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.

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, 2025. 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 May 2026, the FASB issued ASU 2026-02, Environmental Credits and Environmental Credit Obligations (Topic 818), which introduces an accounting model for the recognition, measurement, presentation, and disclosure of environmental credits and related compliance obligations settled by using environmental credits. This ASU is effective for fiscal years beginning after December 15, 2027, and interim periods within those annual reporting periods. Early adoption is permitted. We are currently evaluating the impact this ASU will have on our consolidated financial position, results of operations and cash flows.

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.

NOTE 3: DISCONTINUED OPERATIONS

In November 2024, we sold our tissue operations. The results of our tissue operations were classified as discontinued operations in our Consolidated Statements of Operations for all periods presented. For the quarter ended June 30, 2025, we recognized $0.9 million of loss from discontinued operations, net of tax. For the six months ended June 30, 2025, we recognized $1.3 million of loss from discontinued operations, net of tax and net cash used in operating activities of discontinued operations was $2.0 million.

NOTE 4: FAIR VALUE MEASUREMENTS

Carrying amounts reported on the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. The fair value of our debt is included in the following table:

NOTE 5: RECEIVABLES

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: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of:

Included in "Accounts payable and accrued liabilities" are $13.3 million and $7.4 million related to capital expenditures that had not yet been paid as of June 30, 2026 and December 31, 2025.

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, 2026 and December 31, 2025, $3.3 million of outstanding obligations under this program 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, 2026 and 2025, we recognized an income tax benefit of $12.3 million and a provision of $0.1 million on loss from continuing operations. Our effective tax rate for the six months ended June 30, 2026 varied from the U.S. federal statutory tax rate of 21% primarily due to the effects of changes in state taxes, interest received on tax refunds and nondeductible compensation. Our effective tax rate for the six months ended June 30, 2025 varied from the U.S. federal statutory tax rate of 21% primarily due to the effects of state taxes, nondeductible compensation, and a change in the state valuation allowance.

NOTE 10: DEBT

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

PCA CREDIT AGREEMENT

Our PCA Credit Agreement matures on May 1, 2029, subject to a springing maturity 91 days prior to the maturity of the Company’s 2020 Notes if the outstanding principal of the 2020 Notes plus $50 million at any time during such 91 day period is greater than the sum of our available borrowing liquidity and unrestricted cash. The term revolver commitment under the PCA Credit Agreement is currently $259.3 million and is subject to an annual reduction of 2% of the commitments then in effect. As of June 30, 2026, no balance was outstanding on the term revolver commitment. We may increase term revolver commitments under the PCA Credit Agreement in an aggregate amount of up to $60.0 million, subject to obtaining commitments from any participating lenders and certain other conditions.

We may prepay and reborrow any borrowings under the PCA Credit Agreement, in whole or in part, at any time and from time to time without premium or penalty (except in certain circumstances). In addition, we must make mandatory prepayments of principal under the PCA Credit Agreement upon the occurrence of certain asset sales. We may also increase the term revolver commitments under the PCA Credit Agreement in an aggregate amount of up to $60.0 million, subject to obtaining commitments from any participating lenders and certain other conditions

ABL CREDIT AGREEMENT

Our ABL Credit Agreement matures on November 7, 2027. The revolving loan commitment under the ABL Credit Agreement is $375.0 million, subject to borrowing base limitations based on a percentage of applicable eligible receivables and eligible inventory. As of June 30, 2026, our eligible receivables and inventory supported up to $197.7 million availability under the line, of which we utilized $82.8 million, consisting of $79.0 million borrowings outstanding and $3.8 million to issue letters of credit. 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.

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 x to 1.00 x, provided that the financial covenant under the ABL Credit Agreement is only applicable during an event of default or if availability, as calculated under the ABL Credit Agreement, is at any time less than or equal to the greater of (i) 10.0% of the lesser of the borrowing base and the maximum $375 million of current revolving loan commitments and (ii) $25 million.

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). We may also increase the revolving commitments under the ABL Credit Agreement in an aggregate amount of up to $100 million, subject to obtaining commitments from any participating lenders and certain other conditions.

NOTE 11: OTHER OPERATING CHARGES, NET

The major components of “Other operating charges, net” in the Consolidated Statements of Operations for the quarter and six months ended June 30, 2026 and 2025 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 2026, we recorded $7.5 million of income in "Other Operating Charges, Net." The main components include:

•expense of $1.3 million associated with our cost reduction plan;

•expense of $1.6 million associated with union settlement retroactive wage payments incurred for the year ended December 31, 2025;

•proceeds of $11.4 million related to claims made on our representations and warranties insurance policy; and

•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 2026, we recorded $11.1 million of income in "Other Operating Charges, Net." The main components include:

•expense of $0.7 million associated with our cost reduction plan;

•proceeds of $11.9 million related to claims made on our representations and warranties insurance policy; and

•reversal of expense of $0.7 million relating to directors' equity-based compensation which is remeasured each period based upon changes in our stock price.

During the second quarter of 2025, we recorded $7.1 million of expense in "Other Operating Charges, Net." The main components include:

•expense of $0.9 million associated with integration activities related to the Augusta operations;

•expense of $0.8 million associated with our cost reduction plan (primarily severance cost);

•expense of $3.1 million associated with impairment of assets; and

•expense of $0.9 million relating to directors' equity-based compensation which is remeasured each period based upon changes in our stock price.

During the first quarter of 2025, we recorded $11.8 million of expense in "Other Operating Charges, Net." The main components 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.

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, 2026 and 2025 are reflected in the table below:

Additionally, we recognized $0.8 million in interest income on tax refunds received during the quarter ended June 30, 2026 which was recorded within "Income tax provision (benefit)" on our Consolidated Statement of Operations.

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 is recorded in "Other non-operating expense" on our Consolidated Statements of Operations. For the quarter and six months ended June 30, 2026, we recorded $0.6 million and $1.2 million to "Cost of sales" and $0.1 million and $0.2 million to "Selling, general, and administrative expenses." For the quarter and six months ended June 30, 2025, we recorded $0.7 million and $1.3 million to "Cost of sales" and $0.1 million and $0.3 million to "Selling, general, and administrative expenses."

During the quarter ended June 30, 2026, we contributed $0.5 million to our qualified pension plans, which is included in the "defined benefit pension and other postretirement employee benefits" line on the statement of cash flows. We expect to contribute an additional $2.9 million to fund our pension benefit plans in 2026.

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, 2026, approximately 2.0 million shares were available for future issuance under our current plan.

As of June 30, 2026, there was $9.9 million of total unrecognized compensation costs related to outstanding restricted stock unit awards.

During the six months ended June 30, 2026, we granted 328,558 restricted stock units (time vesting) at an average grant date fair value of $14.74 per share and 169,753 restricted stock units (performance vesting) at an average grant date fair value of $14.69 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 from continuing operations are reported because the effect is anti-dilutive.

Shares excluded from the computation of diluted earnings (loss) per share were 0.3 million for the quarter and six months ended June 30, 2026 and 0.3 million and 0.4 million for the quarter and six months ended June 30, 2025 as they were either antidilutive (not in-the-money) or the required performance conditions were not met.

NOTE 17: COST REDUCTION PLAN

During 2025, we announced a plan to reduce our cost structure across operations and selling, general and administrative expenses as we right-size our operations. During 2026, we announced further restructuring actions to reduce personnel at certain manufacturing facilities, incurring additional severance expense of $1.7 million which was recorded in "Other operating charges, net" in the Consolidated Statement of Operations.

Changes in our severance liability (included in accounts payable and accrued liabilities on the consolidated balance sheets) for the six months ended June 30, 2026 and 2025 are as follows:

NOTE 18: 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 (loss) from continuing operations is as follows:

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

NOTE 19: INSURANCE RECOVERY

In connection with the acquisition of a paperboard manufacturing facility and associated business, we obtained representation and warranty insurance, subject to exclusions, a policy limit of $105 million, and certain other terms and conditions, to cover losses resulting from a breach of representations and warranties in the Asset Purchase Agreement made by Graphic Packaging International, LLC, a wholly owned subsidiary of Graphic Packaging Holding Company. We have notified the insurance carriers of alleged breaches of certain representations and warranties contained in the Asset Purchase Agreement. In July and November 2025, we submitted claims to the insurance carriers for losses arising of the alleged breaches. During the quarter and six months ended June 30, 2026, we received total settlement proceeds of $15.0 million and $32.5 million related to these claims, of which $3.6 million and $9.2 million were related to reimbursable costs and recorded within "Cost of sales" and $11.4 million and $23.3 million related to other breaches and recorded within "Other operating charges, net" in our Consolidated Statements of Operations. This recovery is in addition to the recovery of $23.0 million received in the fourth quarter of 2025.