due to basis differences associated with the goodwill written-off as part of the sale of our Ladysmith facility.
NOTE 7 Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at the balance sheet dates consist of:
(In thousands)
September 30, 2019
 
December 31, 2018
Trade accounts payable
$
141,458

 
$
228,059

Accrued wages, salaries and employee benefits
37,395

 
41,426

Lease liabilities
14,598

 

Accrued taxes other than income taxes payable
7,037

 
6,243

Accrued utilities
6,707

 
6,934

Accrued discounts and allowances
6,502

 
8,143

Accrued interest
5,322

 
14,672

Accrued account purchase agreement liabilities

 
4,885

Other
10,544

 
10,670

 
$
229,563

 
$
321,032

NOTE 8 Debt
CREDIT AGREEMENTS
On July 26, 2019, we entered into credit agreements with several lenders and JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, which included (a) a $300 million Term Loan Credit Agreement (the “Term Loan Credit Agreement”) and (b) a $250 million asset based lending, or ABL, Credit Agreement (the "Term Loan Credit Agreement" and "ABL Credit Agreement" collectively the "Credit Agreements"). At closing, the Term Loan Credit Agreement was fully advanced and $58.0 million was

15



drawn under the ABL Credit Agreement, proceeds of which were used to refinance and terminate our: (a) $200 million credit agreement dated October 31, 2016, as amended, with Wells Fargo Bank, National Association, ("Wells Fargo") as administrative agent, and the lenders party thereto, of which $135.0 million was outstanding and b) the $200 million credit agreement dated October 31, 2016, as amended, with Northwest Farm Credit Services, PCA, ("Farm Credit") as administrative agent, and the lenders party thereto, of which $200.0 million was outstanding (the "Prior Credit Agreements"); pay fees and expenses in connection with the Credit Agreements; and for working capital purposes.
In conjunction with the termination of the Prior Credit Agreements, of which the $200 million credit agreement with Wells Fargo was treated as a modification under Topic 470, "Debt", debt extinguishment costs, consisting of $1.7 million in breakage fees and $1.1 million in unamortized debt issuance costs, were written-off as debt retirement costs during the three months ended September 30, 2019. Unamortized debt issuance costs of $1.6 million, related to the debt modification, are being amortized over the remaining term of the ABL Credit Agreement. We incurred debt issuance costs of $7.1 million, which are allocated and amortized over the respective terms of the Credit Agreements.
As of September 30, 2019, there was $300.0 million outstanding under our Term Loan and $58.0 million outstanding under our ABL Credit Agreement.
The borrowings outstanding under the Prior Credit Agreements as of December 31, 2018 consisted of a combination of short-term floating base rate and LIBOR rate loans, which were classified as current liabilities in our Consolidated Balance Sheet, and $100.0 million of borrowings with a three-year fixed interest rate that was included in “Long-term debt” in our Consolidated Balance Sheet.
The Credit Agreements contain certain customary representations, warranties, and affirmative and negative covenants of us and our subsidiaries that restrict us and our subsidiaries’ ability to take certain actions, including, incurrence of indebtedness, creation of liens, mergers or consolidations, dispositions of assets, repurchase or redemption of capital stock and certain types of indebtedness, making certain investments, entering into certain transactions with affiliates or changing the nature of our business. At September 30, 2019, we were in compliance with the Credit Agreements.
Term Loan Credit Agreement
The Term Loan Credit Agreement matures on July 26, 2026. We are required to repay the aggregate outstanding principal amount in quarterly installments on the last day of each March, June, September and December, commencing March 31, 2020, and ending with the last such day to occur prior to the maturity date, in an aggregate amount for each such date equal to the aggregate principal amount of the initial loan amount (as such amount may be adjusted pursuant to the prepayment provisions of the Term Loan Credit Agreement) multiplied by 0.25%. In addition, we must make mandatory prepayments of principal under the Term Loan Credit Agreement upon the occurrence of certain specified events, including certain asset sales (subject to customary reinvestment rights), debt issuances not permitted under the Term Loan Credit Agreement, and based on a percentage, which may vary from 50% to 0% depending on our secured leverage ratio, of annual excess cash flows in excess of certain threshold amounts, less any voluntary prepayments under the Term Loan Credit Agreement. Any remaining outstanding principal balance under the Term Loan Credit Agreement is repayable on the maturity date. Amounts repaid or prepaid by us with respect to the loans under the Term Loan Credit Agreement cannot be reborrowed. We may, at our option, prepay any borrowings under the Term Loan Credit Agreement, in whole or in part, at any time and from time to time without premium or penalty (except in certain circumstances).
We may add one or more incremental term loan facilities to the Term Loan Credit Agreement, subject to obtaining commitments from any participating lenders and certain other conditions in an amount not to exceed (1) $100 million, plus (2) the amount of all voluntary prepayments of the Term Loan Credit Agreement (other than prepayments funded with long-term indebtedness), plus (3) an additional amount, so long as after giving effect to the incurrence of such additional amount, our pro forma first lien secured leverage ratio would not exceed 2.00 to 1.00. Under the Term Loan Credit Agreement, loans generally may bear interest based on LIBOR or an annual base rate, as applicable, plus, in each case, an applicable margin, when our leverage ratio is (i) less than or equal to 4.25 to 1.00, of 3.00% per annum in the case of LIBOR loans and of 2.00% per annum in the case of annual base rate loans and (ii) greater than 4.25 to 1.00, of 3.25% per annum in the case of LIBOR loans and of 2.25% per annum in the case of annual base rate loans. At September 30, 2019, our applicable margin on LIBOR loans was 3.25%.
ABL Credit Agreement
The ABL Credit Agreement matures on July 26, 2024 and includes a $250 million revolving loan commitment, subject to borrowing base limitations based on a percentage of applicable eligible receivables and eligible inventory. Up to $15 million of the ABL Credit Agreement is available for the issuance of letters of credit, of which $5.5 million was utilized at September 30, 2019. We may, at our option, prepay any borrowings under the ABL Credit Agreement, in whole or in part, at any time and from time to time without premium or penalty (except in certain circumstances). Borrowings under the ABL Credit Agreement are also subject to mandatory prepayment in certain circumstances, including in the event that borrowings exceed applicable borrowing base limits. We may also increase commitments under the ABL Credit Agreement in an aggregate principal amount of up to $100 million, subject to obtaining commitments from any participating lenders and certain other conditions.

16



Under the ABL Credit Agreement, loans may bear interest based on LIBOR or an annual base rate, as applicable, plus, in each case, an applicable margin that is based on availability (as determined under the ABL Credit Agreement) that may vary from 1.25% per annum to 1.75% per annum in the case of LIBOR loans and 0.25% per annum to 0.75% per annum in the case of annual base rate loans. In addition, a commitment fee based on unused availability is also payable which may vary from 0.25% per annum to 0.375% per annum. From July 26, 2019 through September 30, 2019, our weighted average interest rate was 3.8%. At September 30, 2019, we were able to borrow with an applicable margin of 1.25% on LIBOR loans and our commitment fee rate was 0.375%.
The ABL Credit Agreement also contains a financial covenant, which requires us to maintain a consolidated fixed charge coverage ratio of not less than 1.10 to 1.00, provided that the financial covenant under the ABL Credit Agreement is only applicable when availability falls below a certain threshold.
NOTE 9 Other Long-Term Obligations
Other long-term obligations at the balance sheet dates consist of: 
(In thousands)
September 30, 2019
 
December 31, 2018
Finance lease obligations, net of current portion
$
20,929

 
$
21,589

Deferred compensation
4,471

 
2,585

Deferred proceeds
3,955

 
4,511

Other
4,635

 
10,292

 
$
33,990

 
$
38,977

NOTE 10 Pension and Other Postretirement Employee Benefit Plans
The following table details the components of net periodic cost of our company-sponsored pension and other postretirement employee benefit, or OPEB, plans for the periods presented:
 
Three Months Ended September 30,
(In thousands)
2019
 
2018
 
2019
 
2018
 
Pension Benefit Plans
 
Other Postretirement
Employee  Benefit Plans
Service cost
$
609

 
$
447

 
$
23

 
$
34

Interest cost
3,110

 
3,005

 
700

 
609

Expected return on plan assets
(4,134
)
 
(4,250
)
 

 

Amortization of prior service credit

 

 

 
(419
)
Amortization of actuarial loss (gain)
1,844

 
2,515

 
(99
)
 
(226
)
Net periodic cost (benefit)
$
1,429

 
$
1,717

 
$
624

 
$
(2
)
 
Nine Months Ended September 30,
(In thousands)
2019
 
2018
 
2019
 
2018
 
Pension Benefit Plans
 
Other Postretirement
Employee  Benefit Plans
Service cost
$
1,828

 
$
1,342

 
$
68

 
$
102

Interest cost
9,333

 
9,015

 
2,099

 
1,827

Expected return on plan assets
(12,401
)
 
(12,751
)
 

 

Amortization of prior service credit

 

 

 
(1,257
)
Amortization of actuarial loss (gain)
5,529

 
7,543

 
(294
)
 
(677
)
Net periodic cost (benefit)
$
4,289

 
$
5,149

 
$
1,873

 
$
(5
)
During the nine months ended September 30, 2019 and 2018, we made no contributions to our qualified pension plans. We do not expect, nor are we required, to make contributions in 2019.
During the nine months ended September 30, 2019, we made contributions of $0.3 million to our company-sponsored non-qualified pension plan. We estimate contributions will total $0.4 million in 2019. We do not anticipate funding our OPEB plans in 2019 except to pay benefit costs as incurred during the year by plan participants.

17



We record the service component of net periodic cost (benefit) as part of "Cost of sales" and "Selling, general, and administrative expenses," while the non-service components of net periodic cost (benefit) are recorded to "Non-operating pension and other postretirement benefit costs (income)" on our Consolidated Statements of Operations.
NOTE 11 Earnings per Share
Basic (loss) earnings per share is based on the weighted-average number of shares of common stock outstanding. Diluted earnings per share is based upon the weighted-average number of shares of common stock outstanding plus all potentially dilutive securities that were assumed to be converted into common shares at the beginning of the period under the treasury stock method. This method requires the effect of potentially dilutive common stock equivalents be excluded from the calculation of diluted earnings per share for the periods in which net losses are reported because the effect is anti-dilutive.
The following table reconciles the number of common shares used in calculating the basic and diluted net earnings per share:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Basic weighted-average
   common shares outstanding1
16,538,569

 
16,486,935

 
16,531,195

 
16,492,843

Incremental shares due to:
 
 
 
 
 
 
 
Restricted stock units

 
22,461

 

 
27,893

Performance shares

 
54,253

 

 
52,508

Stock options

 

 

 
60

Diluted weighted-average
   common shares outstanding
16,538,569

 
16,563,649

 
16,531,195

 
16,573,304

 
 
 
 
 
 
 
 
Basic net (loss) earnings per common share
$
(0.66
)
 
$
2.09

 
$
(0.46
)
 
$
2.67

Diluted net (loss) earnings per common share
(0.66
)
 
2.08

 
(0.46
)
 
2.66

 
 
 
 
 
 
 
 
Anti-dilutive shares excluded from calculation
1,060,643

 
985,312

 
1,040,544

 
935,037

1 
Basic weighted-average common shares outstanding includes restricted stock unit awards that are fully vested, but are deferred for future issuance.
NOTE 12 Equity-Based Compensation
We recognize equity-based compensation expense for all equity-based payment awards made to employees and directors, including restricted stock units, or RSUs, performance shares and stock options, based on estimated fair values.
EMPLOYEE AWARDS
Employee equity-based compensation expense (income) was recognized as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Restricted stock units
$
794

 
$
595

 
$
1,975

 
$
1,599

Performance shares
(682
)
 
499

 
(164
)
 
1,409

Stock options
357

 
639

 
1,047

 
1,767

Total employee equity-based compensation expense
$
469

 
$
1,733

 
$
2,858

 
$
4,775

As provided in the Clearwater Paper Corporation 2017 Stock Incentive Plan, the performance measure used to determine the number of performance shares ultimately issuable for performance shares granted in 2019 is a free cash flow performance measure for 70% of the performance share awards. For the remaining 30% of the grants, a return on invested capital measure is used. The combined performance of these measures is then subject to an adjustment (increase or decrease) of up to 25% based on our total shareholder return, or TSR, compared to the TSR performance of a selected index. The number of performance shares actually issued, as a percentage of the amount subject to the performance share award, could range from 0%-200%. Throughout the service periods we assess the probability of achieving the performance conditions for our applicable performance share grants, and expense is recognized based on the probable outcomes.

18



During the nine months ended September 30, 2019, 47,504 RSUs were settled and distributed. After adjusting for minimum tax withholdings, a net 32,992 shares were issued. In connection with the issued RSUs, the minimum tax withholding payments made during the nine months ended September 30, 2019 totaled $0.4 million.
During the nine months ended September 30, 2019, we had 75,223 stock option awards expire with a weighted-average exercise price of $51.69. At September 30, 2019, we had 515,438 stock option awards that were exercisable with a weighted-average exercise price of $51.19.
The following table summarizes the number of share-based awards granted under the Clearwater Paper Corporation 2017 Stock Incentive Plan during the nine months ended September 30, 2019 and the grant-date fair value of the awards: 
 
Nine Months Ended
 
September 30, 2019
 
Number of
Shares Subject to Award
 
Weighted-Average Fair
Value of Award Per Share
Restricted stock units
137,037

 
$
26.61

Performance shares
151,664

 
26.60

DIRECTOR AWARDS
Annually, each outside member of our Board of Directors receives deferred equity-based awards that are measured in units of our common stock and ultimately settled in cash at the time of payment. Accordingly, the compensation expense associated with these awards is subject to fluctuations each quarter based on mark-to-market adjustments at each reporting period in line with changes in the market price of our common stock. As a result of the mark-to-market adjustment, we recorded director equity-based compensation expense of $0.4 million and $0.8 million for the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, we recorded director equity-based compensation expense of $0.1 million and a benefit of $1.9 million, respectively.
As of September 30, 2019, the liability amounts associated with director equity-based compensation included in "Other long-term obligations" on the accompanying Consolidated Balance Sheet were $2.2 million. At December 31, 2018, the liability amounts associated with director equity-based compensation included in "Other long-term obligations" and "Accounts payable and accrued liabilities" totaled $0.8 million and $1.3 million, respectively.
NOTE 13 Fair Value Measurements
The estimated fair values of our financial instruments at the dates presented below are as follows: 
 
September 30,
 
December 31,
 
2019
 
2018
 
Carrying
 
Fair
 
Carrying
 
Fair
(In thousands)
Amount
 
Value
 
Amount
 
Value
Cash, cash equivalents and restricted cash (Level 1)
$
10,295

 
$
10,295

 
$
24,947

 
$
24,947

Short-term borrowings under revolving credit agreements (Level 2)
58,000

 
58,000

 
100,000

 
99,909

Other short-term debt (Level 1)

 

 
20,833

 
20,833

Long-term debt (Level 2)
875,000

 
863,340

 
675,000

 
612,546

Accounting guidance establishes a framework for measuring the fair value of financial instruments, providing a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities, or “Level 1” measurements, followed by quoted prices of similar assets or observable market data considering the assets' underlying maturities, or “Level 2” measurements, and the lowest priority to unobservable inputs, or “Level 3” measurements.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used should seek to maximize the use of observable inputs and minimize the use of unobservable inputs.
Cash, cash equivalents and restricted cash, borrowings under the revolving credit agreements, other short-term debt and long-term debt are the only items measured at fair value on a recurring basis.
For cash, cash equivalents, restricted cash and any revolving line of credit borrowings, the carrying amount approximates fair value due to the short-term nature of these financial instruments.

19



The fair value of our long-term debt is estimated based upon quoted market prices for similar debt issues or estimated based on average market prices for comparable debt when there is no quoted market price.
We do not have any financial assets measured at fair value on a nonrecurring basis.
NOTE 14 Segment Information
Our reportable segments are described below.
CONSUMER PRODUCTS
Our Consumer Products segment manufactures and sells a complete line of at-home tissue products, or retail products, and away-from-home tissue products, or non-retail products, and parent rolls. Retail products include bath, paper towels, facial and napkin product categories. Non-retail products include conventional one and two-ply bath tissue, two-ply paper towels, some facial tissue product categories, hard wound towels and dispenser napkins sold to customers with commercial and industrial tissue needs. Each category is further distinguished according to quality segments: ultra, premium, value and economy.
PULP and PAPERBOARD
Our Pulp and Paperboard segment manufactures and markets solid bleached sulfate paperboard for the high-end segment of the packaging industry as well as offers custom sheeting, slitting and cutting of paperboard. Our overall production consists primarily of folding carton, liquid packaging, cup and plate products and commercial printing grades. The majority of our Pulp and Paperboard customers are packaging converters, folding carton converters, merchants and commercial printers.

20




The table below presents information about our reportable segments: 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Segment net sales:
 
 
 
 
 
 
 
Consumer Products
$
228,544

 
$
211,642

 
$
676,220

 
$
672,069

Pulp and Paperboard
216,644

 
214,818

 
649,740

 
623,442

Total segment net sales
$
445,188

 
$
426,460

 
$
1,325,960

 
$
1,295,511

 
 
 
 
 
 
 
 
Earnings (loss) before income taxes:
 
 
 
 
 
 
 
Consumer Products1
$
(4,438
)
 
$
(1,269
)
 
$
(8,300
)
 
$
(3,244
)
   Gain on divested assets

 
22,944

 

 
22,944

Pulp and Paperboard1
17,098

 
38,280

 
80,073

 
98,626

 
12,660

 
59,955

 
71,773

 
118,326

Corporate1
(15,120
)
 
(13,055
)
 
(44,530
)
 
(41,506
)
(Loss) income from operations
(2,460
)
 
46,900

 
27,243

 
76,820

Interest expense, net
(13,077
)
 
(7,547
)
 
(32,477
)
 
(23,290
)
Debt retirement costs
(2,725
)
 

 
(2,725
)
 

Non-operating pension and other postretirement benefit costs
(1,421
)
 
(1,234
)
 
(4,266
)
 
(3,700
)
(Loss) earnings before income taxes
$
(19,683
)
 
$
38,119

 
$
(12,225
)
 
$
49,830

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Consumer Products
$
19,025

 
$
14,447

 
$
51,227

 
$
42,964

Pulp and Paperboard
11,168

 
9,316

 
30,144

 
28,106

Corporate
1,797

 
1,579

 
4,972

 
4,616

Total depreciation and amortization
$
31,990

 
$
25,342

 
$
86,343

 
$
75,686


1 
Income (loss) from operations for the Consumer Products, Pulp and Paperboard and Corporate segments for the nine months ended September 30, 2018 include $1.7 million, $0.5 million and $4.2 million, respectively, of expenses associated with our selling, general and administrative cost control measures.     

For the nine months ended September 30, 2019, no customer accounted for more than 10% of our total company net sales. For the nine months ended September 30, 2018, one customer in our Consumer Products segment, the Kroger Company, accounted for approximately 11.9% of our total company net sales.

21




Net sales, classified by the major geographic areas in which our customers are located and by major products, were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Primary geographical markets:
 
 
 
 
 
 
 
United States
$
424,743

 
$
404,593

 
$
1,270,944

 
$
1,237,644

Other countries
20,445

 
21,867

 
55,016

 
57,867

Total net sales
$
445,188

 
$
426,460

 
$
1,325,960

 
$
1,295,511

 
 
 
 
 
 
 
 
Major products:
 
 
 
 
 
 
 
Paperboard
$
215,370

 
$
214,818

 
$
644,565

 
$
623,442

Retail tissue
215,255

 
183,948

 
630,354

 
601,557

Non-retail tissue
12,421

 
27,624

 
43,153

 
68,348

Other
2,142

 
70

 
7,888

 
2,164

Total net sales
$
445,188

 
$
426,460

 
$
1,325,960

 
$
1,295,511



22



NOTE 15 Supplemental Guarantor Financial Information
All of our subsidiaries that are 100% directly or indirectly owned by Clearwater Paper, guarantee our $275 million aggregate principal amount of 4.5% senior notes issued in January 2013 and due 2023, which we refer to as the 2013 Notes, on a full and unconditional, and joint and several basis. There are no significant restrictions on the ability of the guarantor subsidiaries to make distributions to Clearwater Paper, the issuer of the 2013 Notes. The following tables present the results of operations, financial position and cash flows of Clearwater Paper and its subsidiaries, the guarantor subsidiaries, and the eliminations necessary to arrive at the information for Clearwater Paper on a consolidated basis.
Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
Three Months Ended September 30, 2019
(In thousands)
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Total
Net sales
$
416,293

 
$
67,869

 
$
(38,974
)
 
$
445,188

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
(396,794
)
 
(60,240
)
 
38,330

 
(418,704
)
Selling, general and administrative expenses
(24,255
)
 
(4,689
)
 

 
(28,944
)
Total operating costs and expenses
(421,049
)
 
(64,929
)
 
38,330

 
(447,648
)
(Loss) income from operations
(4,756
)
 
2,940

 
(644
)
 
(2,460
)
Interest expense, net
(13,076
)
 
(1
)
 

 
(13,077
)
Debt retirement costs
(2,725
)
 

 

 
(2,725
)
Non-operating pension and other postretirement benefit costs
(1,421
)
 

 

 
(1,421
)
(Loss) earnings before income taxes
(21,978
)
 
2,939

 
(644
)
 
(19,683
)
Income tax benefit (provision)
13,996

 
(1,397
)
 
(3,889
)
 
8,710

Equity in income of subsidiary
1,542

 

 
(1,542
)
 

Net (loss) earnings
$
(6,440
)
 
$
1,542

 
$
(6,075
)
 
$
(10,973
)
Other comprehensive income, net of tax
1,286

 

 

 
1,286

Comprehensive (loss) income
$
(5,154
)
 
$
1,542

 
$
(6,075
)
 
$
(9,687
)

23




Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
Nine Months Ended September 30, 2019
(In thousands)
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Total
Net sales
$
1,250,145

 
$
203,094

 
$
(127,279
)
 
$
1,325,960

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
(1,154,834
)
 
(181,741
)
 
123,800

 
(1,212,775
)
Selling, general and administrative expenses
(71,578
)
 
(14,364
)
 

 
(85,942
)
Total operating costs and expenses
(1,226,412
)
 
(196,105
)
 
123,800

 
(1,298,717
)
Income from operations
23,733

 
6,989

 
(3,479
)
 
27,243

Interest expense, net
(32,338
)
 
(139
)
 

 
(32,477
)
Debt retirement costs
(2,725
)
 

 

 
(2,725
)
Non-operating pension and other postretirement benefit costs
(4,266
)
 

 

 
(4,266
)
(Loss) earnings before income taxes
(15,596
)
 
6,850

 
(3,479
)
 
(12,225
)
Income tax benefit (provision)
10,221

 
(1,821
)
 
(3,735
)
 
4,665

Equity in income of subsidiary
5,029

 

 
(5,029
)
 

Net (loss) earnings
$
(346
)
 
$
5,029

 
$
(12,243
)
 
$
(7,560
)
Other comprehensive income, net of tax
3,859

 

 

 
3,859

Comprehensive income
$
3,513

 
$
5,029

 
$
(12,243
)
 
$
(3,701
)
Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
Three Months Ended September 30, 2018
(In thousands)
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Total
Net sales
$
426,816

 
$
50,340

 
$
(50,696
)
 
$
426,460

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
(383,737
)
 
(45,693
)
 
53,209

 
(376,221
)
Selling, general and administrative expenses
(20,721
)
 
(5,562
)
 

 
(26,283
)
Gain on divested assets, net

 
22,944

 

 
22,944

Total operating costs and expenses
(404,458
)
 
(28,311
)
 
53,209

 
(379,560
)
Income from operations
22,358

 
22,029

 
2,513

 
46,900

Interest expense, net
(7,366
)
 
(181
)
 

 
(7,547
)
Non-operating pension and other postretirement benefit costs
(1,234
)
 

 

 
(1,234
)
Earnings before income taxes
13,758

 
21,848

 
2,513

 
38,119

Income tax benefit (provision)
1,748

 
(5,043
)
 
(380
)
 
(3,675
)
Equity in income of subsidiary
16,805

 

 
(16,805
)
 

Net earnings
$
32,311

 
$
16,805

 
$
(14,672
)
 
$
34,444

Other comprehensive income, net of tax
1,378

 

 

 
1,378

Comprehensive income
$
33,689

 
$
16,805

 
$
(14,672
)
 
$
35,822


24




Clearwater Paper Corporation
Consolidating Statement of Operations and Comprehensive Income
Nine Months Ended September 30, 2018
(In thousands)
Issuer