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WPP > SEC Filings for WPP > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for WAUSAU PAPER CORP.

Form 10-K for WAUSAU PAPER CORP.


3-Mar-2014

Annual Report


Item 7. Management's Discussion & Analysis of Financial Condition and Results of Operations

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

The following discussion and analysis of our financial condition and results of operations contain 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 forward-looking statements. Forward-looking statements may be identified by, among other things, beliefs or expectations that certain events may occur or are anticipated and projections or statements of expectations with respect to various aspects of our business, our plans or intentions, our stock performance, the industry within which we operate, the markets in which we compete, the economy, and any other expressions of similar import or covering other matters relating to our business and operations. Risks, uncertainties, and assumptions relating to our forward-looking statements include the level of competition for our products, downturns in our target markets, changes in the away-from-home towel and tissue industry, changes in the price or availability of raw materials and energy, the failure to develop new products that meet customer needs, adverse changes in our relationships with large customers and labor unions, the failure to recruit and retain key personnel, costs of compliance with environmental regulations, our ability to fund our operations, unforeseen operating problems, changes in strategic plans or our ability to execute such plans, maintenance of adequate internal controls, changes in financial accounting standards, changes in tax laws, increasing costs of certain employee and retiree benefits, unforeseen liabilities arising from current or prospective claims, unforeseen claims concerning intellectual property rights, unexpected disruptions in the availability of our computer systems, attempts by shareholders to effect changes at or acquire control over the Company, and the effect of certain organizational anti-takeover provisions. These and other risks, uncertainties, and assumptions are described under the caption "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, and from time to time in our other filings with the Securities and Exchange Commission after the date of such annual report. We assume no obligation, and do not intend, to update these forward-looking statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The 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 consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. We believe the following are the accounting policies which could have the most significant effect on our reported results and require subjective or complex judgments by management.

SALES REBATES

In certain circumstances, we will grant sales rebates to help stimulate sales of certain products. The expense for such rebates is accrued for and recorded as a deduction in arriving at our net sales at the time of the sale of the product to the customer. The amount of rebates to be paid is estimated based upon historical experience, announced rebate programs, and competitive pricing, among other things. In the future, we may take actions to increase customer rebates, possibly resulting in an increase in the deduction recorded to arrive at net sales at the time the incentive is offered.

IMPAIRMENT OF LONG-LIVED AND OTHER ASSETS

In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Subtopic 360-10 "Property, Plant, and Equipment", we evaluate the recoverability of the carrying amount of long-lived and other assets, including dispenser systems, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable and exceeds its fair value. The carrying amount of an asset may not be fully recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. We use judgment when applying the impairment rules to determine when an impairment test is necessary. Factors we consider that could trigger an impairment review include significant underperformance relative to historical or forecasted operating results, a significant decrease in the market value of an asset, a significant change in the extent or manner in which an asset is used, and significant negative or industry trends.

Impairment losses are measured as the amount by which the carrying value of an asset exceeds its estimated fair value. Generally, fair value will be determined using valuation techniques such as the present value of expected future cash flows, which requires us to make estimates of our future cash flows related to the asset subject to review. These estimates require assumptions about demand for our products, future market conditions, and technological developments. Other assumptions in determining fair value include determining the discount rate and future growth rates. Within discontinued operations in the years ended December 31, 2013, 2012, and 2011, we recorded pre-tax impairment losses of $64.5 million, $2.1 million, and $58.8 million, respectively. Additional information regarding impairment losses is available in "Note 2 - Discontinued Operations and Other" in the Notes to Consolidated Financial Statements.


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PENSION BENEFITS

Defined benefit pension costs and obligations are actuarially determined and are affected by assumptions including discount rate, the expected rate of return on plan assets, and assumed annual rate of compensation increase for plan employees, among other factors. Changes in discount rate and differences from actual and assumed asset returns as well as changes in other assumptions will affect the amount of pension expense recognized in future periods. For example, fluctuation in the discount rate assumption of 25 basis points would have impacted 2013 defined benefit pension obligations by approximately $6.7 million. Additional information regarding pension benefits is available in "Note 7 - Pension and Other Post-retirement Benefit Plans" in the Notes to Consolidated Financial Statements.

OTHER POST-RETIREMENT BENEFITS

The costs and obligations for post-retirement benefits other than pension are also actuarially determined and are affected by assumptions including the discount rate and expected future increase in per capita costs of covered post-retirement health care benefits. Changes in the discount rate and differences between actual and assumed per capita health care costs may affect the recorded amount of the expense in future periods. For example, fluctuation in the discount rate assumption of 25 basis points would have impacted the 2013 obligations for other post-retirement benefits by approximately $0.7 million. In addition, a one percentage point increase in the assumed health care cost trend rate would impact obligations for other post-retirement benefits by approximately $2.0 million, while a decrease of one percentage point would impact the same obligations by approximately $1.7 million. Additional information regarding other post-retirement benefits is available in "Note 7 - Pension and Other Post-retirement Benefit Plans" in the Notes to Consolidated Financial Statements.

ENVIRONMENTAL MATTERS

We record environmental liabilities based on estimates for known environmental remediation exposure utilizing information received from third-party experts and our past experience with these matters. At third-party sites where more than one potentially responsible party has been identified, we record a liability for an estimated allocable share of costs related to our involvement with the site as well as an estimated allocable share of costs related to the involvement of insolvent or unidentified parties. Environmental liability estimates may be affected by changing determinations of what constitutes an environmental exposure or acceptable level of cleanup. To the extent that remediation procedures change or the financial condition of other potentially responsible parties is adversely affected, the estimate of our environmental liabilities may change. Additional information regarding environmental matters is available in "Note 10 - Commitments and Contingencies" in the Notes to Consolidated Financial Statements.

TAX MATTERS

Under the provisions of FASB ASC Subtopic 740-10 "Income Taxes", the benefits of tax losses and credits are recognized as deferred tax assets, subject to appropriate valuation allowances. At the end of 2013, we had federal and state net operating loss carryovers of $40.5 million and $174.7 million, respectively. At the end of 2013, we also had federal and state tax credit carryovers of $12.9 million and $10.8 million, respectively. These loss and credit carryovers may be used to reduce future federal and state income tax liabilities. If not utilized, the carryover amounts will expire from 2014 through 2037.

Tax valuation allowances totaled $20.9 million at the end of 2013. Of this amount, $8.0 million relates to the federal cellulosic biofuel credit carryover, and $12.9 million relates to state loss and credit carryovers, primarily in the state of Wisconsin. Deferred tax assets are regularly reviewed for recoverability, and a valuation allowance is established if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The determination of whether a valuation allowance is required is based on an analysis of all positive and negative evidence, including future earnings, changes in operations, the expected timing of the reversals of existing temporary differences, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.

Other significant accounting policies, not involving the same level of uncertainties as those previously discussed, are important to an understanding of the consolidated financial statements. Additional information regarding significant accounting policies is available in "Note 1 - Description of the Business and Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements.

OPERATIONS REVIEW

OVERVIEW

The year ended December 31, 2013, was a pivotal year for Wausau Paper. We completed the execution of our plans to transform our company into an organization that is 100 percent focused on away-from-home towel and tissue markets. In


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fact, this transformation has occurred over the past few years beginning with our former Paper segment as described below:

º •
º During the first quarter of 2012, we completed the sale of our premium Print & Color brands, inventory, and select equipment, and permanently ceased papermaking operations at our Brokaw, Wisconsin mill.

º •
º In the first quarter of 2013, we completed the closure of our technical specialty paper mill in Brainerd, Minnesota.

º •
º On June 26, 2013, we finalized the sale of our specialty paper business and primarily all its assets and selected liabilities, excluding the Brainerd 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, refer to "Note 2 - Discontinued Operations and Other" in the Notes to Consolidated Financial Statements.

In coordination with our transformation to a pure play tissue company, during 2013:

º •
º We successfully commercialized the first green-field towel and tissue machine using ATMOS technology in North America; completing the largest capital expansion in our history,

º •
º We introduced 20 new items within our new Green Seal™ DublNature® family of premium away-from-home towel and tissue products, and

º •
º We achieved over 4 percent case volume growth over the course of the year, with over 7 percent case volume growth in the second half of the year or approximately 4 to 5 times the market growth rate of approximately 1.6 percent in the second half of 2013.

Not only were we able to accomplish these goals, we also:

º •
º Ensured that our balance sheet was strong enough to continue to support the acceleration of growth in tissue,

º •
º Reduced and realigned our existing cost structure, including a reduction of salaried staffing levels by approximately 20 percent by the end of 2013, and

º •
º Established a commitment to return additional capital to our shareholders.

2013 was a year of dynamic change for Wausau Paper, as we transformed our company into an organization that is 100 percent focused on the away-from-home towel and tissue markets.

CONSOLIDATED

(all dollar amounts in thousands, except per share
data)                                                       2013        2012         2011


(Loss) earnings from continuing operations            $ (28,183)   $ (1,562)   $   25,228
Net (loss) earnings from continuing operations per
share - basic and diluted                             $   (0.57)   $  (0.03)   $     0.51
(Loss) earnings from discontinued operations, net
of taxes                                              $ (69,082)   $   2,238   $ (46,926)
Net (loss) earnings from discontinued operations
per share - basic and diluted                         $   (1.40)   $    0.05   $   (0.95)

In 2013, we reported a net loss from continuing operations of $28.2 million, or $0.57 per share, compared to a prior-year net loss from continuing operations of $1.6 million, or $0.03 per share. The net loss from continuing operations in 2013 included after-tax charges of $1.9 million, or $0.04 per share, related to settlement expenses associated with our defined benefit retirement plans, and an after-tax credit of $2.1 million, or $0.04 per share, related to a contract at a former manufacturing facility. Also included in 2013, was an additional provision for income taxes of $21.0 million, or $0.42 per share, related to an income tax valuation allowance for a portion of an existing cellulosic biofuels credit and certain state income tax carryforwards that will likely not be utilized to offset taxable income in the future.

In 2012, we reported a net loss from continuing operations of $1.6 million, or $0.03 per share, compared to prior-year net earnings from continuing operations of $25.2 million, or $0.51 per share. The net loss from continuing operations in 2012 included after-tax charges of $5.3 million, or $0.11 per share, related to the tissue expansion project, after-tax charges of $4.5 million, or $0.09 per share, related to settlement expenses associated with our defined benefit retirement plans, and after-tax charges of $2.1 million, or $0.04 per share, related to a charge for a contract at a former manufacturing facility.

Net earnings for 2011 was $25.2 million, or $0.51 per share, which included after-tax expenses of $1.4 million, or $0.03 per share, related to a capital expansion project. In addition, 2011 included after-tax gains on sales of timberlands of $23.3 million, or $0.47 per share.


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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 substantially all related assets and selected liabilities, excluding the Brainerd mill, closed on June 26, 2013. In February 2013, we announced the planned closure of our Brainerd paper mill. The Brainerd mill permanently closed on March 29, 2013.

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 Brokaw mill on February 10, 2012.

We determined that the sale of the specialty paper business, the closure of the Brainerd mill, and the closure of the Brokaw mill, met the criteria for discontinued operations presentation as established ASC Subtopic 205-20, "Discontinued Operations". The results of operations of the specialty paper business, Brainerd, and Brokaw mills have been reported as discontinued operations in the Consolidated Statements of Comprehensive Income (Loss) for all periods presented. The corresponding assets and liabilities of the discontinued operations have been reclassified in accordance with authoritative literature on discontinued operations when the respective component met the criteria for discontinued operations presentation and prior periods were not restated. As such, the December 31, 2012, Consolidated Balance Sheet amounts included liabilities of discontinued operations only related to the Brokaw mill. The assets and liabilities of the specialty paper business and the Brainerd mill have not been reclassified in the December 31, 2012 Consolidated Balance Sheet. The Statements of Cash Flows for the years ended December 31, 2013 and 2012, have not been adjusted to separately disclose cash flows related to discontinued operations. Please refer to "Note 2 - Discontinued Operations and Other" in the Notes to Consolidated Financial Statements for additional information.

OUTLOOK

In the near term, the pace of growth in the overall United States and global economies is expected to remain slow. With our 2012 exit from the Print & Color markets and 2013 exit from the technical specialty paper business, we narrowed our focus to the comparatively stable and growing away-from-home tissue market category. We believe our narrowed focus will allow us to capitalize on our participation within the growing tissue market where our growth is presently exceeding overall market rates. Although our economic outlook continues to be cautious, we are focused and determined to achieve sales growth in our target markets. Our ability to achieve sales growth will continue to be influenced by general economic conditions, competitive factors, and changes in market demand and product pricing.

NET SALES AND GROSS PROFIT ON SALES

     (all dollar amounts in thousands)           2013           2012           2011


     Net sales                           $    348,584   $    344,182   $    335,230
     Tons shipped                             181,046        177,458        173,451
     Cases shipped                         16,728,540     16,021,000     15,502,791
     Gross profit on sales               $     49,602   $     63,740   $     91,318
     Gross profit margin                          14%            19%            27%

Net sales for the year ended December 31, 2013 were $348.6 million, compared with net sales of $344.2 million for the year ended December 31, 2012. Total shipments in 2013 of 181,046 tons increased 2% from the 177,458 tons shipped in 2012, and 2013 cases shipped of 16.7 million increased 4% from the 16.0 million shipped in 2012. Net sales in 2011 were $335.2 million, consisting of shipments of 173,451 tons, or 15.5 million cases.

Comparing 2013 to 2012, average net selling price per case decreased approximately 4%, or over $15 million, with actual net selling price decreases contributing to over three-quarters of the decline, and the remaining decrease a result of the composition of overall product mix. The decline in average net selling price during the comparative periods was primarily due to volume gains in our support product categories, which generally carry a lower average net selling price. Compared to 2011, 2012 average net selling price decreased 1%, or nearly $5 million, with actual net selling price decreases only partially offset by an improvement in composition of overall product mix.

Gross profit margin decreased to $49.6 million, or 14% of net sales, in 2013 compared with $63.7 million, or 19% of net sales, in 2012. Gross profit margin in 2011 was $91.3 million, or 27% of net sales.

During the year ended December 31, 2013, as compared to the same period in 2012, a decrease in fiber related costs of more than $1 million was more than offset by a decrease in average net selling price and significant increases in manufacturing costs, including a $8 million increase in depreciation expense and a $10 million increase in utilities primarily due to the new paper machine in Harrodsburg, Kentucky, resulting in a decline in gross profit. Comparing the year ended December 31, 2012 to the same period in 2011, a decrease in fiber and energy costs of approximately $15 million and


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$1 million, respectively, was unable to offset increases in other manufacturing costs and a decrease in average net selling price. Gross profit in 2013, 2012 and 2011 was impacted by capital expenses totaling $0.1 million, $6.6 million and $0.8 million, respectively, due to the expansion project at our Harrodsburg facility. In addition, 2011 gross profit was favorably impacted by $36.0 million in gains on sales of timberlands.

During the year ended December 31, 2013, raw materials and packaging comprised approximately 57% of our total cost of sales, with market pulp, wastepaper, and purchased towel and tissue parent rolls accounting for over three-quarters of this total. Labor and fringes were approximately 18% of our total cost of sales, while utilities accounted for approximately 8%. Net other operating expenses, including outbound freight, depreciation, and maintenance, comprised the remaining 17% of our cost of sales.

Combined fiber prices, consisting of market pulp, wastepaper, and purchased towel and tissue parent rolls, decreased during 2013. As compared to 2012, 2013 fiber costs decreased approximately $1 million, after decreasing approximately $15 million in 2012 as compared with 2011. In 2011, pulp and wastepaper prices increased, reaching record highs before declining significantly in the last quarter of that year. Pulp and wastepaper prices continued to decline at moderate rates throughout 2012, leveling off near the end of the year. Pulp and wastepaper prices declined slightly in 2013 and have begun to increase in 2014.

In 2013, we consumed approximately 141,000 standard tons of wastepaper, 67,000 air-dried metric tons of market pulp, and 36,000 standard tons of purchased parent rolls. Approximately 137,000 standard tons of wastepaper, 19,000 air-dried metric tons of market pulp, and 73,000 standard tons of purchased parent rolls were consumed in 2012. The average price of wastepaper, used in the production of towel and tissue products, decreased $19 per standard ton, or nearly $3 million, in 2013 as compared to 2012. As compared with 2011, the average price of wastepaper decreased $66 per standard ton, or almost $9 million, in 2012. Purchased pulp increased $37 per metric ton, or $3 million in 2013 compared to 2012 while the price had decreased $88 per metric ton, or nearly $2 million from 2012 compared to 2011. Purchased towel and tissue parent rolls, used in our converting operations, decreased $100 per standard ton, or approximately $1 million, in 2013 as compared to 2012, after decreasing $56 per standard ton, or nearly $4 million, in 2012 as compared to 2011.

Energy-related prices, consisting primarily of natural gas, electricity, coal, fuel oil, and transportation, increased in 2013 as compared to 2012, with the increase in the price of natural gas, only partially offset by decreases in electricity, transportation, fuel oil and coal. In total, energy-related costs, including transportation, increased approximately $1 million in 2013 as compared with 2012, after decreasing approximately $1 million in 2012 as compared with 2011.

During 2013, the average price of natural gas increased 38%, or approximately $2 million, as compared with 2012. During 2012, the average price of natural gas decreased 22%, less that $1 million, as compared with 2011. As compared with 2012, 2013 electricity costs decreased approximately 5%, or approximately $1 million while fuel oil, transportation, and coal prices had less than a $1 million impact in 2013 as compared to 2012. Comparing 2012 with 2011, electricity prices decreased approximately 13%, or more than $1 million, while coal, transportation, and fuel oil price increases had less than a $1 million impact.

As previously discussed, in 2011 our Board of Directors approved plans to expand our production capabilities in response to growing demand for its environmentally friendly, strategic products. The expansion included the construction of a state-of-the-art paper machine, located at our Harrodsburg, Kentucky converting facility, and is capable of producing premium towel and tissue products from 100% recycled fiber. We successfully started production on the new paper machine in December 2012 and introduced new premium recycled towel and tissue products throughout 2013. Within cost of sales, labor and fringe costs increased 5% in 2013 as compared to 2012, primarily due to increases in headcount due to the start-up of the new paper machine at the Harrodsburg facility. Depreciation expense increased 80% in 2013 as compared to 2012, also due to the new paper machine.

Estimated market demand for away-from-home towel and tissue products increased by approximately 1.6% in 2013 after a similar increase in 2012 as compared to 2011.

BACKLOGS

Customer order backlogs were approximately 3,900 tons, representing $9.1 million in sales at December 31, 2013. Customer backlogs, excluding discontinued operations, were approximately 4,200 tons, or $9.9 million in sales, as of December 31, 2012, and approximately 2,000 tons, or $4.2 million in sales, as of December 31, 2011. Changes in customer backlog do not necessarily indicate a change in business conditions, as a large portion of orders are shipped directly from inventory upon receipt and do not impact backlog numbers. The entire backlog at December 31, 2013 is expected to be shipped during the first quarter of 2014.

LABOR

We employed approximately 900 employees at the end of 2013. Less than one-third of our hourly mill employees are covered under collective bargaining agreements. We negotiated a five-year umbrella agreement with the United Steelworkers that was ratified on February 4, 2011. The agreement covers all collectively bargained employees and includes competitive increases in wages and retirement income benefits. On December 20, 2011, the Company and the


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United Steelworkers Local 1381 signed a closure agreement for the Brokaw, Wisconsin, paper mill. Similarly, on March 18, 2013, we signed a closure agreement for the Brainerd, Minnesota, paper mill with the United Steelworkers . . .

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