Clearwater Paper Corp

Clearwater Paper Corporation

Notes to Consolidated Financial Statements

Note 1 Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position, results of operations, stockholders' equity and cash flows for us and our subsidiaries for the interim periods presented. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023. All dollar amounts are shown in millions, except per share.

Note 2 Recently Issued Accounting Standards

In December 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-09, Income Taxes—Improvements to Income Tax Disclosures (Topic 740), which requires enhanced disclosures primarily related to the rate reconciliation and disaggregation of income taxes paid. This ASU is effective for annual periods beginning after December 15, 2024, with early adoption permitted. Adoption of this ASU will result in additional disclosure, but it will not impact our consolidated financial position, results of operations or cash flows.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting—Improvements to Reportable Segment Disclosures (Topic 280). This standard requires enhanced disclosures of segment expenses as well as additional information provided to the Chief Operating Decision Maker. This ASU is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The amendments in this ASU should be applied retrospectively to all prior periods presented in the financial statements, with early adoption permitted. Adoption of this ASU will result in additional disclosure, but it will not impact our consolidated financial position, results of operations or cash flows.

Note 3 Business Acquisition

On May 1, 2024, we completed the acquisition of a paperboard manufacturing facility and associated business, located in Augusta, Georgia (Augusta) from Graphic Packaging International, LLC (Augusta Acquisition). The acquisition is being accounted for under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinationas a business combination as opposed to an asset acquisition. We used borrowings under our credit facilities to fund the acquisition. This acquisition strengthens our position as a premier, independent supplier of paperboard products to converters through improved scale and cost structure. This acquisition is reported within our Pulp and Paperboard segment.

The purchase price of the Augusta Acquisition was allocated to assets acquired and liabilities assumed based on the estimated fair values as of the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill, which is expected to be deductible for tax purposes. The allocation of the purchase price shown below remains preliminary and is subject to further adjustment, pending additional refinement and final completion of valuations, including but not limited to valuations of property, plant and equipment. Goodwill is primarily attributed to synergies from future expected economic benefits, including enhanced revenue growth as well as cost savings from reduction of duplicative overhead, streamlined operations and enhanced operational efficiency.

The purchase price allocation as of May 1, 2024 is as follows:

The Consolidated Statements of Operations includes $81.2 million of Net Sales and $5.8 million of Net Loss for the quarter and six months ended June 30, 2024.

The following unaudited pro forma consolidated financial information for the quarter and six months ended June 30, 2024 combines our results and the unaudited results of the Augusta operations for the corresponding periods. The unaudited pro forma consolidated financial information assumes that the Augusta Acquisition, which closed on May 1, 2024, was completed on January 1, 2023. The pro forma consolidated financial information has been calculated after applying our accounting policies and includes adjustments to reduce previous recorded amortization expense, fair value adjustments for acquired inventory, property, plant and equipment and operating leases. The impact to depreciation expense was de minimis due to the valuation step up being offset by increased useful lives. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of our operating results that would have been achieved had the Augusta Acquisition actually taken place on January 1, 2023. In addition, these results are not intended to be a projection of future results and do not reflect events that may occur after the Augusta Acquisition, including but not limited to revenue enhancements, cost savings or operating synergies that we may achieve as a result of the Augusta Acquisition.

Note 4 Receivables

Receivables consist of:

Note 5 Inventories

Inventories are stated at the lower of net realizable value or current cost using the average cost method and consist of:

Note 6 Property, Plant and Equipment

Property, plant and equipment consist of:

Note 7 Goodwill and Intangibles

Changes in the carrying amounts of goodwill and intangible assets allocated to the pulp and paperboard segment as follows:

Intangible assets consisted of $5.4 million customer relationships. Outstanding definite-lived intangible assets are amortized over their useful lives of 10 years.

The gross book value and accumulated amortization of definite lived intangible assets at June 30, 2024 was $34.9 million and $29.5 million. The gross book value and accumulated amortization of definite lived intangible assets at December 31, 2023 was $34.9 million and $28.4 million.

Note 8 Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of:

Included in "Accounts payable and accrued liabilities" are $35.1 million and $13.0 million related to capital expenditures that had not yet been paid as of June 30, 2024 and December 31, 2023.

We maintain a program with a financial institution to provide our vendors with an option to receive payment earlier than our standard payment terms. As of June 30, 2024 and December 31, 2023, $15.1 million and $14.7 million of outstanding obligations under this program were included in "Other" in the table above.

As of June 30, 2024 and December 31, 2023, unrecognized tax benefits, including associated interest, of $28.5 million and $27.4 million were included in "Other" in the table above.

Note 9 Income Taxes

For interim periods, accounting standards require that income tax expense be determined by applying the estimated annual effective income tax rate to year-to-date results, unless this method does not result in a reliable estimate of year-to-date income tax expense. Each period, the income tax accrual is adjusted to the latest estimate and the difference from the previously accrued year-to-date balance is adjusted to the current quarter.

For the six months ended June 30, 2024, our income tax benefit was $2.4 million compared to a provision of $18.6 million in the same period in 2023. Our effective tax rate for the six months ended June 30, 2024 varied from the U.S. federal statutory tax rate of 21.0% primarily due to the effects of state taxes, nondeductible compensation and interest related to uncertain tax provisions.

Note 10 Debt

Long-term debt at the balance sheet dates consisted of:

TERM CREDIT AGREEMENTS

On May 1, 2024, the Company entered into an amendment and restatement of our Credit Agreement, dated October 27, 2023, with AgWest Farm Credit, PCA, as administrative agent, and several lenders (as so amended and restated, the “Term Credit Agreement”).

After giving effect to the amendment and restatement, the credit facilities provided under the Term Credit Agreement consist of (i) a term revolver loan commitment in the amount of $270 million (the “Term Revolver Facility”), $150 million of which was borrowed on October 27, 2023 and $120 million of which was borrowed on May 1, 2024, (ii) a term loan commitment in the amount of $400 million (the “Farm Credit Term Loan Facility”), which was fully drawn on May 1, 2024 and (iii) a term loan commitment in the amount of $90 million (the “Commercial Bank Term Loan Facility” and together with the Farm Credit Term Loan Facility, collectively, the “Term Loan Facilities”), which was fully drawn on May 1, 2024.

We may increase commitments under the Term Revolver Facility in an aggregate principal amount of up to $60 million, subject to obtaining commitments from participating lenders. The Term Credit Agreement matures on the earlier of (i) in the case of the Term Revolver Facility and the Commercial Bank Term Loan Facility, May 1, 2029, (ii) in the case of the Farm Credit Term Loan Facility, May 1, 2031 and (iii) and subject to springing maturity 91 days prior to the maturity of the 2020 Notes, if the outstanding principal amount of the 2020 Notes plus $50 million is less than our available borrowing liquidity and unrestricted cash.

We may prepay and reborrow the borrowings under the Term Revolver Facility, in whole or in part, at any time and from time to time without premium or penalty (other than prepayments of the initial advance on the Term Revolver Facility of $150 million to the extent made prior to November 1, 2024 and in certain other circumstances). In addition, we must make mandatory prepayments of principal under the Term Revolver Facility upon the occurrence of certain asset sales. We are required to repay a percentage of the aggregate outstanding principal amount of the borrowings under the Term Loan Facilities in quarterly installments on the last day of each March, June, September and December, commencing on the first day of the third full fiscal quarter after May 1, 2024. We may prepay any borrowings under the Term Loan Facilities, in whole or in part, at any time and from time to time without premium or penalty. In addition, we must make mandatory prepayments of principal under the Term Loan Facilities upon the occurrence of certain specified events, including certain asset sales (as disclosed in Note 19), debt issuances not permitted under the Term Credit Agreement, and of 50% of our quarterly excess cash flows, less any voluntary prepayments of the Term Loan Facilities.

ABL CREDIT AGREEMENT

On May 1, 2024, the Company entered into an amendment (the “ABL Amendment”) of its Credit Agreement, dated July 26, 2019, with JPMorgan Chase Bank, N.A., as administrative agent and several lenders (as so amended, the “ABL Credit Agreement”). After giving effect to the ABL Amendment, the maximum commitment of the lenders (subject to borrowing base limitations) under the ABL Credit Agreement was increased from $275 million to $375 million, $120 million of which was borrowed as of May 1, 2024 and $3.7 million of which was utilized for outstanding but undrawn letters of credit.

At June 30, 2024, we were in compliance with the currently applicable covenants associated with the Term Credit Agreement and the ABL Credit Agreement.

The fair value of our debt is included in the following table:

Note 11 Other Operating Charges

The major components of “Other operating (income) charges, net” in the Consolidated Statements of Operations for the quarter and six months ended June 30, 2024 and 2023 are reflected in the table below and described in the paragraphs following the table. These items are considered outside of our core operations.

During the second quarter of 2024, we recorded $17.0 million of expense in "Other operating (income) charges, net." The main components of the expense include:

•expense of $10.3 million associated with acquisition and divestiture activities (primarily legal and professional services);

•expense of $4.1 million associated with integration activities (primarily professional services);

•loss of $0.7 million associated with the impairment of property, plant and equipment; and

•expense of $2.0 million relating to directors' equity-based compensation which is remeasured each period based upon changes in our stock price.

During the first quarter of 2024, we recorded $7.9 million of expense in "Other operating (income) charges, net." The main components of the expense include:

•expense of $4.2 million associated with acquisition and divestiture activities (primarily legal and professional services);

•expense of $2.3 million associated with integration activities (primarily professional services);

•loss of $0.2 million associated with the impairment of equipment and related spare parts no longer being used; and

•expense of $1.2 million relating to directors' equity-based compensation which is remeasured each period based upon changes in our stock price.

During the second quarter of 2023, we recorded $0.4 million of income in "Other operating (income) charges, net." The components of the expense include:

•reversal of expense of $0.2 million relating to directors' equity-based compensation which is remeasured each period based upon changes in our stock price.

During the first quarter of 2023, we recorded $1.1 million of expenses in "Other (income) operating charges, net." The components of the expense include:

•loss of $1.1 million associated with the impairment of equipment and related spare parts no longer being used; and

•reversal of expense of $0.2 million relating to directors' equity based compensation which is remeasured each period based upon changes in our stock price.

Note 12 Non-Operating Expense

The components of “Non-operating expense” in the Consolidated Statements of Operations for the quarter and six months ended June 30, 2024 and 2023 are reflected in the table below:

Note 13 Retirement Plans and Postretirement Benefits

The following table details the components of net periodic cost of our company-sponsored pension and other postretirement employee benefit plans for the periods presented:

We record the service component of net periodic cost as part of "Cost of sales" and "Selling, general, and administrative expenses," while the non-service component of net periodic cost are recorded to "Other non-operating income" on our Consolidated Statements of Operations. For the quarter and six months ended June 30, 2024, we recorded $0.6 million and $1.1 million to "Cost of sales" and $0.1 million and $0.3 million to "Selling, general, and administrative expenses." For the quarter and six months ended June 30, 2023, we recorded $0.8 million and $1.5 million to "Cost of sales" and $0.1 million and $0.3 million to "Selling, general, and administrative expenses."

Note 14 Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, net of tax, is comprised of the following:

Note 15 Stockholders' Equity

Common Stock Plans

We have stock-based compensation plans under which restricted stock awards and stock options are outstanding or granted subject to time or performance vesting requirements. At June 30, 2024, approximately 0.5 million shares were available for future issuance under our current plan.

At June 30, 2024, there was $19.0 million of total unrecognized compensation costs related to outstanding restricted stock unit awards.

During the six months ended June 30, 2024, we granted 221,319 restricted stock units (time vesting) at an average grant date fair value of $38.18 per share and 163,310 restricted stock units (performance vesting) at an average grant date fair value of $40.17 per share.

Note 16 Earnings (Loss) per Share

Basic income (loss) per share is based on the weighted-average number of shares of common stock outstanding. Diluted income (loss) 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.

Shares excluded from the computation of diluted earnings (loss) per share were 0.4 million for the quarter and six months ended June 30, 2024 and 0.5 million and 0.4 million for the quarter and six months ended June 30, 2023 as they were either antidilutive (not in-the-money) or the required performance conditions were not met.

Note 17 Segment Information

We operate in two segments: Pulp and Paperboard and Consumer Products. Our business units have been aggregated into these two segments based upon the similarity of economic characteristics, customers and distribution methods. Our results of operations are summarized below for each of these segments separately. Segment information was prepared in accordance with the same accounting principles as those described in Note 1 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.

Net sales, classified by major products, were as follows:

Note 18 Insurance Recovery

During the first quarter of 2024, we experienced a natural gas disruption due to an extreme weather event that resulted in damage at our Lewiston, Idaho facility. During the quarter ended June 30, 2024, we received $10.5 million in insurance proceeds, of which $4.7 million was related to business interruption insurance and $5.8 million was related to reimbursable costs. Proceeds of $0.9 million and $9.3 million were allocated to our Consumer Products and Pulp and Paperboard segments, and were recorded within "Cost of sales" in the Consolidated Statements of Operations. Proceeds of $0.3 million were related to property, plant and equipment.

Note 19 Subsequent Event - Business Divestiture

On July 21, 2024, the Company entered into a Membership Interest Purchase Agreement and an Asset Purchase Agreement with Sofidel America Corp. (“Sofidel”), a wholly owned subsidiary of Sofidel S.p.A., pursuantto which, among other things, the Company agreed to sell our consumer products division (tissue business) to Sofidel for approximately $1.06 billion in cash, subject to adjustments for debt, cash, transaction expenses and net working capital (the “Tissue Divestiture”). The Company expects net proceeds from the Tissue Divestiture of approximately $850 million, which we intend to use to meaningfully de-lever our balance sheet. The Tissue Divestiture is expected to close in the fourth quarter of 2024, subject to regulatory approvals and other customary closing conditions.