Clearwater Paper Corp

Clearwater Paper Corporation

Notes to Consolidated Financial Statements

Note 1 Description of Business and Basis of Presentation

Description of Business

Clearwater Paper Corporation (the “Company,” “our” or “we”) is a premier manufacturer and supplier of bleached paperboard focused on servicing independent converters in North America. We also offer services that include customer sheeting, slitting, and cutting. Prior to the completion of the sale of our consumer products division, we manufactured and sold consumer and parent roll tissues to major retailers, including grocery, club and discount stores.

On May 1, 2024, we completed the acquisition of a paperboard manufacturing facility and associated business in Augusta Georgia. See Note 3 Business Acquisition for more information about the acquisition.

On July 21, 2024, we signed a binding agreement with Sofidel America to sell our consumer products division. This anticipated sale represents a strategic shift in our operations and financial results resulting in discontinued operations accounting treatment associated with this division. For all periods presented, the operating results associated with the consumer products division have been reclassified to discontinued operations and have been shown as net income from discontinued operations, net of taxes. The assets and liabilities associated with these businesses have been reflected as current and long-term assets and liabilities of discontinued operations in the Consolidated Balance Sheets. Additionally, certain reclassifications have been made to our continuing business to reflect certain intercompany transactions between the consumer products division and our remaining entity such as treatment of intercompany sales and cost inputs. For the three and nine months ended September 30, 2023, the impact of this reclassification was an increase to net sales of $18.3 million and $58.8 million and an increase to cost of sales of $18.4 million and $58.9 million. See Note 4, Discontinued Operation for more information on the divestiture.

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 unaudited 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.

Reportable Segment

Effective July 21, 2024, we have determined that we have one reportable segment. This reportable segment aligns with the Company's business strategy, and the manner in which the Chief Executive Officer, the Company's chief operating decision maker, assesses performance and makes decisions regarding the allocation of resources for the Company. We manage our operations as a single segment for the purposes of assessing performance and making operating decisions.

Discontinued Operations

We present discontinued operations when there is a plan to dispose of a component of an entity or a group of components of an entity if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. In the period in which the component meets held-for-sale or discontinued operations criteria, the major assets and liabilities are reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinuing operations, less applicable income taxes, are reported as components of net income (loss) separate from the net income (loss) from continuing operations. Additionally, we have elected to allocate interest expense to discontinued operations related to debt that was not directly attributed to the division being disposed of. Interest expense was allocated based on a ratio of net assets of discontinued operations to the consolidated net assets plus consolidated debt.

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). The guidance enhances disclosures of significant segment expenses by requiring the disclosure of significant segment expenses regularly provided to the chief operating decision maker, extends certain annual disclosures to interim periods, and permits more than one measure of segment profit or loss to be reported under certain conditions. All disclosure requirements are also required for companies with a single reportable segment. The guidance is effective in fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. 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 Combinationsas a business combination as opposed to an asset acquisition. We used borrowings under our credit facilities to fund the acquisition. This acquisition strengthened our position as a premier, independent supplier of paperboard products to converters through improved scale and cost structure.

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 September 30, 2024 is as follows:

As reflected in the previous table, we updated the purchase price allocation for the Augusta acquisition based on third-party valuation reports we received during the third quarter of 2024 to update the fair value of property, plant and equipment acquired with a corresponding change to goodwill.

The Consolidated Statements of Operations includes $213.1 million of Net Sales and $5.5 million of Net Loss for the nine months ended September 30, 2024 associated with this acquisition.

The following unaudited pro forma consolidated financial information for the nine months ended September 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 Discontinued Operations

On July 21, 2024, we entered into agreements with Sofidel America Corp. (Sofidel), pursuant to which we agreed to sell our consumer products division through the divestiture of certain wholly owned subsidiaries and certain assets of the Company. The purchase price was $1.06 billion in cash, subject to adjustments for debt and transaction expenses. Accordingly, financial results included in this document report the consumer products division as discontinued for all periods presented. Below is a reconciliation of line items constituting pre-tax income from discontinued operations to the after-tax income from discontinued operations as reported on our Consolidated Statement of Operations:

The major components of “Other operating charges, net” included in discontinued operations for the quarter and nine months ended September 30, 2024 and 2023 are reflected in the table below. These items are considered outside of our core discontinued operations.

The carrying amounts of major components of assets and liabilities included as part of discontinued operations are as follows:

Operating and investing cash flows of the discontinued operation are presented in the following table:

Note 5 Revenue and Receivables

The table below represents our disaggregation of revenue based upon continuing operations. The information provided has been recast from prior reported information to include certain transfers of pulp and other inputs into Net Sales. These amounts were previously reported as an offset to manufacturing costs in the pulp and paperboard division.

Receivables consist of:

Note 6 Inventories

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

Note 7 Property, Plant and Equipment

Property, plant and equipment consist of:

Note 8 Goodwill and Intangibles

Changes in the carrying amounts of goodwill and intangible assets are as follows:

Intangible assets consisted of $4.8 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 September 30, 2024 was $34.9 million and $30.0 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 9 Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of:

Included in "Accounts payable and accrued liabilities" are $25.5 million and $13.0 million related to capital expenditures that had not yet been paid as of September 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 September 30, 2024 and December 31, 2023, $15.2 million and $14.7 million of outstanding obligations under this program were included in "Other" in the table above.

As of September 30, 2024 and December 31, 2023, unrecognized tax benefits, including associated interest, of $29.1 million and $27.4 million were included in "Other" in the table above.

Note 10 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 nine months ended September 30, 2024, we recognized an income tax benefit of $17.4 million on loss from continuing operations before taxes of $71.8 million compared to a provision of $16.7 million on income from continuing operations of $68.1 million in the same period in 2023. Our effective tax rate for the nine months ended September 30,

2024 varied from the U.S. federal statutory tax rate of 21.0% primarily due to the effects of changes in state valuation allowances, nondeductible compensation and interest related to uncertain tax provisions offset by federal and state return to provision adjustments. The tax provision has been allocated to discontinued operations based upon a blended federal and state statutory rate.

Note 11 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 borrowed 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 borrowed 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 4 Discontinued Operations), 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 September 30, 2024 and $3.7 million of which was utilized for outstanding but undrawn letters of credit.

As of September 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 12 Other Operating Charges

The major components of “Other operating charges, net” in the Consolidated Statements of Operations for the quarter and nine months ended September 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 third quarter of 2024, we recorded $0.3 million of income in "Other operating charges, net." The main components of the income include:

•expense of $0.5 million associated with acquisition activities (primarily legal and professional services);

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

•loss of $0.4 million associated with the impairment of property, plant and equipment; and

•income of $3.5 million relating to directors' equity-based compensation which is remeasured each period based upon changes in our stock price.

During the second quarter of 2024, we recorded $15.3 million of expense in "Other operating charges, net." The main components of the expense include:

•expense of $10.1 million associated with acquisition activities (primarily legal and professional services);

•expense of $2.5 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 $5.3 million of expense in "Other operating charges, net." The main components of the expense include:

•expense of $3.3 million associated with acquisition activities (primarily legal and professional services);

•expense of $0.8 million associated with integration activities (primarily professional services); 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 third quarter of 2023, we recorded $1.7 million of expense in "Other operating charges, net." The main components of the expense include:

•expense of $1.0 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 $0.1 million of income in "Other operating charges, net." The components of the income 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 $0.4 million of income in "Other operating 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.

Note 13 Non-Operating Expense

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

Note 14 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 is recorded in "Other non-operating income" on our Consolidated Statements of Operations. For the quarter and nine months ended September 30, 2024, we recorded $0.6 million and $1.7 million to "Cost of sales" and $0.1 million and $0.4 million to "Selling, general, and administrative expenses." For the quarter and nine months ended September 30, 2023, we recorded $0.8 million and $2.3 million to "Cost of sales" and $0.1 million and $0.4 million to "Selling, general, and administrative expenses."

Note 15 Accumulated Other Comprehensive Loss

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

Note 16 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 September 30, 2024, approximately 0.6 million shares were available for future issuance under our current plan.

At September 30, 2024, there was $15.8 million of total unrecognized compensation costs related to outstanding restricted stock unit awards, of which $2.5 million was related to the consumer products division.

During the nine months ended September 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 17 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 0.3 million and 0.4 million for the quarter and nine months ended September 30, 2024 and 0.3 million and 0.4 million for the quarter and nine months ended September 30, 2023 as they were either antidilutive (not in-the-money) or the required performance conditions were not met.

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 $9.3 million, associated with continuing operations, were recorded within "Cost of sales" in the Consolidated Statements of Operations and $0.3 million related to property, plant and equipment. Proceeds associated with discontinued operations were $0.9 million.

Note 19 Subsequent Events

Business Divestiture

On November 1, 2024, we completed the sale of the consumer products division (CPD) to Sofidel. As a result of the sale, we received $1.06 billion, subject to post-closing adjustments. As part of the transaction, we entered into a Transition Services Agreement, pursuant to which we will provide certain services of a transitional nature to Sofidel, a Lease Agreement, pursuant to which we will lease the portion of the land and facilities on which CPD operates at the Lewiston, Idaho facility to Sofidel, and a Services and Use Agreement, pursuant to which we will provide certain services to Sofidel in connection with the ongoing operations at Sofidel's manufacturing facilities located in Lewiston, Idaho. The lease term shall be five years with certain renewal rights for a maximum of ten years. In connection with the closure of the sale, we used the net proceeds to pay off all outstanding debt excluding 2020 Notes.

On October 31, 2024, Clearwater Paper's Board of Directors approved a new $100 million share repurchase authorization, allowing the Company to opportunistically repurchase shares in addition to offsetting the dilution from employee share grants. This authorization replaces the Company’s previous authorization. The timing and amount of any repurchases of common stock will be solely at the discretion of the Company and is subject to general business and market conditions, as well as other factors. The authorization permits the Company to make repurchases of its common stock from time to time in open market or privately negotiated transactions, including accelerated share repurchase transactions and the use of Rule 10b5-1 trading plans. The authorization has no expiration date.