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WPP > SEC Filings for WPP > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for WAUSAU PAPER CORP.

Form 10-Q for WAUSAU PAPER CORP.


8-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis of financial condition and results of operations is provided as a supplement to our condensed consolidated financial statements and accompanying notes to help provide an understanding of our financial condition, the changes in our financial condition, and our results of operations. The following discussion of the financial condition and results of operations of Wausau Paper Corp. should be read together with the condensed consolidated financial statements for the three and nine months ended September 30, 2013 and 2012, including the notes thereto, included elsewhere in this report, and the audited consolidated annual financial statements as of and for the year ended December 31, 2012 and notes thereto included in the Company's Annual Report on Form 10-K.

Operations Review

We currently manufacture, convert, and sell a complete line of towel and tissue products that are marketed along with soap and dispensing systems for the industrial and commercial away-from-home market.

In May 2013, we entered into an asset purchase agreement pursuant to which we would sell our specialty paper business; the transaction closed on June 26, 2013. In February 2013, we announced the planned closure of the Paper segment's technical specialty paper mill in Brainerd, Minnesota. During the first quarter we completed the closure of the Brainerd mill. In December 2011, our Board of Directors approved the sale of our premium Print & Color brands and the closure of our Brokaw, Wisconsin paper mill. During the first quarter of 2012, we completed the sale of the premium Print & Color brands, inventory, and select equipment, and ceased papermaking operations at the Brokaw mill. Consequently, the operations of the former Paper segment and its related closure activities are reported as discontinued operations, and all results discussed below exclude the results of discontinued operations unless otherwise indicated. For additional information on discontinued operations as a result of the sale of the specialty paper business, closure of the Brainerd mill and closure of the Brokaw mill, please refer to "Note 4 - Restructuring, Discontinued Operations, and Other" in the Notes to Condensed Consolidated Financial Statements.

In April 2011, our Board of Directors approved plans to expand the Tissue segment's production capabilities in response to growing market demand for environmentally-friendly, premium products. The expansion included the construction of a state-of-the-art paper machine, located at our Harrodsburg, Kentucky facility, capable of producing premium towel and tissue products from 100 percent recycled fiber. We started production on the new paper machine in conventional mode in December 2012, and began displacing conventional purchased parent rolls. In February 2013, we executed a major outage on the new machine to install and commission major elements of the machine's ATMOS technology. With the installation of this technology, we were able to introduce our new Green Seal™ DublNature® family of premium away-from-home towel and tissue products on May 20, 2013, providing availability of 16 new products in tissue, roll and folded towel to the market during the second quarter. Four additional new products were introduced in the third quarter for a total of 20 new products as of September 30, 2013.


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Overview



                                                   Three Months                 Nine Months
(all dollar amounts in thousands, except       Ended September 30,          Ended September 30,
per share data)                                 2013          2012           2013          2012

Loss from continuing operations              $    (2,034 )  $  (1,601 )  $    (20,361 )  $  (1,795 )
Loss from continuing operations per share
- basic and diluted                          $     (0.04 )  $   (0.03 )  $      (0.41 )  $   (0.04 )

For the third quarter of 2013, we reported a loss from continuing operations of $2.0 million, or $0.04 per share, compared to prior-year loss from continuing operations of $1.6 million, or $0.03 per share. The loss from continuing operations in the third quarter of 2013 includes an adjustment made to our provision for income taxes, net of federal tax benefit, of approximately $0.6 million, or $0.01 per share, with the total $0.6 million recognized related to certain state income tax carryforwards that will likely not be utilized to offset taxable income in the future.

For the nine months ended September 30, 2013, we reported a loss from continuing operations of $20.4 million, or $0.41 per share, compared to loss from continuing operations of $1.8 million, or $0.04 per share, in the first nine months of 2012. The loss from continuing operations for the first nine months of 2013 includes an adjustment made to our provision for income taxes, net of federal tax benefit, of approximately $13.0 million, or $0.26 per share, with approximately $12.6 million of the amount recognized related to certain state income tax carryforwards that will likely not be utilized to offset taxable income in the future.

Net Sales and Gross Profit on Sales



                                           Three Months                 Nine Months
                                       Ended September 30,          Ended September 30,
(all dollar amounts in thousands)      2013           2012          2013           2012

Net sales                           $    91,663    $    86,811   $   257,480   $    257,221
Tons sold                                47,126         44,773       133,508        132,256
Cases shipped                         4,358,360      4,056,030    12,335,265     11,929,914
Gross profit on sales               $    13,373    $    15,336   $    34,462   $     48,852
Gross profit margin                          15 %           18 %          13 %           19 %

During the third quarter of 2013, net sales increased by approximately 6% while product shipments, as measured in tons, increased by approximately 5% compared to the same period in 2012. As measured in cases, our product shipments increased by more than 7% during the third quarter of 2013 compared to the same period in 2012. Average net selling price declined by approximately 3%, or more than $3 million, in the third quarter of 2013 compared with the third quarter of 2012. The decline in average net selling price during the comparative quarterly periods was primarily due to volume gains in our support product categories, which generally carry a lower average net selling price.


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Gross profit margin decreased 3 percentage points in the three months ended September 30, 2013, as compared to the same period in 2012. During the third quarter of 2013 as compared to the same period in 2012, decreases in fiber and energy prices combined to positively impact gross profit margin by approximately $1.7 million. The benefits realized from decreases in fiber and energy prices were more than offset by the decrease in average net selling price, and increased depreciation as a result of the new paper machine at our Harrodsburg, Kentucky facility.

Net sales during the first nine months of 2013 remained flat as compared to the same period in 2012, while product shipments, as measured in tons, increased approximately 1% over the same comparative periods. As measured in cases, our product shipments increased by more than 3% during the first nine months of 2013 compared to the same period in 2012. Average net selling price decreased nearly 4% in the first nine months of 2013 compared to the first nine months of 2012. Similar to the quarter over quarter discussion above, the decline in average net selling price was primarily due to volume gains in our support product categories, which generally carry a lower average net selling price.

Gross profit margin decreased 6 percentage points in the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012. During the first nine months of 2013 as compared to the same period in 2012, decreases in fiber and energy prices combined to positively impact gross profit margin by approximately $3 million. These improvements were more than offset by the decrease in average net selling price. In addition, gross profit margin declined due to increased manufacturing costs, primarily depreciation, as a result of the start-up and commercialization of towel and tissue products on the new paper machine at our Harrodsburg, Kentucky facility.

September 30,
Order Backlogs 2013 2012

Order backlogs in tons: 3,000 4,000

Backlog tons at September 30, 2013 represent approximately $8 million in sales compared to approximately $9 million in sales at September 30, 2012. The entire backlog at September 30, 2013 is expected to be shipped during the remainder of 2013.

Selling and Administrative Expenses - Continuing Operations



                                          Three Months               Nine Months
                                       Ended September 30,       Ended September 30,
(all dollar amounts in thousands)       2013          2012        2013          2012

Selling and administrative expense   $    13,557    $ 17,108   $    39,265    $ 48,909
As a percent of net sales                     15 %        20 %          15 %        19 %

Selling and administrative expenses in the third quarter of 2013 were $13.6 million compared to $17.1 million in the same period of 2012. During the three months ended September 30, 2013 and 2012, we incurred pre-tax expenses of $0.8 million and $4.4 million, respectively, related to settlement charges associated with certain defined benefit retirement plans. The remaining


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decrease in selling and administrative expense is primarily due to decreases in salaries and benefits resulting from our realignment and reduction of staffing following the sale of our specialty paper business.

Selling and administrative expenses for the nine months ended September 30, 2013 were $39.3 million compared to $48.9 million in the same period of 2012. During the first nine months of 2013 and 2012 we incurred pre-tax expenses of $2.1 million and $6.6 million, respectively, related to settlement charges associated with certain defined benefit retirement plans. In addition, during the nine months ended September 30, 2013 and 2012, we recognized a pre-tax credit of $1.7 million and a pre-tax charge of $3.3 million, respectively, related to adjustments to a natural gas transportation contract for a former manufacturing facility. Taking into consideration these items, selling and administrative expenses were relatively flat during the comparable nine month periods.

Other Income and Expense - Continuing Operations

Three Months Nine Months
Ended September 30, Ended September 30,
(all dollar amounts in thousands) 2013 2012 2013 2012

Interest expense $ 1,972 $ 649 $ 6,840 $ 2,358

Interest expense in the third quarter of 2013 was $2.0 million compared to interest expense of $0.6 million in the second quarter of 2012. For the first nine months of 2013, interest expense increased to $6.8 million from $2.4 million of interest expense recorded during the same period in 2012. Comparing the third quarter of 2013 to the same period in 2012, the increase in interest expense is primarily due to the impact of capitalized interest on a construction project of $1.4 during the third quarter of 2012. Similarly, comparing the first nine months of 2013 to the same period in 2012, the increase in interest expense was impacted by capitalized interest on a construction project of $3.5 million during the nine months ended September 30, 2012. The remaining increase in interest expense in the year-over-year comparison was due to higher average outstanding debt levels during the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012.

Income Taxes



                                                   Three Months                  Nine Months
                                               Ended September 30,           Ended September 30,
(all dollar amounts in thousands)               2013           2012          2013            2012

(Credit) provision for income taxes from
continuing operations                       $       (132 )  $     (832 )  $     8,703     $     (659 )
Effective tax rate                                     6 %          34 %          (75 )%          27 %

Our normalized tax rate for 2013 is expected to be approximately 37%. As a result of the sale of the specialty paper business, during the nine months ended September 30, 2013, our effective tax rate was impacted by an adjustment made to our provision for income taxes, net of federal tax benefit, of approximately $13.0 million, with approximately $12.6 million of the amount recognized related to certain state income tax carryforwards that will likely not be utilized to


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offset taxable income in the future as we no longer have manufacturing operations in these states. In addition, our effective tax rate during the three and nine months ended September 30, 2013, was impacted by the reclassification of specific income tax items between continuing and discontinued operations.

Liquidity and Capital Resources

The liquidity and capital resources discussion below includes discontinued operations for all periods reported.

Cash Flows and Capital Expenditures



                                                        Nine Months Ended
                                                          September 30,
(all dollar amounts in thousands)                        2013        2012

Net cash (used in) provided by operating activities   $   (5,304 ) $  31,344
Capital expenditures                                     (29,457 )  (110,346 )

Net cash used in operating activities was $5.3 million for the nine months ended September 30, 2013, compared to net cash provided by operating activities of $31.3 million during the same period in 2012. The decrease in year-over-year comparisons of cash provided by operating activities is primarily due to significant benefits achieved in the first nine months of 2012 as working capital, primarily related to the sale of the Print & Color brands, as described in "Note 4 - Restructuring, Discontinued Operations, and Other" was liquidated, compared to a build in working capital in the first nine months of 2013. The build in working capital during the first nine months of 2013 was primarily related to increased inventory levels built to support the introduction of new product offerings to the market.

Capital spending for the first nine months of 2013 was $29.5 million compared to $110.3 million during the first nine months of 2012. The decrease in capital expenditures in the first nine months of 2013 as compared to the same period in 2012 is primarily due to the Tissue expansion project, which was completed in the fourth quarter of 2012. Total capital spending for the full year of 2013 is expected to be approximately $46 million, with approximately $2 million related to discontinued operations.

Debt and Equity



                                       September 30,     December 31,
(all dollar amounts in thousands)          2013              2012

Total debt                            $       150,000   $      196,200
Stockholders' equity                          140,210          205,501
Total capitalization                          290,210          401,701
Long-term debt/capitalization ratio                52 %             49 %

As of September 30, 2013, total debt decreased $46.2 million from the $196.2 million borrowed at December 31, 2012. The decrease in debt is due primarily to the use of net proceeds received


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from the sale of our specialty paper business to eliminate the outstanding balance as of June 26, 2013, of approximately $67 million under our revolving credit agreement.

On March 31, 2010, we entered into a note purchase and private-shelf agreement. This agreement provided for the April 9, 2010, issuance of $50 million of unsecured senior notes having an interest rate of 5.69% that mature on April 9, 2017, and also established a private shelf facility under which up to $125 million of additional promissory notes may be issued at terms agreed upon by the parties at the time of issuance until July 20, 2014. On April 4, 2011, we issued an additional aggregate principal amount of $50 million of our senior notes under the terms of this note purchase and private-shelf agreement. The notes bear interest at 4.68% and mature on April 4, 2018. On August 22, 2011, the private-shelf agreement was amended to expand the total amount available under the private-shelf agreement to $150 million. On April 9, 2012, we issued an additional aggregate principal amount of $50 million of our senior notes under this note purchase and private-shelf agreement. The notes bear interest at 4.00% and mature on June 30, 2016. At September 30, 2013, the total availability of unsecured private placement notes was $200 million, with $150 million of unsecured private placement notes currently outstanding.

We have estimated the fair value of our long-term debt in accordance with Financial Accounting Standards Board ("FASB") authoritative guidance. The FASB defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date. Fair value information for long-term debt is within Level 2 of the fair value hierarchy and is based on current market interest rates and estimates of current market conditions for instruments with similar terms and maturities. At September 30, 2013, the estimated fair value of long-term debt is approximately $159 million which compares to the carrying value of $150 million. At December 31, 2012, the estimated fair value of long-term debt was approximately $209 million which compares to the carrying value of $196 million.

On June 23, 2010, we entered into a $125 million revolving-credit agreement with five financial institutions that will expire on June 23, 2014. On June 26, 2013, we entered into an amendment to the revolving-credit agreement reducing the amount of aggregate commitments from $125 million to $100 million. At September 30, 2013 there were no amounts outstanding under the revolving-credit agreement.

In addition, we maintain an unrated commercial paper placement agreement with a bank to issue up to $50 million of unsecured debt obligations. The agreement requires unused credit availability under our revolving-credit agreement equal to the amount of outstanding commercial paper. There were no outstanding borrowings under this agreement at September 30, 2013.

We are subject to certain financial and other covenants under the revolving-credit agreement and the note purchase and private-shelf agreement. At September 30, 2013, we were in compliance with all required covenants and expect to remain in full compliance throughout the remainder of 2013.

We currently expect that our current cash balance, cash provided by operations, and the available credit under our private-shelf agreement will provide sufficient liquidity to meet our cash flow


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needs for capital, working capital, dividends, and other liquidity needs during the next twelve months.

At September 30, 2013, there were approximately 2.0 million shares available for repurchase through an authorization approved by our Board of Directors in 2008. There were no repurchases during the first nine months of 2013 or 2012. Repurchases may be made from time to time in the open market or through privately negotiated transactions.

Dividends

On December 15, 2012, the Board of Directors declared a quarterly cash dividend of $0.03 per common share. The dividend was paid on February 15, 2013, to shareholders of record on February 1, 2013. On April 18, 2013, the Board of Directors declared a quarterly cash dividend of $0.03 per common share. The dividend was paid on May 15, 2013 to shareholders of record on May 1, 2013. On June 20, 2013, the Board of Directors declared a quarterly cash dividend of $0.03 per common share. The dividend was paid on August 15, 2013 to shareholders of record on August 1, 2013. On October 17, 2013, the Board of Directors declared a quarterly cash dividend of $0.03 per common share. The dividend is payable November 15, 2013 to shareholders of record on November 1, 2013.

Capital Allocation Policy

On October 17, 2013, we announced a capital allocation policy targeting a return of approximately 50% of free cash flow to shareholders through dividends or share repurchases. The capital allocation policy is subject to continuing review by the Board of Directors, discussions with lenders, business and general economic conditions, as well as other capital allocation priorities that may be established in the future. Although a target level of return of capital has been established, actual payout amounts may be more or less than the target in any particular measurement period.

We define free cash flow as net cash provided by operating activities in a period less payments for property and equipment. Free cash flow is considered a non-GAAP financial measure. We believe that free cash flow, which measures our ability to generate additional cash from operations, is a key financial measure for use in evaluating financial performance. Although other companies report free cash flow, numerous methods may exist for calculating a company's free cash flow. As a result, the method we utilize to calculate free cash flow may differ from the methods used by other companies.


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Discontinued Operations

In May 2013, we announced that our Board of Directors had approved the sale of our specialty paper business. The sale of the specialty paper business and related assets closed on June 26, 2013. We have determined that the sale of the specialty paper business meets the criteria for, and is reported as, discontinued operations in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Subtopic 205-20, "Discontinued Operations."

The sale of the specialty paper business resulted in a pre-tax impairment charge of $63.7 million, which is recorded in loss from discontinued operations in the Condensed Consolidated Statements of Comprehensive Income (Loss) for the nine months ended September 30, 2013. Included in the impairment charge is a net pre-tax credit of $5.9 million related to pension and other postretirement plan settlements, curtailments, and special termination benefits resulting from the sale transaction. Pre-tax expense related to severance and benefits, contract termination costs, and other associated costs was $1.4 million and $5.7 million, respectively in the three and nine months ended September 30, 2013. We expect to incur additional pre-tax closure charges of $1.4 million, with approximately $0.4 million expected during the fourth quarter.

In February 2013, we announced the planned closure of our paper mill in Brainerd, Minnesota. The Brainerd mill permanently closed on March 29, 2013. In the second quarter of 2013, we determined that the closure of the Brainerd mill in conjunction with the sale of the specialty paper business meets the criteria for, and is reported as, discontinued operations in accordance with FASB ASC Subtopic 205-20, "Discontinued Operations."

Included in loss from discontinued operations during the three and nine months ended September 30, 2013, are pre-tax charges of $0.4 million and $45.4 million, respectively. The charges for the nine months ended September 30, 2013, are primarily a result of accelerated depreciation on mill assets, an adjustment of mill inventory and spare parts to net realizable value, severance and benefit continuation costs, and other associated closure costs. These charges are included in loss from discontinued operations in the Condensed Consolidated Statements of Comprehensive Income (Loss).

In December 2011, we announced that our Board of Directors had approved the sale of our premium Print & Color brands, and the closure of our Brokaw, Wisconsin paper mill. The sale of the premium Print & Color brands, select paper inventory, and certain manufacturing equipment closed on January 31, 2012. We permanently ceased papermaking operations at the mill on February 10, 2012. In the first quarter of 2012, we determined that the closure of the Brokaw mill, met the criteria for, and is reported as, discontinued operations in accordance with FASB ASC Subtopic 205-20, "Discontinued Operations."

The sale of the premium Print & Color brands, select paper inventory, and certain manufacturing equipment generated a pre-tax gain of $12.5 million, which is recorded in earnings from discontinued operations in the Condensed Consolidated Statements of Comprehensive Income (Loss) for the nine months ended September 30, 2012. During the third quarter of 2012, we completed the sale and disposal of the remaining long-lived assets of the Brokaw mill.


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Critical Accounting Policies and Estimates

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Please refer to the notes to the financial statements, which appear in the Annual Report on Form 10-K for the year ended December 31, 2012, for our accounting policies and other disclosures which are pertinent to these statements.

Information Concerning Forward-Looking Statements

The foregoing discussion and analysis of our financial condition and results of operations contains forward-looking statements that involve risks, uncertainties, and assumptions. Forward-looking statements are not guarantees of performance. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Wausau Paper and our consolidated subsidiaries may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed . . .

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