Clearwater Paper Corp

Clearwater Paper Corporation

Notes to Consolidated Financial Statements

Note 1 Description of Business and Basis of Presentation

Description of Business

We are a premier manufacturer and supplier of bleached paperboard focused on servicing independent converters in North America. We also offer services that include custom sheeting, slitting, and cutting.

During the year ended December 31, 2024, we sold our tissue (consumer products) operations. Accordingly, the results of our previously-owned tissue operations have been presented as discontinued operations in our Consolidated Statements of Operations for all periods presented. See Note 4, "Discontinued operations."

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal and recurring nature. These consolidated financial statements and related Notes should be read in conjunction with our annual report on Form 10-K for the fiscal year ended December 31, 2024. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year. All dollar amounts are shown in millions, except per share amounts.

Note 2 Recently Issued Accounting Standards

In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses (Subtopic 220-40), which requires disaggregated disclosure of certain types of expenses, such as inventory purchases, employee compensation, depreciation, and amortization in commonly presented expense captions such as cost of revenue and selling, general and administrative expenses. This ASU is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption is 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 December 2023, the FASB issued 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.

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). The purchase price of the Augusta acquisition was allocated to assets acquired and liabilities based on the fair values as of the date of acquisition.

The purchase price allocation as of March 31, 2025 is as follows:

The following unaudited pro forma consolidated financial information combines our results and the unaudited results of the Augusta operations had the transaction been completed on January 1, 2024. 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

In November 2024, we sold our tissue operations. The results of our tissue operations have been classified as discontinued operations in our Consolidated Statements of Operations for all periods presented. Amounts included below for the quarter ended March 31, 2025 consist of the settlement of contractual and employment related obligations that are directly related to the disposal. The following table presents the financial results of the tissue segment for the quarter ended March 31, 2025 and 2024:

The major components of “Other operating charges, net” included in discontinued operations for the quarter ended March 31, 2025 and 2024 are reflected in the table below.

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

Additionally, we have not finalized the working capital adjustment with the buyer and therefore have accrued an estimate in "Accounts payable and accrued liabilities" included on our Consolidated Balance Sheets as of March 31, 2025 and December 31, 2024.

Note 5 Fair Value Measurements

Carrying amounts reported on the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. The fair value of our 2020 Notes as of March 31, 2025 and December 31, 2024 was $256.1 million and $258.9 million.

Note 6 Receivables

Receivables consist of:

Note 7 Inventories

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

Note 8 Property, Plant and Equipment

Property, plant and equipment consist of:

Note 9 Goodwill and Intangibles

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

Note 10 Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of:

Included in "Accounts payable and accrued liabilities" are $16.6 million and $25.8 million related to capital expenditures that had not yet been paid as of March 31, 2025 and December 31, 2024.

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 March 31, 2025 and December 31, 2024, $13.7 million and $12.7 million of outstanding obligations under this program were included in "Other" in the table above.

Note 11 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 three months ended March 31, 2025, we recognized an income tax benefit of $1.8 million on loss from continuing operations and a provision of $0.5 million on loss from continuing operations in the same period in 2024. Our effective tax rate for the three months ended March 31, 2025 varied from the U.S. federal statutory tax rate of 21.0% primarily due to the effects of changes in state taxes and nondeductible compensation.

Note 12 Other Operating Charges

The major components of “Other operating charges, net” in the Consolidated Statements of Operations for the quarter ended March 31, 2025 and 2024 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 first quarter of 2025, we recorded $11.8 million of expense in "Other operating charges, net." The main components of the expense include:

•expense of $3.8 million associated with integration activities related to the Augusta operations;

•expense of $5.3 million associated with our cost reduction plan (primarily severance cost);

•expense of $0.1 million associated with impairment of assets; and

•reversal of expense of $0.4 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 $6.0 million of expense in "Other operating charges, net." The components of the expense include:

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

•expense of $1.5 million associated with restructuring and 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.

Note 13 Non-Operating Expense

The components of “Non-operating expense” in the Consolidated Statements of Operations for the quarter ended March 31, 2025 and 2024 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 (expense)" on our Consolidated Statements of Operations. For the quarter ended March 31, 2025, we recorded $0.7 million to "Cost of sales" and $0.1 million to "Selling, general, and administrative expenses." For the quarter ended March 31, 2024, we recorded $0.5 million to "Cost of sales," $0.1 million to "Selling, general, and administrative expenses," and $0.1 million to Discontinued Operations.

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 March 31, 2025, approximately 0.2 million shares were available for future issuance under our current plan.

As of March 31, 2025, there was $14.4 million of total unrecognized compensation costs related to outstanding restricted stock unit awards.

During the quarter ended March 31, 2025, we granted 193,707 restricted stock units (time vesting) at an average grant date fair value of $28.36 per share and 190,914 restricted stock units (performance vesting) at an average grant date fair value of $31.02 per share.

During the quarter ended March 31, 2024, stock-based compensation expense of $3.0 million was charged to continuing operations and $0.4 million was charged to discontinued operations.

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 from continuing operations are reported because the effect is anti-dilutive.

Shares excluded from the computation of diluted earnings (loss) per share were 0.6 million for the quarter ended March 31, 2025 and 0.7 million for the quarter ended March 31, 2024 as due to our loss position on continuing operations in both periods presented.

Note 18 Cost Reduction Plan

In early 2025, we announced a plan to reduce our cost structure across operations and selling, general and administrative expenses as we right-size our operations after the sale of our tissue operations (discussed at Note 3). In connection with these activities, we expect to record employee severance costs of $5 to $7 million by the end of 2025. During the first quarter of 2025, we incurred severance expense of $4.4 million associated with this plan. The remaining severance will be recognized from the date of notification until it is earned

Changes in our severance liability (included in accounts payable and accrued liabilities on the consolidated balance sheet) for the first quarter of 2025 are as follows:

Note 19 Segment Disclosure

Our Chief Operating Decision Maker (CODM) evaluates performance and makes operating decisions about allocating resources based on financial data presented on a consolidated basis. Since our CODM evaluates financial performance on a consolidated basis, we have determined that we have a single operating segment composed of the consolidated financial results of Clearwater Paper.

Our CODM also reviews total assets, as reported on our consolidated balance sheets, and purchases of property and equipment, as reported on our consolidated statements of cash flows.

Our CODM utilizes other key operating metrics, including disaggregated measures of net sales by product line, disaggregation of significant segment expenses and Adjusted EBITDA in order to assess our financial performance.

Net sales classified by major product lines and a reconciliation of significant expenses to consolidated income from operations is as follows:

Non-significant expenses is primarily made up of other operating charges, net and changes in inventory.