Edgar Filing: Clearwater Paper Corp

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

(Mark One)



ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017



¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-34146

CLEARWATER PAPER CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		20-3594554
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

601 W. Riverside Avenue, Suite 1100
Spokane, Washington		99201
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (509) 344-5900

Securities registered pursuant to Section 12(b) of the Act:



TITLE OF EACH CLASS		NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock ($0.0001 par value per share)		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ý Yes ¨ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes ý No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes ý No

As of June 30, 2017 (the last business day of the registrant’s most recently completed second quarter), the aggregate market value of the common stock held by non-affiliates of the registrant was $755.5 million. Shares of common stock beneficially held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 16, 2018, 16,447,898 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed on or about April 3, 2018, with the Securities and Exchange Commission in connection with the registrant’s 2018 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.

CLEARWATER PAPER CORPORATION

Index to 2017 Form 10-K



		PAGE NUMBER
	PART I
ITEM 1.	Business	2-8
ITEM 1A.	Risk Factors	9-16
ITEM 1B.	Unresolved Staff Comments	16
ITEM 2.	Properties	17
ITEM 3.	Legal Proceedings	18
ITEM 4.	Mine Safety Disclosures	18
	PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
ITEM 6.	Selected Financial Data	20
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-36
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risks	37
ITEM 8.	Financial Statements and Supplementary Data	38-84
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	84
ITEM 9A.	Controls and Procedures	84
ITEM 9B.	Other Information	84
	PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	85
ITEM 11.	Executive Compensation	85
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	86
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	86
ITEM 14.	Principal Accounting Fees and Services	86
	PART IV
ITEM 15.	Exhibits, Financial Statement Schedules	87-92
ITEM 16.	Form 10-K Summary	92
SIGNATURES		93

Part I

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Our disclosure and analysis in this report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the acquisition of Manchester Industries and closure of our Oklahoma City facility, our strengths and related benefits, our strategy, pulp production and the continuous digester at our Idaho facility, raw materials and input usage and costs, including energy costs and usage, benefits, production quality and quantity, costs and timing associated with the new Shelby, North Carolina facility, strategic capital projects and related costs and benefits, energy conservation, cash flows, capital expenditures, return on investment from capital projects, tax rates, operating costs, selling, general and administrative expenses, timing of and costs related to major maintenance and repairs, liquidity, benefit plan funding levels, capitalized interest and interest expenses. Words such as “anticipate,” “expect,” “intend,” “plan,” “target,” “project,” “believe,” “schedule,” “estimate,” “may,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are based on management’s current expectations, estimates, assumptions and projections that are subject to change. Our actual results of operations may differ materially from those expressed or implied by the forward-looking statements contained in this report. Important factors that could cause or contribute to such differences in operating results include those risks discussed in Item 1A of this report, as well as the following:


•	competitive pricing pressures for our products, including as a result of increased capacity as additional manufacturing facilities are operated by our competitors;


•	the loss of, changes in prices in regards to, or reduction in orders from a significant customer;


•	changes in customer product preferences and competitors' product offerings;


•	our ability to successfully implement our operational efficiencies and cost savings strategies;


•	our ability to execute on our expansion strategies, including on-time completion of our planned new tissue manufacturing operations in Shelby, North Carolina;


•	customer acceptance and timing and quantity of purchases of our tissue products, including the existence of sufficient demand for and the quality of tissue produced by our expanded Shelby, North Carolina operations when they are completed;


•	changes in the U.S. and international economies and in general economic conditions in the regions and industries in which we operate;


•	labor disruptions;


•	changes in transportation costs and disruptions in transportation services;


•	changes in the cost and availability of wood fiber and wood pulp;


•	manufacturing or operating disruptions, including IT system and IT system implementation failures, equipment malfunction and damage to our manufacturing facilities;


•	changes in costs for and availability of packaging supplies, chemicals, energy and maintenance and repairs;


•	cyclical industry conditions;


•	changes in expenses and required contributions associated with our pension plans;


•	environmental liabilities or expenditures;


•	cyber-security risks;


•	reliance on a limited number of third-party suppliers for raw materials;


•	our inability to service our debt obligations;


•	restrictions on our business from debt covenants and terms; and


•	changes in laws, regulations or industry standards affecting our business.

Forward-looking statements contained in this report present management’s views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management’s views to reflect events or circumstances occurring after the date of this report. You are advised, however, to consult any further disclosures we make on related subjects in our quarterly reports on Form 10-Q and current reports on Form 8-K filed with the Securities and Exchange Commission, or SEC.



ITEM 1.
Business

GENERAL

Clearwater Paper manufactures quality consumer tissue, away-from-home tissue (or AFH), parent roll tissue, bleached paperboard and pulp at manufacturing facilities across the nation. The company is a premier supplier of private label tissue to major retailers and wholesale distributors, including grocery, drug, mass merchants and discount stores. In addition, the company produces bleached paperboard used by quality-conscious printers and packaging converters, and offers services that include custom sheeting, slitting and cutting. Clearwater Paper's employees build shareholder value by developing strong customer relationships through quality and service.

On December 16, 2016, we acquired Manchester Industries, or Manchester, an independently-owned paperboard sales, sheeting and distribution supplier to the packaging and commercial print industries. The addition of Manchester's customers to our paperboard business extends our reach and service platform to small and mid-sized folding carton plants, by offering a range of converting services that include custom sheeting, slitting and cutting. These converting operations include five strategically located facilities in Virginia, Pennsylvania, Indiana, Texas and Michigan.

On March 31, 2017, we permanently closed our Oklahoma City, Oklahoma converting facility. Due to productivity gains from cost and optimization programs across the company, we expect the production from this facility to be effectively absorbed and more efficiently supplied by our other facilities.

Company Strengths

Leading private label tissue manufacturer with a broad U.S. footprint. Our consumer products business is a premier private label tissue manufacturer. We have through-air-dried, or TAD, tissue manufacturing facilities in Shelby, North Carolina and Las Vegas, Nevada, and non-TAD manufacturing facilities located in Ladysmith, Wisconsin, Lewiston, Idaho, and Neenah, Wisconsin, as well as converting operations strategically located across the United States. We believe we were the sixth largest tissue manufacturer in the North American tissue market as of December 31, 2017, based on tissue parent roll capacity. Our broad manufacturing footprint allows us to service a diverse customer base, on a cost effective basis, including major grocery store chains and retailers across the U.S.

High quality brand-equivalent tissue and other products to meet retailers' private label strategies. Our consumer products business produces high-quality products that match the quality of the leading national brands. We focus on high value tissue products across a wide variety of categories and retail channels. We also manufacture a broad range of cost-competitive consumer tissue products, as well as recycled tissue and tissue parent rolls.

High quality premium bleached paperboard products. Our pulp and paperboard business produces premium paperboard products with ultra-smooth print surfaces, superior cleanliness, and excellent forming and sealing characteristics. Products are available in several thicknesses to provide the level of rigidity and strength needed for a wide range of applications. The high quality of our paperboard allows buyers to use our products for packaging where branding and quality are critical, such as ice cream containers, health and beauty packaging, pharmaceutical packaging, and point of purchase displays.

Long-standing customer relationships. Our consumer products business supplies private label tissue products to several of the largest national retail chains. Our top 10 consumer products customers in 2017 accounted for approximately 80% of our total consumer products net sales. The average tenure of these customer relationships was approximately 11 years. In total, our consumer products business maintained 79 customers across a broad geographic area. We also have long-standing customer relationships with our paperboard customers. Our top 10 paperboard customers in 2017 accounted for approximately 45% of our total paperboard net sales. The average tenure of these customer relationships was approximately 30 years.

Strategically positioned pulp and paperboard facilities. Our pulp and paperboard mill in Lewiston, Idaho is one of only two solid bleach sulfate, or SBS, paperboard mills, and the only coated SBS paperboard mill, in the Western U.S. to offer a full range of specialized products to meet the needs of customers for traditional folding carton, plates, cup and liquid packaging products. This facility's geographic location reduces transportation costs to customers in the Western U.S. as well as Asia, which allows us to compete on a cost-advantaged basis relative to East Coast producers. Our Cypress Bend, Arkansas mill is centrally located, which reduces transportation costs to the Midwestern and Eastern U.S. and complements the Lewiston mill in shipping to customers nationwide.

Largely integrated pulp and tissue operations. Our consumer products business sources a significant portion of its pulp supply internally from our pulp and paperboard operations in Idaho. This relationship provides our consumer products business with a secure pulp supply as well as significant transportation and drying cost savings, provides our pulp and paperboard business with a steady demand source and helps mitigate input cost volatility associated with purchasing external pulp.

Strategy

Our long-term strategy is to expand our business to meet the needs of our customers and optimize the profitability of both our consumer products business and our paperboard business. In the near-term, our focus is on successfully completing strategic capital projects, optimizing the operating efficiency and cost effectiveness of both segments of our company and growing in-line with our customer's needs.

ORGANIZATION

Our businesses are organized into two operating segments: Consumer Products and Pulp and Paperboard. Additional information relating to the amounts of net sales, operating income, depreciation and amortization, identifiable assets and capital expenditures attributable to each of our operating segments for 2015-2017, as well as geographic information regarding our net sales, is set forth in Note 19, "Segment Information" to our consolidated financial statements included under Part II, Item 8 of this report.

Consumer Products Segment

Our Consumer Products segment manufactures and sells a complete line of at-home tissue products as well as AFH products. Our integrated manufacturing and converting operations and geographic footprint enable us to deliver a broad range of cost-competitive products with brand equivalent quality to our customers. In 2017, our Consumer Products segment had net sales of $941.9 million. A listing of our Consumer Products segment facilities is included under Part I, Item 2 of this report.

Tissue Industry Overview

Consumer Tissue Products. The U.S. tissue market can be divided into two market segments: the at-home or consumer retail purchase segment, which represents approximately two-thirds of U.S. tissue sales; and the AFH segment, which represents the remaining one-third of U.S. tissue market sales and includes locations such as restaurants, hotels and office buildings.

The U.S. at-home tissue segment consists of bath, paper towels, facial and napkin products categories. Each category is further distinguished according to quality segments: ultra, premium, value and economy. As a result of manufacturing process improvements and consumer preferences, the majority of at-home tissue sold in the U.S. is ultra and premium quality.

At-home tissue producers are comprised of companies that manufacture branded tissue products, private label tissue products, or both. Branded tissue suppliers manufacture, market and sell tissue products under their own nationally branded labels. Private label tissue producers manufacture tissue products for retailers to sell as their store brand.

In the U.S., at-home tissue is primarily sold through grocery stores, mass merchants, warehouse clubs, drug stores and discount dollar stores. Tissue has historically been one of the strongest segments of the paper industry due to its steady demand growth and the relative absence of severe supply imbalances, largely due to population growth in the U.S., that occur in a number of other paper industry segments. In addition to economic and demographic drivers, tissue demand is affected by product innovations and shifts in distribution channels.

Our Consumer Products Business

We believe that we are the only U.S. consumer tissue manufacturer that solely produces a full line of quality private label tissue products for large retail trade channels. Most U.S. tissue producers manufacture only branded products, or both branded and private label products, or in the case of certain smaller or midsize manufacturers, only produce a limited range of tissue products or quality segments. Branded producers generally manufacture their private label products at a quality grade or two below their branded products so as not to impair sales of the branded products. Because we do not mass produce and market branded tissue products, we believe we are able to offer products that match the quality of leading national brands, but generally at lower prices. We utilize independent companies to routinely test our product quality.

In bathroom tissue, the majority of our sales are high quality two-ply ultra and premium products. In paper towels, we produce and sell ultra quality towels as well as premium and value towels. In the facial category, we sell ultra-lotion three-ply and a complete line of two-ply premium products, as well as value facial tissue. In napkins, we manufacture ultra two- and three-ply dinner napkins, as well as premium and value one-ply luncheon napkins. Recycled fiber value grade products are also produced for customers who wish to further diversify their product portfolio. We compete primarily in the at-home portion of the U.S. tissue market, which made up approximately 95% of our Consumer Products segment sales in 2017.

We manufacture and sell a line of AFH products to customers with commercial and industrial tissue needs. Products include conventional one- and two-ply bath tissue, two-ply paper towels, hard wound towels and dispenser napkins.

During 2017, our consumer products were manufactured on 10 paper machines in facilities located throughout the U.S. Parent rolls from our paper machines are then converted and packaged at our converting facilities located across the U.S. Two of our paper machines, located in Las Vegas, Nevada and Shelby, North Carolina, produce TAD tissue that we convert into national brand comparable, ultra quality towels and bath tissue.

In 2017 and 2016, through multi-outlet channels, which include grocery, drug, dollar, super and club stores, we sold approximately 32% and 33%, respectively, of the total private label tissue products in the U.S.

We had one customer in the Consumer Products segment, the Kroger Company, that accounted for approximately 15.3% of our total company net sales in 2017, approximately 13.4%, of our total company net sales in 2016, and approximately 12.3%, of our total company net sales in 2015.

We sell private label tissue products through our own sales force and compete based on product quality, customer service and price. We deliver customer-focused business solutions by assisting in managing product assortment, category management, and pricing and promotion optimization.

Pulp and Paperboard Segment

Our Pulp and Paperboard segment manufactures and markets bleached paperboard for the high-end segment of the packaging industry and is a leading producer of SBS paperboard, as well as offering services that include custom sheeting, slitting and cutting of paperboard. This segment also produces hardwood and softwood pulp, which is primarily used as the basis for our paperboard products, and slush pulp, which it supplies to our Consumer Products segment. In 2017, our Pulp and Paperboard segment had net sales of $788.5 million. A listing of our Pulp and Paperboard segment facilities is included under Part I, Item 2 of this report.

Pulp and Paperboard Industry Overview

SBS paperboard is a premium paperboard grade that is most frequently used to produce folding cartons, liquid packaging, cups and plates, blister and carded packaging, top sheet, and commercial printing items. SBS paperboard is used for such products because it is manufactured using virgin fiber combined with the kraft bleaching process, which results in superior cleanliness, brightness and consistency. SBS paperboard is often manufactured with a clay coating to provide superior surface printing qualities. SBS paperboard can also be extrusion coated with a plastic film to provide a moisture barrier for some uses.

In general, the process of making paperboard begins by chemically cooking wood fibers to make pulp. The pulp is bleached to provide a white, bright pulp, which is formed into paperboard. Bleached pulp that is to be used as market pulp is dried and baled on a pulp drying machine, bypassing the paperboard machines. The various grades of paperboard are wound into rolls for converting to final end users. Liquid packaging and cup stock grades are often coated with polyethylene, a plastic coating, in a separate operation to create a resistant and durable liquid barrier.

Folding Carton Segment. Folding carton is the largest portion of the SBS category of the U.S. paperboard industry, comprising approximately 40% of the category in 2017. Within the folding carton segment there are varying qualities of SBS paperboard. The high end of the folding carton category in general requires a premium print surface and includes uses such as packaging for pharmaceuticals, cosmetics and other premium retail goods. SBS paperboard is also used in the packaging of frozen foods, beverages and baked goods.

Liquid Packaging and Cup Segment. SBS liquid packaging paperboard is primarily used in the U.S. for the packaging of juices. In Japan and other Asian countries, SBS liquid packaging paperboard is primarily used for the packaging of milk and other consumable liquids. The cup segment of the market consists primarily of hot and cold drink cups and food packaging. The hot and cold cups are primarily used to serve beverages in quick-service restaurants, while round food containers are often used for packaging premium ice-cream, hot noodle and dry food products.

Commercial Printing Segment. Commercial printing applications use bleached bristols, which are heavyweight paper grades, to produce postcards, signage and sales literature. Bristols can be clay coated on one side or both sides for applications such as brochures, presentation folders and paperback book covers. Customers in this segment are accustomed to high-quality paper grades, which possess superior printability and brightness compared to most paperboard packaging grades. Suppliers to this segment must be able to deliver small volumes, often within 24 hours.

Market Pulp. The majority of the pulp manufactured worldwide is used in paper and paperboard production, usually at the same mill location. In those cases where a paper mill is not paired with pulp production operations or requires pulp with different production qualities, it must purchase pulp on the open market. Market pulp is defined as pulp produced for sale to these customers and it excludes tonnage consumed by the producing mill or shipped to any of its affiliated mills within the same company.

Our Pulp and Paperboard Business

Our Pulp and Paperboard segment operates pulp and paperboard facilities in Idaho, which has two paperboard machines, and Arkansas, which has one paperboard machine. As of December 31, 2017, we were one of the five largest producers of bleached paperboard in North America with approximately 12% of the available production capacity. Additionally, we provide custom sheeting, slitting, and cutting of paperboard products from five converting facilities.

Our overall pulp and paperboard production consists primarily of folding carton, liquid packaging, cup and plate products, blister and carded packaging, top sheet, commercial printing grades and hardwood and softwood pulp.

Folding carton board used in pharmaceuticals, cosmetics and other premium packaging, such as those that incorporate foil and holographic lamination, accounts for the largest portion of our total paperboard sales. We focus on high-end folding carton applications where the heightened product quality requirements provide for differentiation among suppliers, generally resulting in margins that are more attractive than less critical packaging applications.

Our liquid packaging paperboard is known for its cleanliness and printability, and is engineered for long-lived performance due to its three-ply, softwood construction. Our reputation for producing liquid packaging meeting the most demanding standards for paperboard quality and cleanliness has resulted in meaningful sales in Japan, where consumers have a particular tendency to associate blemish-free, vibrant packaging with the cleanliness, quality and freshness of the liquids contained inside.

We also sell cup stock and plate stock grades for use in food service products. A majority of our sales in this area consist of premium clay coated cup stock grades used for high-end food packaging, such as premium ice cream.

With the exception of our capability to supply just-in-time sheeting and narrow rolls, we do not produce converted paperboard end-products, so we are not simultaneously a supplier of and a competitor to our customers in key market segments, notably folding carton. Of the five largest SBS paperboard producers in the U.S., we are the only producer that does not convert SBS paperboard into folding cartons, cups, plates, and liquid packaging end-use products. We believe our position provides us a diverse group of loyal customers because when there is increased market demand for paperboard, we do not anticipate diverting our production to internal uses.

We can convert paperboard parent rolls to flat sheets and narrow rolls, which expands our in-market service capabilities and allows us to support small and mid-sized folding carton converters that buy sheeted paperboard to convert into packaging end-products. Providing a service platform in this way expands the key folding carton segment of our business and does not compete with our customers in other key market segments.

At our Idaho facility we produce bleached softwood pulp primarily for internal use, including in our Consumer Products segment.

With the recent installation of a continuous pulp digester at our Idaho facility, our pulp mills are capable of producing approximately 908,000 tons of pulp on an annual basis. We completed the continuous pulp digester installation at our Idaho facility at the end of the third quarter of 2017 and expect it to be at full production capacity by the end of the first quarter of 2018. In 2017, we produced approximately 807,000 tons of pulp in the aggregate and utilized approximately 83% of that production, or approximately 673,000 tons, to produce approximately 794,000 tons of paperboard. The increase in tonnage from pulp to paperboard production is due to the addition of coatings and other manufacturing processes. We also used approximately 16% of our pulp production, or approximately 129,000 tons, in our Consumer Products segment to produce tissue products. The remaining pulp production of less than 1%, or approximately 5,000 tons, was sold externally by our Consumer Products segment.

We utilize various methods for the sale and distribution of our paperboard and softwood pulp. The majority of our paperboard is sold to packaging converters domestically through sales managers located throughout the U.S., with a smaller percentage channeled through distribution to commercial printers. Additionally, we directly sell sheeted paperboard products to folding carton converters, merchants and commercial printers. The majority of our international

paperboard sales are conducted through sales agents and are primarily denominated in U.S. dollars. Our principal methods of competing are product quality, customer service and price.

RAW MATERIALS AND INPUT COSTS

For our manufacturing operations, the principal raw material used is wood fiber, which consists of purchased pulp and chips, sawdust and logs. In 2017, our Consumer Products segment sourced approximately 46% of its total pulp supply internally, with the remainder purchased from external suppliers. We own and operate a wood chipping facility located in Clarkston, Washington, near our Lewiston, Idaho, facility, which we believe bolsters our wood fiber position and provides short-term and long-term cost savings.

We utilize a significant amount of chemicals in the production of pulp and paper, including caustic, polyethylene, starch, sodium chlorate, latex and specialty process paper chemicals. A portion of the chemicals used in our manufacturing processes, particularly in the pulp-making process, are petroleum-based or are impacted by petroleum prices.

Transportation is a significant cost input for our business. Fuel prices impact our transportation costs for delivery of raw materials to our manufacturing facilities and delivery of our finished products to customers.

We consume substantial amounts of energy, such as electricity, hog fuel, steam and natural gas. We purchase a significant portion of our natural gas and electricity under supply contracts, most of which are between a specific facility and a specific local provider. Under most of these contracts, the providers have agreed to provide us with our requirements for a particular type of energy at a specific facility. Most of these contracts have pricing mechanisms that adjust or set prices based on current market prices. In addition, we use firm-price contracts to mitigate price risk for certain of our energy requirements.

As a significant producer of private label consumer tissue products, we also incur expenses related to packaging supplies used for retail chains, wholesalers and cooperative buying organizations.

Our maintenance and repairs are expensed as incurred. We perform routine maintenance on our machines and equipment and periodically replace a variety of parts such as motors, pumps, pipes and electrical parts.

We also record depreciation expense associated with our plant and equipment.

Further information regarding our raw material and input costs is included under "Operating Costs" within Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report.

SEASONALITY

Our Consumer Products segment experiences a decrease in shipments during the fourth quarter generally as a result of decreased consumer demand, retail brand holiday promotions, and end of year inventory management by non-retail customers. In addition, customer buying patterns for our paperboard generally result in lower sales for certain grades of our Pulp and Paperboard segment during the first and fourth quarters, when compared to the second and third quarters of a given year.

ENVIRONMENTAL

Information regarding environmental matters is included under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report, and is incorporated herein by reference.

WEBSITE

Interested parties may access our periodic and current reports filed with the SEC, at no charge, by visiting our website, www.clearwaterpaper.com. In the menu select “Investor Relations,” then select “Financial Information & SEC Filings.” Information on our website is not part of this report.

EMPLOYEES

As of December 31, 2017, we had approximately 3,280 employees, of which approximately 1,870 were employed by our Consumer Products segment, approximately 1,230 were employed by our Pulp and Paperboard segment, and approximately 180 were corporate administration employees. This workforce consisted of approximately 790 salaried employees and approximately 2,490 hourly and fixed rate employees. As of December 31, 2017, approximately 49% of our workforce was covered under collective bargaining agreements.

Unions represent hourly employees at three of our manufacturing sites. We had two hourly union labor contracts that expired in 2017 and are currently being renegotiated:



CONTRACT EXPIRATION DATE	DIVISION AND LOCATION	UNION	APPROXIMATE NUMBER OF HOURLY EMPLOYEES
August 31, 2017	Consumer Products Division & Pulp & Paperboard Division - Lewiston, Idaho	United Steel Workers (USW)	950
August 31, 2017	Consumer Products Division & Pulp & Paperboard Division - Lewiston, Idaho	International Brotherhood of Electrical Workers (IBEW)	60

The following hourly union labor contract expires in 2018:



CONTRACT EXPIRATION DATE	DIVISION AND LOCATION	UNION	APPROXIMATE NUMBER OF HOURLY EMPLOYEES
May 31, 2018	Pulp & Paperboard Division - Lewiston, Idaho, No. 4 Power Boiler Unit	International Association of Machinists (IAM)	40

EXECUTIVE OFFICERS OF THE REGISTRANT

The following individuals are deemed our “executive officers” under the Securities Exchange Act of 1934 as of January 1, 2018. Executive officers of the company are generally appointed as such at the annual meeting of our board, and each officer holds office until the officer’s successor is duly elected and qualified or until the earlier of the officer’s death, resignation, retirement, removal by the board or as otherwise provided in our bylaws. There are no arrangements or understandings between any of our executive officers and any other persons pursuant to which they were selected as officers. No family relationships exist among any of our executive officers.

Linda K. Massman (age 51), has served as President and Chief Executive Officer, as well as a director, since January 2013. Ms. Massman served as President and COO from November 2011 to December 2012. She served as CFO and Senior Vice President, Finance from May 2011 to November 2011, and as CFO and Vice President, Finance from December 2008 to May 2011. From September 2008 to December 2008, Ms. Massman served as Vice President of Potlatch Corporation pending completion of the spin-off of Clearwater Paper Corporation. From May 2002 to August 2008, Ms. Massman was Group Vice President, Finance and Corporate Planning, for SUPERVALU Inc., a grocery retail company. In 2017, Ms. Massman served in the position of board chair for the American Forest & Paper Association (AF&PA), the national trade association of the forest products industry. Ms. Massman also serves as a director of Black Hills Corporation (NYSE: BKH), an energy company, and as a member of its Compensation Committee, as well as a director for TreeHouse Foods, Inc. (NYSE:THS) and is a member of its Audit Committee and Governance Committee.

John D. Hertz (age 51) joined the company in June 2012 as Senior Vice President, and has served as Senior Vice President, Finance and Chief Financial Officer since August 2012. From June 2010 to June 2012, Mr. Hertz was the Vice President and Chief Financial Officer of Novellus Systems, Inc. From October 2007 to June 2010, he served as Novellus' Vice President of Corporate Finance and Principal Accounting Officer and as Vice President and Corporate Controller from June 2007 to October 2007. From 2000 to 2007, Mr. Hertz worked for Intel Corporation where he held a number of positions, including Central Finance Controller of the Digital Enterprise Group, Finance Controller of the Enterprise Platform Services Division and Accounting Policy Controller. Prior to that, Mr. Hertz was a Senior Manager with KPMG, LLP.

Michael S. Gadd (age 53) has served as Senior Vice President since May 2011 and General Counsel and Corporate Secretary since December 2008. He served as Vice President from December 2008 to May 2011. From March 2006 to December 2008, Mr. Gadd served as Associate General Counsel of Potlatch Corporation, and served as Corporate Secretary of Potlatch from July 2007 to December 2008. From January 2001 to January 2006, Mr. Gadd was an attorney with Perkins Coie, LLP in Portland, Oregon.

Arsen S. Kitch (age 36) has served as Vice President, General Manager, Consumer Products since January 2018. He served as Vice President, Finance from January 2015 through December 2017, and served as Senior Director, Planning and Strategy from August 2013 through December 2014. Mr. Kitch was with Nestlé, a food manufacturer, from 2011 to 2013 including as a Finance Director in his final position.

Kari G. Moyes (age 50) has served as Senior Vice President, Human Resources since February 2015, and served as Vice President, Labor Relations from July 2013 through January 2015. From November 2010 through June 2013, Ms. Moyes served as National Director of Human Resources for Nestlé. Prior to her tenure with Nestle, Ms. Moyes spent 10 years with Pepsico in various capacities.



ITEM 1A.
Risk Factors

Our business, financial condition, results of operations and liquidity are subject to various risks and uncertainties, including those described below, and as a result, the trading price of our common stock could decline.

Increases in tissue supply, particularly in the premium and ultra categories, could adversely affect our operating results and financial condition.

Over the past few years, several new or refurbished premium and ultra-quality tissue paper machines have been completed or announced by us and by our competitors, including private label competitors, which will result in a substantial increase in the supply of premium and ultra-quality tissue in the North American market. Additionally, several new or refurbished conventional tissue machines have been installed or announced, including as a result of foreign competitors increasing their presence and operations in North America. We believe that increasing tissue capacity, together with intensifying competition experienced by our retail customers, has made it difficult for us to pass through to our customers the significant increases in input costs we have experienced in the last several years. If demand for tissue products in the North American market does not increase or consumer preferences as to tissue products changes, the increase in supply of ultra-quality tissue products could have a material adverse effect on the price of premium and ultra-quality tissue products. In addition, increased supply of premium and ultra-quality tissue may adversely affect the market prices for such tissue and result in the displacement of demand for conventional tissue, which could adversely effect the market price for conventional tissue products, which will continue to represent a significant portion of our total production for the foreseeable future.

The loss of, or a significant reduction in, orders from, or changes in prices in regards to, any of our large customers could adversely affect our operating results and financial condition.

We derive a substantial amount of revenues from a concentrated group of customers. For example, our top 10 consumer products customers in 2017 accounted for approximately 80% of our total consumer products net sales. We have experienced increased price and promotion competition for our consumer products customers, particularly in regards to ultra-quality products, and this competition has decreased our gross margins and adversely affected our financial condition. Our top 10 paperboard customers in 2017 accounted for approximately 45% of our total paperboard net sales. If we lose any of these customers or a substantial portion of their business or if the terms of our relationship with any of them becomes less favorable to us, our net sales would decline, which would harm our results of operations and financial condition. Some of our customers have the capability to produce the parent rolls or products that they purchase from us.

We generally do not have long-term contracts with many of our customers that ensure a continuing level of business from them. In addition, our agreements with our customers, including our largest customers, are not exclusive and generally do not contain minimum volume purchase commitments. Our relationship with our largest and most important customers will depend on our ability to continue to meet their needs for quality products and services at competitive prices. If we lose one or more of these customers or if we experience a significant decline in the level of purchases by any of them, we may not be able to quickly replace the lost business volume and our operating results and business could be harmed. In the third quarter of 2017, our largest tissue customer made the decision to go from a single source model to a multi-source model for their private label tissue supply beginning in the first quarter of 2018. This decision will primarily affect conventional tissue supply to this customer and we do not expect to be able to fully replace this lost volume in 2018 through sales to other customers.

Competitors' branded products and private label products could have an adverse effect on our financial results.

Our consumer products compete with well-known, branded products, as well as other private label products. Our business may be harmed by new product offerings by competitors, the effects of consolidation within retailer and distribution channels, and price competition from companies that may have greater financial resources than we do. If we are unable to offer our existing customers, or new customers, tissue products comparable to branded products or private label products in terms of quality, customer service, and/or price, we may lose business or we may not be able to grow our existing business and be forced to sell lower-margin products, all of which could negatively affect our financial condition and results of operations.

Changing retail purchasing patterns have increased the need to increase operating efficiencies and diversify our customer base and sales channels.

We have historically sold a majority of our consumer tissue products through retail grocery stores. These and other traditional retail outlets are facing increasingly intense competition from supercenters, club stores, wholesale grocers,

and drug, dollar, variety and specialty stores, as well as competitors who have incorporated the internet as a direct-to-consumer channel and internet-only providers that sell tissue and other grocery products. The intense competition faced by our customers has resulted in increased efforts by them to reduce costs from suppliers like us and requires that we become more cost efficient in order to maintain our market share and profitability. The changing retail landscape also requires that we develop and maintain relationships with a wider variety of retailers and retail channels to succeed in this dynamic environment.

Our operational efficiency optimization and cost-saving goals may not be fully achieved or may not support the level of investment or commitment we are making.

Our near term strategy of improving our competitive position by investing to achieve increased operational efficiencies and implementing cost control measures may not be fully achieved. Those goals, along with the capital projects we have invested in or are investing in to help achieve these goals, including the continuous digester at our Lewiston facility and warehouse automation at several facilities, may not achieve expected operational or financial results in the time frames we anticipate, or at all. Such delays or failures could materially affect our business, cash flows and financial condition.

The expansion of our business through the construction of new tissue making and converting facilities may not proceed as anticipated.

In connection with our long-term expansion strategy, we are adding a paper machine capable of producing certain premium and ultra-quality tissue products, and converting facilities to our Shelby, North Carolina site. The tissue machine to be installed in North Carolina is highly complex and costly and it can be manufactured by only one company in the world. Installing this machine and building the supporting facilities entails numerous risks, including difficulties in completing the project on time due to construction or permitting issues, cost overruns, difficulties in integrating the new operations and personnel, and uncertainties regarding the existence of sufficient customer demand and acceptance of the quality of the tissue produced once the new paper machine becomes operational. Any of these risks, if realized, could have a material adverse effect on our business, financial condition, results of operations and liquidity. In addition, such events could also divert management’s attention from other business concerns.

United States and global economic conditions could have adverse effects on the demand for our products and financial results.

U.S. and global economic conditions and currency exchange rates have a significant impact on our business and financial results. Recessed global economic conditions and a strong U.S. dollar can affect our business in a number of ways, including causing declines in global demand for consumer tissue and paperboard, which increases the likelihood or the pace of foreign manufacturers entering into or increasing sales into the U.S. market.

Increased competition and supply from foreign manufacturers could have adverse effects on the demand for our products and financial results.

Foreign manufacturers in Asia and Europe are currently in the process of increasing, and are expected to continue to increase, their paperboard production capabilities. This, in turn, may result in increased competition in the North American paperboard markets from direct sales by foreign competitors into these markets and/or increased competition in the U.S. as domestic manufacturers seek increased U.S. sales to offset displaced overseas sales caused by increased sales by foreign suppliers into Asia and European markets. An increased supply of foreign paperboard products could cause us to lower our prices or lose sales to competitors, either of which could have a material adverse effect on our results of operations and cash flows.

Our business and financial performance may be harmed by future labor disruptions.

As of December 31, 2017, approximately 49% of our full-time employees were represented by unions under collective bargaining agreements. As these agreements expire, we may not be able to negotiate extensions or replacement agreements on terms acceptable to us. In 2017, the collective bargaining agreements for hourly employees at our Lewiston, Idaho facility, which affects approximately 1,010 employees, expired and are currently being negotiated. Any failure to reach an agreement with one of the unions may result in strikes, lockouts, work slowdowns, stoppages or other labor actions, any of which could have a material adverse effect on our operations and financial results.

Disruptions in transportation services or increases in our transportation costs could have a material adverse effect on our business.

Our business, particularly our consumer products business, is dependent on transportation services to deliver our products to our customers and to deliver raw materials to us. Shipments of products and raw materials may be delayed or disrupted due to weather conditions, labor shortages or strikes, regulatory actions or other events. If our transportation providers are unavailable or fail to deliver our products in a timely manner, we may incur increased costs. If any

transportation providers are unavailable or fail to deliver raw materials to us in a timely manner, we may be unable to manufacture products on a timely basis.

The costs of these transportation services are also affected by geopolitical and economic events. In 2017, our transportation costs were 11.6% of our sales, with those costs spiking in the second half of 2017 as the result of higher line haul rates, diesel prices and weather related events. We have not been able in the past, and may not be able in the future, to pass along part or all of any fuel price increases to customers. If we are unable to increase our prices as a result of increased fuel or transportation costs, our gross margins may be materially adversely affected.

We depend on external sources of wood pulp and wood fiber for a significant portion of our tissue production, which subjects our business and results of operations to potentially significant fluctuations in the price of market pulp and wood fiber.

Our Consumer Products segment sources a significant portion of its wood pulp requirements from external suppliers, which exposes us to price fluctuation. In 2017, we sourced approximately 54% of our pulp requirements for tissue manufacturing externally, comprising approximately 11.2% of our sales.

Pulp prices can, and have, changed significantly from one period to the next. The volatility of pulp prices can adversely affect our earnings if we are unable to pass cost increases on to our customers or if the timing of any price increases for our products significantly trails the increases in pulp prices. In 2017, we were not able to pass on these pulp price increases to our customers due to competitive conditions.

Wood fiber is the principal raw material used to create wood pulp, which in turn is used to manufacture our pulp and paperboard products and consumer products. In 2017, our wood fiber costs were 7.8% of our sales. Much of the wood fiber we use in our pulp manufacturing process in Lewiston, Idaho, is the by-product of sawmill operations. As a result, the price of these residual wood fibers is affected by operating levels in the lumber industry. The significant reduction in home building over the past several years resulted in the closure or curtailment of operations at many sawmills and consolidation amongst suppliers. The expansion of operations and production of other paper mills and wood pellet manufacturers in the Inland Northwest region of the United States can, and has, increased the demand and price for wood fiber. Additionally, the ability of paper and wood pellet mills in British Columbia to acquire wood fiber from the Inland Northwest region with limited to no reciprocal ability by U.S. mills to acquire wood fiber from British Columbia, reduces the supply of and increases the costs for wood fiber. The price of wood fiber is expected to remain volatile.

The supply and price of wood fiber can also be negatively affected by weather and other events. For example, our Arkansas pulp and paperboard facility relies on whole log chips for a significant portion of its wood fiber, and in the past this facility has experienced increases in the costs for wood fiber due to extremely wet weather conditions in the Southeastern U.S. that limited accessibility and availability.

The effects on market prices for wood fiber resulting from various governmental programs involving tax credits or payments related to biomass and other renewable energy projects are uncertain and could result in a reduction in the supply of wood fiber available for our pulp and paperboard manufacturing operations. Additionally, wood pellet facilities or fluff pulp facilities, such as a fluff pulp facility recently announced in Arkansas, can increase demand and prices for wood fiber. If we and our pulp suppliers are unable to obtain wood fiber at favorable prices or at all, our costs will increase and our operations and financial results may be harmed.

We incur significant expenses to maintain our manufacturing equipment and any interruption in the operations of our facilities may harm our operating performance.

We regularly incur significant expenses to maintain our manufacturing equipment and facilities. The machines and equipment that we use to produce our products are complex, have many parts and some are run on a continuous basis. We must perform routine maintenance on our equipment and will have to periodically replace a variety of parts such as motors, pumps, pipes and electrical parts. In addition, our pulp and paperboard facilities require periodic shutdowns to perform major maintenance. These scheduled shutdowns of facilities result in decreased sales and increased costs in the periods in which they occur and could result in unexpected operational issues in future periods as a result of changes to equipment and operational and mechanical processes made during the shutdown period. We had two scheduled major maintenance shutdowns in 2017, which occurred during the second quarter at our Arkansas facility and the third quarter at our Lewiston, Idaho pulp and paperboard facility.

Unexpected production disruptions could cause us to shut down or curtail operations at any of our facilities. For example, we had a fire in the first quarter of 2017 at our Shelby, North Carolina facility. Disruptions could occur due to any number of circumstances, including prolonged power outages, mechanical or process failures, shortages of raw materials, natural catastrophes, disruptions in the availability of transportation, labor disputes, terrorism, changes in or non-compliance with environmental or safety laws and the lack of availability of services from any of our facilities' key suppliers. Any facility shutdowns may be followed by prolonged startup periods, regardless of the reason for the

shutdown. Those startup periods could range from several days to several weeks, depending on the reason for the shutdown and other factors. Any prolonged disruption in operations at any of our facilities could cause significant lost production, which would have a material adverse effect on our results of operations.

The cost of chemicals and energy needed for our manufacturing processes significantly affects our results of operations and cash flows.

We use a variety of chemicals in our manufacturing processes, including petroleum-based polyethylene and certain petroleum-based latex chemicals. In 2017, our chemical costs were 9.6% of our sales. Prices for these chemicals have been and are expected to remain volatile. In addition, chemical suppliers that use petroleum-based products in the manufacture of their chemicals may, due to supply shortages and cost increases, ration the amount of chemicals available to us, and therefore we may not be able to obtain at favorable prices the chemicals we need to operate our business, if we are able to obtain them at all.

Our manufacturing operations also utilize large amounts of electricity and natural gas. In 2017, our energy costs were 5.0% of our sales. Energy prices have fluctuated widely over the past decade, which in turn affects our cost of sales. We purchase on the open market a substantial portion of the natural gas necessary to produce our products, and, as a result, the price and other terms of those purchases are subject to change based on factors such as worldwide supply and demand, geopolitical events, government regulation, and natural disasters. Our energy costs in future periods will depend principally on our ability to produce a substantial portion of our electricity needs internally, on changes in market prices for natural gas and on reducing energy usage. Any significant energy shortage or significant increase in our energy costs in circumstances where we cannot raise the price of our products could have a material adverse effect on our results of operations. Any disruption in the supply of energy could also affect our ability to meet customer demand in a timely manner and could harm our reputation.

Cyclical industry conditions have in the past affected and may continue to adversely affect the operating results and cash flows of our pulp and paperboard business.

Our pulp and paperboard business has historically been affected by cyclical market conditions. We may be unable to sustain pricing in the face of weaker demand, and weaker demand may in turn cause us to take production downtime. In addition to lost revenue from lower shipment volumes, production downtime causes unabsorbed fixed manufacturing costs due to lower production levels. Our results of operations and cash flows may be materially adversely affected in a period of prolonged and significant market weakness. We are not able to predict market conditions or our ability to sustain pricing and production levels during periods of weak demand.

We rely on information technology in critical areas of our operations, and a disruption relating to such technology could harm our financial condition.

We use information technology, or IT, systems in various aspects of our operations, including enterprise resource planning, or ERP, management of inventories and customer sales. Some of these systems have been in place for long periods of time. We have different legacy IT systems that we are continuing to integrate. If one of these systems was to fail or cause operational or reporting interruptions, or if we decide to change these systems or hire outside parties to provide these systems, we may suffer disruptions, which could have a material adverse effect on our manufacturing and sales operation, results of operations and financial condition. In addition, we may underestimate the costs and expenses of developing and implementing new systems.

We may be required to pay material amounts under multiemployer pension plans.

We contribute to two multiemployer pension plans. The amount of our annual contributions to each of these plans is negotiated with the plan and the bargaining unit representing our employees covered by the plan. In 2017, we contributed approximately $6 million to these plans, and in future years we may be required to make increased annual contributions, which would reduce the cash available for business and other needs. In addition, in the event of a partial or complete withdrawal by us from any multiemployer plan that is underfunded, we would be liable for a proportionate share of such multiemployer plan's unfunded vested benefits, referred to as a withdrawal liability. A withdrawal liability is considered a contingent liability. In the event that any other contributing employer withdraws from any multiemployer plan that is underfunded, and such employer cannot satisfy its obligations under the multiemployer plan at the time of withdrawal, then the proportionate share of the plan’s unfunded vested benefits that would be allocable to us and to the other remaining contributing employers would increase and there could be an increase to our required annual contributions. In renegotiations of collective bargaining agreements with labor unions that participate in these multiemployer plans, we may decide to discontinue participation in these plans.

One of the multiemployer pension plans to which we contribute, the PACE Industry Union-Management Pension Fund, or PIUMPF, was certified to be in “critical status” for the plan year beginning January 1, 2010, and continued to be in critical status through the plan year beginning January 1, 2014. For the plan years beginning January 1, 2015 through

January 1, 2017, PIUMPF was certified to be in "critical and declining status" under the Multiemployer Pension Plan Reform Act of 2014. In 2013, two large employers withdrew from PIUMPF and in 2015 the largest employer in PIUMPF also withdrew. Additional employers have continued to withdraw, or announced plans to withdraw, from the fund in 2016 and 2017, including the second largest remaining employer in early 2018. We believe that we are now the largest contributing employer. Further withdrawals by contributing employers could cause a “mass withdrawal” from, or effectively a termination of, PIUMPF or alternatively we could elect to withdraw. Although we have no current intention to withdraw from PIUMPF, if we were to withdraw, either completely or partially, we would incur a withdrawal liability based on our share of PIUMPF’s unfunded vested benefits. Based on our records as of December 31, 2017, as well as information provided by PIUMPF, and reviewed by our actuarial consultant, we estimate that, as of December 31, 2017, the payments that we would be required to make to PIUMPF in the event of our complete withdrawal would be approximately $5.7 million per year on a pre-tax basis. These payments would continue for 20 years, unless we were deemed to be included in a “mass withdrawal” from PIUMPF, in which case these payments would continue in perpetuity. PIUMPF's rehabilitation plan also purports to require additional accumulated funding deficiency amounts due upon a withdrawal that we believe to be unenforceable.

However, we are not able to determine the exact amount of our withdrawal liability because the amount could be higher or lower depending on the nature and timing of any triggering event, the funded status of the plan and our level of contributions to the plan prior to the triggering event. These withdrawal liability payments would be in addition to pension contributions to any new pension plan adopted or contributed to by us to replace PIUMPF, all of which would reduce the cash available for business and other needs. Adverse changes to or requirements under pension laws and regulations or adverse changes, requirements or claims pursuant to the fund's rehabilitation plan could increase the likelihood and amount of our liabilities arising under PIUMPF.

Our company-sponsored pension plans are currently underfunded, and we may be required to make cash payments to the plans, reducing cash available for our business.

We have company-sponsored pension plans covering certain of our salaried and hourly employees. The volatility in the value of equity and fixed income investments held by these plans, coupled with a low interest rate environment resulting in higher liability valuations, has caused these plans to be underfunded as the projected benefit obligation has exceeded the aggregate fair value of plan assets by varying year-end amounts since 2008. At December 31, 2017, and 2016, our company sponsored pension plans were underfunded in the aggregate by $6.8 million and $18.8 million, respectively. As a result of underfunding, we may be required to make contributions to our qualified pension plans in future years, which would reduce the cash available for business and other needs. In 2017, we made no contributions to these pension plans, and we are not required to make contributions in 2018.

We are subject to significant environmental regulation and environmental compliance expenditures, which could increase our costs and subject us to liabilities.

We are subject to various federal, state and foreign environmental laws and regulations concerning, among other things, water discharges, air emissions, hazardous material and waste management and environmental cleanup. Environmental laws and regulations continue to evolve and we may become subject to increasingly stringent environmental standards in the future, particularly under air quality and water quality laws and standards related to climate change issues, such as reporting of greenhouse gas emissions. Increased regulatory activity at the state, federal and international level is possible regarding climate change as well as other emerging environmental issues associated with our manufacturing sites, such as water quality standards based on elevated fish consumption rates. Compliance with regulations that implement new public policy in these areas might require significant expenditures on our part or even the curtailment of certain of our manufacturing operations.

We are required to comply with environmental laws and the terms and conditions of multiple environmental permits. In particular, the pulp and paper industry in the United States is subject to several performance based rules associated with effluent and air emissions as a result of certain of its manufacturing processes. Federal, state and local laws and regulations require us to routinely obtain authorizations from and comply with the evolving standards of the appropriate governmental authorities, which have considerable discretion over the terms of permits. Failure to comply with environmental laws and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing our operations or requiring us to take corrective measures, install pollution control equipment, or take other remedial actions, such as product recalls or labeling changes. We also may be required to make additional expenditures, which could be significant, relating to environmental matters on an ongoing basis. There can be no assurance that future environmental permits will be granted or that we will be able to maintain and renew existing permits, and the failure to do so could have a material adverse effect on our results of operations, financial condition and cash flows.

We own properties, conduct or have conducted operations at properties, and have assumed indemnity obligations for properties or operations where hazardous materials have been or were used for many years, including during periods before careful management of these materials was required or generally believed to be necessary. Consequently, we will continue to be subject to risks under environmental laws that impose liability for historical releases of hazardous substances and to liability for other potential violations of environmental laws or permits at existing sites or ones for which we have indemnity obligations.

Larger competitors have operational and other advantages over our operations.

The markets for our products are highly competitive, and companies that have substantially greater financial resources compete with us in each market. Some of our competitors have advantages over us, including lower raw material and labor costs and better access to the inputs of our products.

Our consumer products business faces competition from companies that produce the same type of products that we produce or that produce alternative products that customers may use instead of our products. Our consumer products business competes with the branded tissue products producers, such as Procter & Gamble, and branded label producers who manufacture branded and private label products, such as Georgia-Pacific and Kimberly-Clark. These companies are far larger than us, have more sales, marketing and research and development resources than we do, and enjoy significant cost advantages due to economies of scale. In addition, because of their size and resources, these companies may foresee market trends more accurately than we do and develop new technologies that render our products less attractive or obsolete.

Our ability to successfully compete in the pulp and paperboard industry is influenced by a number of factors, including manufacturing capacity, general economic conditions and the availability and demand for paperboard substitutes. Our pulp and paperboard business competes with International Paper, WestRock, Georgia-Pacific, and international producers, most of whom are much larger than us. Any increase in manufacturing capacity by any of these or other producers could result in overcapacity in the pulp and paperboard industry, which could cause downward pressure on pricing. For example, several newer facilities in China have large paperboard manufacturing capacities, the output of which is expected to increase paperboard supplies on the international market. Also, a large European manufacturer has begun paperboard production at a new facility with products intended for the North American market. Furthermore, customers could choose to use types of paperboard that we do not produce or could rely on alternative materials, such as plastic, for their products. An increased supply of any of these products could cause us to lower our prices or lose sales to competitors, either of which could have a material adverse effect on our results of operations and cash flows.

The consolidation of paperboard converting businesses, including through the acquisition and integration of such converting business by larger competitors of ours, could result in a loss of customers and sales on the part of our pulp and paperboard business. A loss of paperboard customers or sales as a result of consolidations and integrations could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our pension and health care costs are subject to numerous factors that could cause these costs to change.

In addition to our pension plans, we provide health care benefits to certain of our current and former salaried and hourly employees. There is a risk of increased costs due to the Affordable Care Act’s individual mandate and required coverage. Our health care costs vary with changes in health care costs generally, which have significantly exceeded general economic inflation rates for many years. Our pension costs are dependent upon numerous factors resulting from actual plan experience and assumptions about future investment returns. Pension plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns as well as changes in general interest rates may result in increased pension costs in future periods. Likewise, changes in assumptions regarding current discount rates, expected rates of return on plan assets and mortality rates could also increase pension costs. Significant changes in any of these factors may adversely impact our cash flows, financial condition and results of operations.

We face cyber-security risks.

Our business operations rely upon secure information technology systems for data capture, processing, storage and reporting. Despite careful security and controls design, implementation and updating, our information technology systems could become subject to cyber-attacks. Network, system, application and data breaches could result in operational disruptions or information misappropriation, which could result in lost sales, business delays, negative publicity and could have a material adverse effect on our business, results of operations and financial condition.

We rely on a limited number of third-party suppliers for certain raw materials required for the production of our products.

Our dependence on a limited number of third-party suppliers, and the challenges we may face in obtaining adequate supplies of raw materials, involve several risks, including limited control over pricing, availability, quality, and delivery schedules. We cannot be certain that our current suppliers will continue to provide us with the quantities of these raw materials that we require or will continue to satisfy our anticipated specifications and quality requirements. Any supply interruption in limited raw materials could materially harm our ability to manufacture our products until a new source of supply, if any, could be identified and qualified. Although we believe there are other suppliers of these raw materials, we may be unable to find a sufficient alternative supply channel in a reasonable time or on commercially reasonable terms. Any performance failure on the part of our suppliers could interrupt production of our products, which would have a material adverse effect on our business.

Additional expansion of our business through construction of new facilities or acquisitions may not proceed as anticipated.

In the future, we may build other converting and papermaking facilities, pursue acquisitions of existing facilities, or both. We may be unable to identify future suitable building locations or acquisition targets. In addition, we may be unable to achieve anticipated benefits or cost savings from construction projects or acquisitions in the timeframe we anticipate, or at all. Any inability by us to integrate and manage any new or acquired facilities or businesses in a timely and efficient manner, any inability to achieve anticipated cost savings or other anticipated benefits from these projects or acquisitions in the time frame we anticipate or any unanticipated required increases in promotional or capital spending could adversely affect our business, financial condition, results of operations or liquidity. Large construction projects or acquisitions can result in a decrease in our cash and short-term investments, an increase in our indebtedness, or both, and also may limit our ability to access additional capital when needed and divert management's attention from other business concerns.

To service our substantial indebtedness, we must generate significant cash flows. Our ability to generate cash depends on many factors beyond our control.

As of December 31, 2017, we had $730 million of outstanding indebtedness, and we could incur substantial additional indebtedness in the future. Our ability to make payments on and to refinance our indebtedness, including our outstanding notes, and to fund planned capital expenditures, will depend on our ability to generate cash in the future. This, to a significant extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our senior secured revolving credit facilities in an amount sufficient to enable us to pay our indebtedness, including our outstanding notes, or to fund our other liquidity needs. We cannot assure you that we will be able to refinance any of our indebtedness, including our senior secured revolving credit facilities and our outstanding notes, on commercially reasonable terms or at all.

The indenture for our outstanding notes that we issued in 2013 and the credit agreements governing our senior secured revolving credit facilities, contain various covenants that limit our discretion in the operation of our business.

The indenture governing our outstanding notes that we issued in 2013 and the credit agreements governing our senior secured revolving credit facilities, contain various provisions that limit our discretion in the operation of our business by restricting our ability to:


•	undergo a change in control;


•	sell assets;


•	pay dividends and make other distributions;


•	make investments and other restricted payments;


•	redeem or repurchase our capital stock;


•	incur additional debt and issue preferred stock;


•	create liens;


•	consolidate, merge, or sell substantially all of our assets;


•	enter into certain transactions with our affiliates;


•	engage in new lines of business; and


•	enter into sale and lease-back transactions.

These restrictions on our ability to operate our business at our discretion could seriously harm our business by, among other things, limiting our ability to take advantage of financing, merger and acquisition and other corporate opportunities, or to borrow in order to fund further capital expenditures. In addition, our senior secured revolving credit facilities

require, among other things, that we maintain a consolidated total leverage ratio in an amount not to exceed 4.50 to 1.00 in 2018, 4.25 to 1.00 in 2019 and 4.00 to 1.00 thereafter (subject to certain exceptions with respect to acquisitions in excess of an agreed threshold amount) and a consolidated interest coverage ratio in an amount not less than 1.75 to 1.00 through 2020 and 2.25 to 1.00 thereafter. Events beyond our control could affect our ability to meet these financial tests, and we cannot assure you that we will meet them.

Our failure to comply with the covenants contained in our senior secured revolving credit facilities or the indentures governing our outstanding notes, including as a result of events beyond our control, could result in an event of default that could cause repayment of the debt to be accelerated.

If we are not able to comply with the covenants and other requirements contained in the indentures governing our outstanding notes, our senior secured revolving credit facilities or our other debt instruments, an event of default under the relevant debt instrument could occur. If an event of default does occur, it could trigger a default under our other debt instruments, prohibit us from accessing additional borrowings, and permit the holders of the defaulted debt to declare amounts outstanding with respect to that debt to be immediately due and payable. Our assets and cash flow may not be sufficient to fully repay borrowings under our outstanding debt instruments. In addition, we may not be able to refinance or restructure the payments on the applicable debt. Even if we were able to secure additional financing, it may not be available on favorable terms.

Certain provisions of our certificate of incorporation and bylaws and Delaware law may make it difficult for stockholders to change the composition of our Board of Directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial.

Certain provisions of our certificate of incorporation and bylaws and Delaware law may have the effect of delaying or preventing changes in control if our Board of Directors determines that such changes in control are not in the best interests of the company and our stockholders. The provisions in our certificate of incorporation and bylaws include, among other things, the following:


•	a classified Board of Directors with three-year staggered terms;


•	the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval;


•	stockholder action can only be taken at a special or regular meeting and not by written consent;


•	advance notice procedures for nominating candidates to our Board of Directors or presenting matters at stockholder meetings;


•	removal of directors only for cause;


•	allowing only our Board of Directors to fill vacancies on our Board of Directors; and


•	supermajority voting requirements to amend our bylaws and certain provisions of our certificate of incorporation.

While these provisions have the effect of encouraging persons seeking to acquire control of the company to negotiate with our Board of Directors, they could enable the Board of Directors to hinder or frustrate a transaction that some, or a majority, of the stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. We are also subject to Delaware laws that could have similar effects. One of these laws prohibits us from engaging in a business combination with a significant stockholder unless specific conditions are met.



ITEM 1B.
Unresolved Staff Comments

None.



ITEM 2.
Properties

FACILITIES

We own and operate facilities located throughout the United States. The following table lists each of our facilities and its location, use, and 2017 capacity and production:

USE

LEASED OR OWNED

CAPACITY¹

PRODUCTION¹

CONSUMER PRODUCTS

Tissue Manufacturing Facilities:

Ladysmith, Wisconsin

Tissue

Owned

56,000

tons

50,000

tons

Las Vegas, Nevada

TAD tissue

Owned

38,000

tons

34,000

tons

Lewiston, Idaho

Tissue

Owned

190,000

tons

190,000

tons

Neenah, Wisconsin

Tissue

Owned

54,000

tons

53,000

tons

Shelby, North Carolina²

TAD tissue

Owned/Leased

77,000

tons

76,000

tons

415,000

tons

403,000

tons

Tissue Converting Facilities:

Elwood, Illinois²

Tissue converting

Owned/Leased

73,000

tons

64,000

tons

Las Vegas, Nevada

Tissue converting

Owned

64,000

tons

61,000

tons

Lewiston, Idaho

Tissue converting

Owned

90,000

tons

81,000

tons

Neenah, Wisconsin

Tissue converting

Owned

70,000

tons

55,000

tons

Oklahoma City, Oklahoma⁴

Tissue converting

Leased

—

tons

2,000

tons

Shelby, North Carolina²

Tissue converting

Owned/Leased

73,000

tons

72,000

tons

370,000

tons

335,000

tons

PULP AND PAPERBOARD

Pulp Mills:

Cypress Bend, Arkansas

Pulp

Owned

318,000

tons

302,000

tons

Lewiston, Idaho³

Pulp

Owned

590,000

tons

505,000

tons

908,000

tons

807,000

tons

Bleached Paperboard Mills:

Cypress Bend, Arkansas

Paperboard

Owned

360,000

tons

337,000

tons

Lewiston, Idaho

Paperboard

Owned

465,000

tons

457,000

tons

825,000

tons

794,000

tons

Sheeted Paperboard Facilities:

Mendon, Michigan²

Paperboard sheeting

Owned/Leased

50,000

tons

40,000

tons

Wilkes-Barre, Pennsylvania²

Paperboard sheeting

Owned/Leased

40,000

tons

23,000

tons

Dallas, Texas²

Paperboard sheeting

Owned/Leased

36,000

tons

20,000

tons

Richmond, Virginia²

Paperboard sheeting

Owned/Leased

35,000

tons

23,000

tons

Hagerstown, Indiana²

Paperboard sheeting

Owned/Leased

32,000

tons

25,000

tons

193,000

tons

131,000

tons

Columbia City, Oregon

Chip shipment

Leased

N/A

Clarkston, Washington

Wood chipping

Owned

N/A

CORPORATE

Alpharetta, Georgia

Operations and administration

Leased

N/A

Spokane, Washington

Corporate headquarters

Leased

N/A


¹	Production amounts are approximations for full year 2017. Annual capacity is an estimate based on assumptions and judgments concerning, among other things, both market demand and product mix, which change from time-to-time.


²	The buildings located at these facilities are leased by Clearwater Paper or a subsidiary, and the operating equipment located within the buildings are owned by Clearwater Paper or a subsidiary.


³	In 2017, we completed the installation of our continuous pulp digester. Given this digester was only in-service for approximately the last three months of the year, production figures do not reflect what we anticipate full annual production to be once the digester has been in-service for a full annual period. We anticipate it to be at full production by the end of the first quarter of 2018.


⁴	On March 31, 2017 we closed our Oklahoma City converting facility. As of December 31, 2017, the facility is subleased.



ITEM 3.
Legal Proceedings

We may from time to time be involved in claims, proceedings and litigation arising from our business and property ownership. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition, results of operations and cash flows.



ITEM 4.
Mine Safety Disclosures

Not applicable.

Part II



ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

MARKET FOR OUR COMMON STOCK

Our common stock is traded on the New York Stock Exchange. The following table sets forth, for each period indicated, the high and low sales prices of our common stock during our two most recent years.



	Common Stock Price
	High		Low
Year Ended December 31, 2017:
Fourth Quarter	$	50.45	$	42.20
Third Quarter	50.10		44.05
Second Quarter	57.40		43.60
First Quarter	67.45		51.75
Year Ended December 31, 2016:
Fourth Quarter	$	68.40	$	50.30
Third Quarter	69.75		59.18
Second Quarter	66.65		47.55
First Quarter	49.58		32.00

HOLDERS

On February 16, 2018, the last reported sale price for our common stock on the New York Stock Exchange was $37.05 per share. As of February 16, 2018, there were approximately 775 registered holders of our common stock.

DIVIDENDS

We have not paid any cash dividends and do not anticipate paying a cash dividend in 2018. We will continue to review whether payment of a cash dividend on our common stock in the future best serves the company and our stockholders. The declaration and amount of any dividends, however, would be determined by our Board of Directors and would depend on our earnings, our compliance with the terms of our notes and revolving credit facilities that contain certain restrictions on our ability to pay dividends, and any other factors that our Board of Directors believes are relevant.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

Please see Part III, Item 12 of this report for information relating to our equity compensation plans.

ISSUER PURCHASES OF EQUITY SECURITIES

Please see Part II, Note 2, "Summary of Significant Accounting Policies" of this report for information relating to our purchases of equity securities.



ITEM 6.
Selected Financial Data

All of the data listed below has been derived from our audited financial statements. Our historical financial and other data is not necessarily indicative of our future performance. Amounts for 2014 forward reflect the sale of our specialty business and mills on December 30, 2014.



(In thousands, except net earnings (loss) per share amounts)	2017		2016		2015		2014			2013
Net sales	$	1,730,408	$	1,734,763	$	1,752,401	$	1,967,139		$	1,889,830
Income from operations	72,328		111,317		123,670		79,811			99,328
Net earnings (loss)¹	97,339		49,554		55,983		(2,315		)	106,955
Working capital²	33,537		79,975		199,010		302,069			374,416
Long-term debt, net of current portion	570,524		569,755		568,987		568,221			640,410
Stockholders’ equity	575,434		469,873		474,866		497,537			605,094
Capital expenditures	198,685		155,677		134,104		99,600			86,508
Property, plant and equipment, net	1,050,982		945,328		866,538		810,987			884,698
Total assets	1,802,252		1,684,342		1,527,369		1,579,149			1,735,235
Net earnings (loss) per basic common share¹	$	5.91	$	2.91	$	2.98	$	(0.11	)	$	4.84
Average basic common shares outstanding	16,464		17,001		18,762		20,130			22,081
Net earnings (loss) per diluted common share¹	$	5.88	$	2.90	$	2.97	$	(0.11	)	$	4.80
Average diluted common shares outstanding	16,556		17,106		18,820		20,130			22,264


¹	Net earnings and net earnings per basic and diluted common share for the twelve months ended December 31, 2017 reflect a $70 million tax benefit resulting from the remeasurement of the company's net deferred tax liabilities following passage of the Tax Cuts and Jobs Act signed into law on December 22, 2017.


²	Working capital is defined as our current assets less our current liabilities, as presented on our Consolidated Balance Sheets.



ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto that appear elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk Factors” and elsewhere in this report.

Unless the context otherwise requires or unless otherwise indicates, references in this report to “Clearwater Paper Corporation,” “we,” “our,” “the company” and “us” refer to Clearwater Paper Corporation and its subsidiaries.

OVERVIEW

Recent Events

Strategic Capital Projects

As part of our focus on strategic capital spending on projects that we expect to provide a positive return on investments, we announced in September 2015 the construction of a continuous pulp digester project at our Lewiston, Idaho, pulp and paperboard facility. Construction of the pulp digester was completed and start-up began at the end of the third quarter of 2017. As of December 31, 2017, we have incurred a total of $139.7 million in total project costs, of which $48.9 million was incurred in 2017. We have also capitalized $6.2 million of interest related to the project to date, of which $3.5 million was capitalized in 2017. We anticipate that this project will significantly reduce air emissions, result in operational improvements through increased pulp quality and production, and lower our costs through the more efficient utilization of wood chips.

On February 8, 2017, we announced plans to build a new tissue machine and related converting equipment at a site adjacent to our existing facility in Shelby, North Carolina. The new tissue machine will produce a variety of high-quality private label premium and ultra-premium bath, paper towel and napkin products. At full production capacity, the new tissue machine is expected to produce approximately 70,000 tons of tissue products annually. The estimated cost for the project includes approximately $280 million for the tissue machine, converting equipment and buildings, and approximately $60 million for the purchase and expansion of an existing warehouse that will consolidate all southeastern warehousing in Shelby. We project that the construction of the new facility will be completed in early 2019 and will be at full production capabilities in 2020. During the year ended December 31, 2017, we spent $76.1 million on construction related activities and the new tissue machine in Shelby. We also capitalized $1.1 million of interest related to the Shelby expansion in 2017.

Facility Closure

Due to expected productivity gains from cost and optimization programs across the company, we announced the closure of our Oklahoma City, Oklahoma converting facility on November 29, 2016. The facility was closed on March 31, 2017. The prior production from this facility is now being supplied by our other facilities. We incurred $16.4 million of costs related to this closure, of which $14.7 million was incurred in 2017.

Notwithstanding the closure, we remain subject to the terms of a long-term master lease applicable to the facility, which expires in May 2023. In October 2017, as a means to significantly reduce our expected cash requirements under the master lease, we transferred to a third party substantially all of the remaining fixed assets and supplies inventory located at this facility and subleased the facility to the third party for the remaining term of the master lease. In connection with the transfer of fixed assets and execution of the sublease agreement, we recorded a loss of $4.3 million in the third quarter of 2017 related primarily to the write-down of the transferred assets to their held-for-sale value and a loss of $3.2 million in the fourth quarter of 2017 related to the execution of the sublease agreement.

Acquisition of Manchester Industries

On December 16, 2016, we acquired Manchester Industries, or Manchester, an independently-owned paperboard sales, sheeting and distribution supplier to the packaging and commercial print industries, for total consideration of $71.7 million. The addition of Manchester Industries' customers to our paperboard business extends our reach and service platform to small and mid-sized folding carton plants, by offering a range of converting services that include custom sheeting, slitting, and cutting. These converting operations include five strategically located facilities in Virginia, Pennsylvania, Indiana, Texas, and Michigan.

Selling, General and Administrative Cost Structure Changes

In the second half of 2017, we began a review of our selling, general and administrative cost structure as part of our effort to maintain our longer-term competitiveness. As a result of this review, in the fourth quarter of 2017 we began executing on a plan that is expected to result in lower selling, general and administrative expenses beginning in 2018. In 2017, we incurred $2.3 million of expenses associated with these efforts, which consisted primarily of professional services and severance expenses.

Developments and Trends in our Business

Net Sales

Prices for our consumer tissue products are affected by competitive conditions and the prices of branded tissue products. Tissue has historically been one of the strongest segments of the paper and forest products industry due to its steady demand growth. In recent years, the industry has seen an increase in ultra tissue products as industry participants have added or improved through-air-dried, or TAD, or equivalent production capacity. Our Consumer Products segment competes based on product quality, customer service and price. We deliver customer-focused business solutions by assisting in managing product assortment, category management, and pricing and promotion optimization.

Demand and pricing for consumer tissue products is currently being affected by increased supply as a result of new tissue machines that have been added or publicly announced in North America, as well as changing dynamics in the at-home tissue segment as a result of changing consumer purchasing habits, consolidations and new entrants in the consumer retail channel, and new and evolving sales and distribution channels. These changing conditions contribute to a very competitive environment for consumer tissue. We expect a reduction in our overall tissue volume sales in 2018 as a result of the loss of a portion of sales to our largest tissue customer.

Our pulp and paperboard business is affected by macro-economic conditions around the world and has historically experienced cyclical market conditions. As a result, historical prices for our products and sales volumes have been volatile. Product pricing is significantly affected by the relationship between supply and demand for our products. Product supply in the industry is influenced primarily by fluctuations in available manufacturing production, which tends to increase during periods when prices remain strong. In addition, currency exchange rates affect U.S. supplies of paperboard, as non-U.S. manufacturers are more attracted to the U.S. market when the dollar is relatively strong. Paperboard pricing increased in 2017 compared to 2016.

The markets for our products are highly competitive. Our business is capital intensive, which leads to high fixed costs and large capital outlays and generally results in continued production as long as prices are sufficient to cover variable costs. These conditions have contributed to substantial price competition, particularly during periods of reduced demand. Some of our competitors have lower production costs, greater buying power and are integrated, and, as a result, may be less adversely affected than we are by price decreases.

Net sales consist of sales of consumer tissue, paperboard, and to a lessor extent pulp, net of discounts, returns and allowances and any sales taxes collected.

Operating Costs

Prices for our principal operating cost items are variable and directly affect our results of operations. For example, as economic conditions improve, we normally would expect at least some upward pressure on our operating costs. Competitive market conditions can limit our ability to pass cost increases through to our customers. The following table shows our principal operating cost items and associated percentage of net sales for each of the past three years:



	Years Ended December 31,
	2017				2016				2015
(Dollars in thousands)	Cost³		Percentage of Sales		Cost³		Percentage of Sales		Cost		Percentage of Sales
Wages and benefits	$	277,902	16.1	%	$	297,277	17.1	%	$	291,736	16.6	%
Transportation¹	200,177		11.6		182,145		10.5		184,824		10.5
Purchased pulp	193,358		11.2		196,848		11.3		186,065		10.6
Chemicals	165,328		9.6		166,954		9.6		179,812		10.3
Chips, sawdust and logs	135,802		7.8		148,583		8.6		147,498		8.4
Depreciation	91,312		5.3		80,652		4.6		76,379		4.4
Packaging supplies	88,245		5.1		86,273		5.0		90,696		5.2
Maintenance and repairs²	88,221		5.1		95,800		5.5		90,709		5.2
Energy	87,287		5.0		87,163		5.0		100,322		5.7
	1,327,632		76.7		1,341,695		77.3		1,348,041		76.9
Other operating costs	201,989		11.7		153,932		8.9		164,808		9.4
Total cost of sales	$	1,529,621	88.4	%	$	1,495,627	86.2	%	$	1,512,849	86.3	%


¹	Includes internal and external transportation costs.


²	Excluding related labor costs.


³	Costs for Manchester are included from the December 16, 2016 acquisition date forward.

Wages and benefits. Costs related to our employees primarily consist of wages and related benefit costs and payroll taxes. Wage and benefit costs for 2017 decreased compared to 2016 primarily due to decreased labor costs resulting from the implementation of our warehouse automation project at several of our Consumer Products segment's facilities, the closure of our Oklahoma City facility and the December 2016 shutdown of two paper machines at our Neenah, Wisconsin facility, partially offset by annual wage increases and the inclusion of Manchester.

Transportation. Fuel prices, mileage driven and line-haul rates largely impact transportation costs for the delivery of raw materials to our manufacturing facilities, internal inventory transfers and delivery of our finished products to customers. Changing fuel prices particularly affect our margins for consumer products because we supply customers throughout the U.S. and transport unconverted parent rolls from our tissue mills to our tissue converting facilities. Our transportation costs for 2017 increased compared to 2016 due primarily to increased fuel prices, increased internal case shipments as a result of the closure of our Oklahoma City facility, location of inventory and customer demand, higher shipping rates due to inclement weather as a result of hurricanes in the Southeast in the third quarter of 2017, and the inclusion of Manchester.

Purchased pulp. We purchase a significant amount of the pulp needed to manufacture our consumer products, and to a lesser extent our paperboard, from external suppliers. For 2017, total purchased pulp costs decreased compared to 2016, due primarily to reduced tissue shipments and the shutdown of two higher cost paper machines at our Neenah facility, partially offset by increased purchased pulp usage because of major maintenance outages at our Idaho and Arkansas pulp and paperboard facilities and elevated pulp prices resulting from robust market demand.

Chemicals. We consume a substantial amount of chemicals in the production of pulp and paperboard, as well as in the production of TAD tissue. The chemicals we generally use include polyethylene, caustic, starch, sodium chlorate, latex and paper processing chemicals. A portion of the chemicals used in our manufacturing processes, particularly in the paperboard extrusion process, are petroleum-based and are impacted by petroleum prices.

In 2017, our chemical costs remained relatively flat compared to 2016.

Chips, sawdust and logs. We purchase chips, sawdust and logs that we use to manufacture pulp. We source residual wood fibers under both long-term and short-term supply agreements, as well as in the spot market. Chips, sawdust

and log costs decreased in 2017 compared to 2016 due to favorable pricing, lower pulp production and improved pulping yields.

Depreciation. We record substantially all of our depreciation expense associated with our plant and equipment in "Cost of Sales" on our Consolidated Statements of Operations. Depreciation expense for 2017 increased compared to 2016, primarily as a result of higher depreciation related to capital spending during recent periods, accelerating depreciation on certain Oklahoma City assets in association with the March 2017 facility closure, and the inclusion of depreciation related to Manchester.

Packaging supplies. As a significant producer of private label consumer tissue products, we package to order for retail chains, wholesalers and cooperative buying organizations. Under our agreements with those customers, we are responsible for the expenses related to the unique packaging of our products for direct retail sale to their consumers. For 2017, packaging costs increased slightly compared to 2016 due to higher poly and corrugate pricing, which was partially offset by reduced tissue shipments.

Maintenance and repairs. We regularly incur significant costs to maintain our manufacturing equipment. We perform routine maintenance on our machines and periodically replace a variety of parts such as motors, pumps, pipes and electrical parts.

Major equipment maintenance and repairs in our Pulp and Paperboard segment also require maintenance shutdowns approximately every 18 to 24 months at both our Idaho and Arkansas facilities, which increase costs and may reduce net sales in the quarters in which the major maintenance shutdowns occur. In 2017, maintenance costs decreased compared to 2016 due to reduced maintenance spending in our Consumer Products segment, primarily at our Neenah, Ladysmith, Lewiston and Oklahoma City facilities, partially offset by increased major maintenance spending in our Pulp and Paperboard segment. We do not expect any planned major maintenance activities in 2018.

In addition to ongoing maintenance and repair costs, we make capital expenditures to increase our operating capacity and efficiency, improve safety at our facilities and comply with environmental laws. In 2017, we spent $194.0 million on capital expenditures, excluding capitalized interest of $4.6 million, which included $152.6 million of capital spending on strategic projects and other projects designed to reduce future manufacturing costs and provide a positive return on investment. These strategic projects in 2017 and 2016 consist primarily of the continuous pulp digester at our Idaho pulp and paperboard facility, the expansion of our Shelby, North Carolina facility, and the warehouse automation projects at several of our Consumer Products segment's facilities. During 2016, excluding capitalized interest of $2.3 million, we spent $153.4 million on capital expenditures, which included $93.9 million of strategic capital spending.

Energy. We use energy in the form of electricity, hog fuel, steam and natural gas to operate our mills. Energy prices may fluctuate widely from period-to-period due primarily to volatility in weather and electricity and natural gas rates. We generally strive to reduce our exposure to volatile energy prices through conservation. In addition, a cogeneration facility that produces steam and electricity at our Lewiston, Idaho manufacturing site helps to lower our energy costs.

Energy costs for 2017 were flat compared to 2016 as increased usage at our Arkansas and Idaho Pulp and Paperboard facilities, due to extended turbine generator outages and higher natural gas prices, were offset by reduced usage as a result of shutdowns of two paper machines at Neenah and the Oklahoma City closure. To help mitigate our exposure to changes in natural gas prices, we use firm-price contracts to supply a portion of our natural gas requirements. As of December 31, 2017, these contracts covered approximately 17% of our expected average monthly natural gas requirements for 2018, which includes approximately 30% of the expected average monthly requirements for the first quarter. Our energy costs in future periods will depend principally on our ability to produce a substantial portion of our electricity needs internally, on changes in market prices for natural gas and on our ability to reduce our energy usage through conservation.

Other. Other costs consist of miscellaneous operating costs, which increased for the year ended December 31, 2017 compared to 2016 primarily due to the inclusion of Manchester, in addition to increases in certain other costs, most notably higher inventory costs recognized in the first quarter of 2017 resulting from planned production curtailments at the end of the fourth quarter of 2016. These increases were partially offset by insurance recoveries primarily related to claim settlements at our Las Vegas and Shelby facilities, as discussed in Note 18, "Business Interruption and Insurance Recovery."

Selling, general and administrative expenses

Selling, general and administrative expenses primarily consist of compensation and associated expenses for sales and administrative personnel, as well as commission expenses related to sales of our products.

Interest expense

Interest expense is primarily comprised of interest on our $275 million aggregate principal amount of 4.5% senior notes issued January 2013 and due 2023, which we refer to as the 2013 Notes, and interest on our $300 million aggregate principal amount of 5.375% senior notes issued in 2014 and due in 2025, which we refer to as the 2014 notes. Interest expense also includes interest on the amount drawn under our revolving credit facilities and amortization of deferred issuance costs associated with all of our notes and revolving credit facilities.

Income taxes

Income taxes are based on reported earnings and tax rates in jurisdictions in which our operations occur and offices are located, adjusted for available credits, changes in valuation allowances and differences between reported earnings and taxable income using current tax laws and rates.

The following table details our tax provision and effective tax rates for the years ended December 31, 2017, 2016 and 2015:



(Dollars in thousands)	2017			2016			2015
Income tax (benefit) provision	$	(56,385	)	$	31,112		$	36,505
Effective tax rate	(137.7		)%	38.6		%	39.5		%

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act, or the Act, which made significant changes to U.S. federal income tax law. We expect that certain aspects of these changes will positively impact our future earnings primarily due to the lower federal statutory tax rate. The benefit for 2017 was primarily driven by a $70 million tax benefit resulting from the remeasurement of our net deferred tax liabilities following passage of the Act.

As a result of the Act, we anticipate our estimated annual effective tax rate for 2018 to be approximately 26%. Given the significant changes resulting from and complexities associated with the Act, the estimated impact on our 2018 estimated rate is subject to further analysis, interpretation and clarification of the Act, which could result in changes during 2018.

RESULTS OF OPERATIONS

Our business is organized into two reporting segments: Consumer Products and Pulp and Paperboard. Intersegment costs for pulp transferred from our Pulp and Paperboard segment to our Consumer Products segment are recorded at cost, and thus no intersegment sales or cost of sales for these transfers are included in our segments' results. Our financial and other data are not necessarily indicative of our future performance.

YEAR ENDED DECEMBER 31, 2017 COMPARED TO YEAR ENDED DECEMBER 31, 2016

The following table sets forth data included in our Consolidated Statements of Operations as a percentage of net sales.



	Years Ended December 31,
(Dollars in thousands)	2017					2016
Net sales	$	1,730,408		100.0	%	$	1,734,763		100.0	%
Costs and expenses:
Cost of sales	(1,529,621		)	88.4		(1,495,627		)	86.2
Selling, general and administrative expenses	(128,459		)	7.4		(127,819		)	7.4
Total operating costs and expenses	(1,658,080		)	95.8		(1,623,446		)	93.6
Income from operations	72,328			4.2		111,317			6.4
Interest expense, net	(31,374		)	1.8		(30,651		)	1.8
Earnings before income taxes	40,954			2.4		80,666			4.6
Income tax benefit (provision)	56,385			3.3		(31,112		)	1.8
Net earnings	$	97,339		5.6	%	$	49,554		2.9	%

Net sales—Net sales for 2017 decreased by $4.4 million, or less than 1.0%, compared to 2016, primarily due to decreased shipments during 2017 in our Consumer Products segment largely offset by increased shipments in our Pulp and Paperboard segment, as a result of the inclusion of Manchester, and a favorable sales mix in both segments. These items are further discussed below under “Discussion of Business Segments."

Cost of sales—Cost of sales was 88.4% of net sales for 2017 compared to 86.2% of net sales for 2016. Cost of sales was $34.0 million higher in 2017 due primarily to increased transportation costs caused by major weather related events, additional internal case shipments as a result of the closure of our Oklahoma City facility, and higher transportation rates. Furthermore, this increase in cost of sales was impacted by higher pulp pricing, higher depreciation expense, higher costs associated with the inclusion of Manchester, and higher inventory costs in the fourth quarter of 2016 that flowed through cost of sales in first quarter of 2017. These cost increases were partially offset by lower wage and benefit costs resulting from the implementation of our warehouse automation project at several of our Consumer Products segment's facilities, the shutdown of two paper machines at our Neenah facility and the closure of our Oklahoma City facility.

Selling, general and administrative expenses—Selling, general and administrative expenses increased $0.6 million during 2017 compared to 2016. The higher expense was primarily a result of $4.3 million of asset write-downs to their held for sale value on certain Oklahoma City assets, $3.2 million of expenses associated with the execution of a sublease for the Oklahoma City facility, $3.0 million of increased amortization of intangibles resulting from our acquisition of Manchester and $2.3 million of reorganization related expenses associated with cost control measures. Additionally, during 2016, we recognized a net gain of $1.8 million as a result of the release to us of $2.3 million from an indemnity escrow account related to the December 2014 sale of our former specialty business and mills, less $0.5 million of other related settlement costs. These cost increases were partially offset by $2.8 million of mark-to-market benefit in 2017 related to our directors' common stock units, which will ultimately be settled in cash, compared to $4.8 million of mark-to-market expense in 2016, lower profit dependent accruals, and a $1.6 million pension settlement charge in 2016.

Interest expense—Interest expense increased $0.7 million during 2017, compared to 2016. The increase was driven by a larger average balance on our revolving credit facilities during 2017 compared to 2016, partially offset by capitalized interest of $4.6 million in 2017 compared to $2.3 million in 2016.

Income tax provision—We recorded an income tax benefit of $56.4 million in 2017, compared to income tax expense of $31.1 million in 2016. The benefit in 2017 was primarily the result of a $70 million tax benefit resulting from the remeasurement of our net deferred tax liabilities following the passage of the Tax Cuts and Jobs Act.

During 2017 and 2016, there were a number of items that were included in the calculation of our income tax benefit and expense that we do not believe were indicative of our core operating performance. Excluding these items, the tax rates for 2017 and 2016 would have been approximately 34% and 38%, respectively. See the section entitled "Non-GAAP Measures" on pages 31-33 of this report for a reconciliation of these adjusted income tax benefit and provision amounts to the comparable income tax provision amounts.

DISCUSSION OF BUSINESS SEGMENTS

Consumer Products



	Years Ended December 31,
(Dollars in thousands - except per ton amounts)	2017			2016
Net sales	$	941,907		$	988,380
Operating income	28,616			67,916
Percent of net sales	3.0		%	6.9		%

Shipments (short tons)
Non-retail	55,562			81,952
Retail	309,067			314,042
Total tissue tons	364,629			395,994
Converted products cases (in thousands)	51,221			52,875

Sales price (per short ton)
Non-retail	$	1,440		$	1,480
Retail	2,775			2,757
Total tissue	$	2,572		$	2,493

Net sales for our Consumer Products segment decreased by $46.5 million, or 4.7%, in 2017 compared to 2016, due to lower overall sales volume in both finished goods cases and parent rolls. The decreased parent roll sales were primarily the result of the shutdown of two paper machines at our Neenah facility in the fourth quarter of 2016. This decrease in volume was partially offset by a favorable sales mix as increased TAD bathroom tissue and household towel sales, combined with reduced parent roll sales, resulted in a 3.2% average price increase.

Segment operating income decreased $39.3 million, or 57.9%, in 2017 compared to 2016 due primarily to increased costs for transportation, pulp and packaging, higher depreciation expense, costs associated with the closure of our Oklahoma City facility, and higher inventory costs in the fourth quarter of 2016 that flowed through cost of sales in the first quarter of 2017. These cost increases were partially offset by reduced wage and benefit costs resulting from the implementation of our warehouse automation project, the shutdown of the two paper machines at our Neenah facility in the fourth quarter 2016 and the closure of our Oklahoma City facility in the first quarter of 2017 which also resulted in favorable maintenance cost comparisons in 2017.

Pulp and Paperboard



	Years Ended December 31,
(Dollars in thousands - except per ton amounts)	2017			2016
Net sales	$	788,501		$	746,383
Operating income	98,508			112,732
Percent of net sales	12.5		%	15.1		%

Paperboard shipments (short tons)	828,201			796,158
Paperboard sales price (per short ton)	$	952		$	937

Net sales for our Pulp and Paperboard segment increased by $42.1 million, or 5.6%, in 2017 compared to 2016. The increase was primarily due to the inclusion of Manchester and incremental volumes with a higher net selling price resulting from a favorable sales mix.

Operating income for the segment decreased $14.2 million, or 12.6%, during 2017 compared to 2016, due primarily to increased costs for purchased pulp, higher natural gas prices and increased electrical usage due to extended turbine generator outages at our Arkansas and Idaho facilities. Additionally, depreciation and amortization costs increased as a result of the acquisition of Manchester and the completion of the continuous pulp digester at our Idaho facility. These cost increases were partially offset by improved pulp yields and reduced wood fiber prices at our Arkansas facility.

YEAR ENDED DECEMBER 31, 2016 COMPARED TO YEAR ENDED DECEMBER 31, 2015

The following table sets forth data included in our Consolidated Statements of Operations as a percentage of net sales.



	Years Ended December 31,
(Dollars in thousands)	2016					2015
Net sales	$	1,734,763		100.0	%	$	1,752,401		100.0	%
Costs and expenses:
Cost of sales	(1,495,627		)	86.2		(1,512,849		)	86.3
Selling, general and administrative expenses	(127,819		)	7.4		(115,882		)	6.6
Total operating costs and expenses	(1,623,446		)	93.6		(1,628,731		)	92.9
Income from operations	111,317			6.4		123,670			7.1
Interest expense, net	(30,651		)	1.8		(31,182		)	1.8
Earnings before income taxes	80,666			4.6		92,488			5.3
Income tax provision	(31,112		)	1.8		(36,505		)	2.1
Net earnings	$	49,554		2.9	%	$	55,983		3.2	%

Net sales—Net sales for 2016 decreased by $17.6 million, or 1.0%, compared to 2015, primarily due to lower average paperboard net selling prices due to increased competition and a mix shift in paperboard. These unfavorable comparisons were partially offset by an increase in retail tissue shipments. These items are further discussed below under “Discussion of Business Segments."

Cost of sales—Cost of sales was 86.2% of net sales for 2016 compared to 86.3% of net sales for 2015. Our overall cost of sales was $17.2 million lower in 2016 due primarily to reduced energy and chemical pricing in addition to lower overall packaging costs and transportation rates and operational improvements from productivity initiatives. During 2016, we also received a partial reimbursement of previously incurred costs related to performance issues with the recovery boiler at our Arkansas pulp and paperboard facility during the second quarter of 2013 through the first quarter of 2015. These favorable comparisons were partially offset by higher costs for purchased pulp and maintenance, as well as $3.5 million of costs, net of insurance received, as a result of a July 2016 unplanned power outage at our Idaho facility, and a $1.9 million pension settlement charge in the third quarter of 2016.

Selling, general and administrative expenses—Selling, general and administrative expenses increased $11.9 million during 2016 compared to 2015. The higher expense was primarily a result of $4.8 million of mark-to-market expense in 2016 related to our directors' common stock units, which will ultimately be settled in cash, compared to $4.1 million of mark-to-market benefit in 2015, $2.7 million of costs associated with our acquisition of Manchester in the fourth quarter of 2016, a $1.6 million pension settlement charge in the third quarter of 2016, and higher depreciation expense and profit dependent compensation accruals in 2016. These were partially offset by $2.0 million of non-routine legal expenses and settlement costs in 2015, including those related to a dispute involving one of our closed facilities, as well as $1.4 million of reorganization related expenses in 2015. Additionally, during 2016, we recognized a net gain of $1.8 million as a result of the release to us of $2.3 million from an indemnity escrow account related to the December 2014 sale of our former specialty business and mills, less $0.5 million of other related settlement costs. During 2015, we recognized a $1.3 million gain primarily related to the release of restricted cash balances pertaining to the settlement of a working capital escrow account established in connection with the sale of our former specialty business and mills.

Interest expense—Interest expense decreased $0.9 million during 2016, compared to 2015. The decrease was attributable to capitalized interest of $2.3 million in 2016 compared to $0.4 million in 2015, partially offset by higher interest expense in 2016 associated with additional borrowings on our revolving credit facilities.

Debt retirement costs—Debt retirement costs for 2016 consist of the write-off of $0.4 million of deferred finance costs in connection with the refinancing of our $125 million senior secured line of credit with two new senior secured revolving credit facilities that provide for up to $300 million in revolving loans.

Income tax provision—We recorded an income tax provision of $31.1 million in 2016, compared to $36.5 million in 2015.

During 2016 and 2015, there were a number of items that were included in the calculation of our income tax provision that we do not believe were indicative of our core operating performance. Excluding these items, the adjusted tax rates for both 2016 and 2015 would have been approximately 38%. See the section entitled "Non-GAAP Measures" on pages 31-33 of this report for a reconciliation of these adjusted income tax benefit and provision amounts to the comparable income tax provision amounts.

DISCUSSION OF BUSINESS SEGMENTS

Consumer Products



	Years Ended December 31,
(Dollars in thousands - except per ton amounts)	2016			2015
Net sales	$	988,380		$	959,894
Operating income	67,916			55,704
Percent of net sales	6.9		%	5.8		%

Shipments (short tons)
Non-retail	81,952			90,178
Retail	314,042			292,438
Total tissue tons	395,994			382,616
Converted products cases (in thousands)	52,875			52,149

Sales price (per short ton)
Non-retail	$	1,480		$	1,469
Retail	2,757			2,825
Total tissue	$	2,493		$	2,505

Net sales for our Consumer Products segment increased by $28.5 million, or 3.0%, in 2016 compared to 2015, due to higher retail sales volumes, partially offset by decreases in parent roll sales. The increase in retail sales was partially offset by a decrease in sales price caused by a mix shift that resulted in a lower average net selling price. The decrease in parent roll sales was the result of increased finished goods sales and inventory balancing. Average selling prices decreased due to competitive pricing and product and customer mix changes.

The segment reported $67.9 million in operating income for 2016, compared to $55.7 million in 2015. The increase was primarily driven by the increase in net sales, which contributed to favorable per ton operating costs and operating income, as well as by lower packaging costs, lower energy costs due to favorable natural gas pricing in 2016, and operational improvements from productivity initiatives. In addition, a net gain of $1.8 million was recorded in 2016 as a result of the release to us of a $2.3 million indemnity escrow account related to the sale of our former specialty business and mills, less $0.5 million of other related settlement costs.

Pulp and Paperboard



	Years Ended December 31,
(Dollars in thousands - except per ton amounts)	2016			2015
Net sales	$	746,383		$	792,507
Operating income	112,732			120,861
Percent of net sales	15.1		%	15.3		%

Paperboard shipments (short tons)	796,158			796,733
Paperboard sales price (per short ton)	$	937		$	990

Net sales for our Pulp and Paperboard segment decreased by $46.1 million, or 5.8%, in 2016 compared to 2015. The decrease was due to lower net selling prices, primarily due to a mix shift from higher priced extruded paperboard sales toward non-extruded paperboard sales.

Operating income for the segment decreased $8.1 million, or 6.7%, during 2016 compared to 2015, due primarily to decreased net sales. This unfavorable comparison was partially offset by lower operating costs due to lower energy costs resulting from decreased natural gas pricing, lower chemical usage and pricing, lower transportation costs due to lower line haul rates and fuel pricing, reduced planned major maintenance and operational improvements from productivity initiatives. These lower operating costs were partially offset by $3.5 million of net costs incurred due to an unplanned power outage at the Lewiston facility in the third quarter of 2016.

NON-GAAP MEASURES

We use earnings before interest (including debt retirement costs), tax, depreciation and amortization, or EBITDA, and EBITDA adjusted for certain items, or Adjusted EBITDA, and Adjusted income tax provision as supplemental performance measures that are not required by, or presented in accordance with GAAP. EBITDA and Adjusted EBITDA should not be considered as alternatives to net earnings, operating income or any other performance measure derived in accordance with GAAP, alternatives to cash flows from operating activities, or a measure of our liquidity or profitability. In addition, our calculation of EBITDA and Adjusted EBITDA may or may not be comparable to similarly titled measures used by other companies.

EBITDA and Adjusted EBITDA have important limitations as analytical tools, and should not be considered in isolation, or as a substitute for any of our results as reported under GAAP. Some of these limitations are:


▪	EBITDA and Adjusted EBITDA do not reflect our cash expenditures for capital assets;


▪	EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital requirements;


▪	EBITDA and Adjusted EBITDA do not include cash pension payments;


▪	EBITDA and Adjusted EBITDA exclude certain tax payments that may represent a reduction in cash available to us;


▪	EBITDA and Adjusted EBITDA do not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our debt;


▪	although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and


▪	other companies, including other companies in our industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure.

We present EBITDA, Adjusted EBITDA and Adjusted income tax provisions because we believe they assist investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use EBITDA and Adjusted EBITDA: (i) as factors in evaluating management’s performance when determining incentive compensation, (ii) to evaluate the effectiveness of our business strategies, and (iii) because our credit agreement and the indentures governing the 2013 Notes use metrics similar to EBITDA to measure our compliance with certain covenants.

The following table provides our EBITDA and Adjusted EBITDA for the periods presented, as well as a reconciliation to net earnings:



	Years Ended December 31,
(In thousands)	2017			2016			2015
Net earnings	$	97,339		$	49,554		$	55,983
Interest expense, net ¹	31,374			30,651			31,182
Income tax (benefit) provision	(56,385		)	31,112			36,505
Depreciation and amortization expense²	104,990			91,090			84,732
EBITDA	$	177,318		$	202,407		$	208,402
Directors' equity-based compensation (benefit) expense	(2,833		)	4,779			(4,073		)
Costs associated with Oklahoma City facility closure³	11,055			318			—
Reorganization related expenses associated with SG&A cost control measures	2,263			—			—
Costs associated with Long Island facility closure	1,443			1,891			2,463
Manchester Industries acquisition related expenses	220			2,665			—
Write-off of assets as a result of Warehouse Automation project	41			—			—
Reorganization related expense	—			—			1,470
Pension settlement expense	—			3,482			—
Costs associated with Neenah paper machines shutdown	—			1,049			—
Gain associated with the sale of the specialty mills, net	—			(1,755		)	(1,267		)
Legal expenses and settlement costs	—			—			1,972
Costs associated with labor agreement	—			—			1,730
Adjusted EBITDA	$	189,507		$	214,836		$	210,697


¹	Interest expense, net for the year ended December 31, 2016 includes debt retirement costs of $0.4 million.


²	Depreciation and amortization expense for the years ended December 31, 2017 and 2016 includes $3.7 million and $1.3 million, respectively, of accelerated depreciation associated with the Oklahoma City facility closure.


³	Costs associated with the Oklahoma City facility closure for the twelve months ended December 31, 2017 include $4.3 million of loss on the write-down of assets to their held for sale value and $3.2 million of expenses associated with the execution of a sublease for the facility.

The following table provides our Adjusted income tax provisions for the years ended December 31, 2017, 2016 and 2015, as well as a reconciliation to income tax benefit (provision):



	Years Ended December 31,
(In thousands)	2017			2016			2015
GAAP income tax benefit (provision)	$	56,385		$	(31,112	)	$	(36,505	)
Adjustments, tax impact:
Federal tax rate change¹	(70,055		)	—			—
Directors' equity-based compensation benefit (expense)	952			(1,693		)	1,288
Costs associated with Oklahoma City facility closure	(4,977		)	(589		)	—
Reorganization related expenses associated with SG&A cost control measures	(757		)	—			—
Costs associated with Long Island facility closure	(686		)	(672		)	(780		)
Accelerated depreciation of assets as a result of warehouse automation project	(121		)	—			—
Manchester Industries acquisition related expenses	(74		)	(465		)	—
Write-off of assets as a result of warehouse automation project	(14		)	—			—
Reorganization related expenses	—			—			(470		)
Costs associated with Neenah paper machines shutdown	—			(371		)	—
Pension settlement expense	—			(1,242		)	—
Gain associated with the sale of the specialty mills	—			626			395
Discrete tax items related to foreign tax credits	—			—			1,309
Legal expenses and settlement costs	—			—			(626		)
Costs associated with labor agreement	—			—			(533		)
Adjusted income tax provision	$	(19,347	)	$	(35,518	)	$	(35,922	)


¹	The benefit in 2017 is primarily due to the remeasurement of deferred tax liabilities as a result of the Act signed into law on December 22, 2017. The resulting net tax benefit is excluded from our adjusted non-GAAP earnings.

LIQUIDITY AND CAPITAL RESOURCES

The following table presents information regarding our cash flows for the years ended December 31, 2017, 2016 and 2015.

Cash Flows Summary



	Years Ended December 31,
(In thousands)	2017			2016			2015
Net cash flows from operating activities	$	177,670		$	172,751		$	159,675
Net cash flows from investing activities	(198,797		)	(222,506		)	(78,548		)
Net cash flows from financing activities	13,864			67,146			(102,848		)

Operating Activities—Net cash flows from operating activities for 2017 increased by $4.9 million compared to 2016. The increase in operating cash flows was driven by $21.8 million of cash flows generated from changes in working capital in 2017, largely due to an increase in accounts payable and accrued liabilities, compared to $3.5 million of cash flows for changes in working capital in 2016. This increase in net cash flows from operating activities was partially offset by a net $10.6 million increase in taxes receivable in 2017, compared to a $5.1 million decrease in taxes receivable in 2016. The change in the taxes receivable balance for 2017 was due to increased tax depreciation relating to our strategic capital projects which lessened our tax burden and increased the amount of refund we expect to receive.

Net cash flows from operating activities for 2016 increased by $13.1 million compared to 2015. The increase in operating cash flows was driven by an increase in earnings, after adjusting for noncash related items, of $7.0 million. Additionally, there was an increase due to a $5.1 million decrease in taxes receivable in 2016 compared to a net $13.6 million increase in taxes receivable in 2015. These increases in cash flows from operating activities were partially offset by

$3.5 million of cash used for changes in working capital in 2016, compared to $14.8 million of cash flows generated from working capital changes in 2015.

Investing Activities—Net cash flows used for investing activities decreased $23.7 million in 2017 compared to 2016. This decrease was largely driven by the acquisition of Manchester Industries in 2016 for $67.4 million, net of cash acquired, partially offset by a $44.4 million increase in cash spent for plant and equipment in 2017, which increased due to our investments in strategic capital projects, including our continuous pulp digester project at our Lewiston, Idaho facility and our new tissue machine and related converting equipment in Shelby, North Carolina.

Net cash flows used for investing activities increased $144.0 million in 2016 compared to 2015. This was largely driven by the acquisition of Manchester in 2016. Cash spent for plant and equipment increased $26.4 million compared to 2015 due to our investments in strategic capital projects, including our continuous pulp digester project at our Lewiston facility. In addition, net investing cash flows were impacted by the conversion of $0.3 million of short-term investments into cash during 2016, compared to the conversion of $49.8 million of short-term investments into cash during 2015.

Financing Activities—Net cash flows from financing activities were $13.9 million for 2017, and were largely driven by net borrowings on our revolving credit facilities of $20.0 million partially offset by $4.9 million in repurchases of our outstanding common stock pursuant to our most recent $100 million stock repurchase program.

Net cash flows from financing activities were $67.1 million for 2016 and were largely driven by net borrowings on our revolving credit facilities of $135.0 million, partially offset by $65.3 million in repurchases of our outstanding common stock pursuant to our most recent $100 million stock repurchase program.

Capital Resources

Due to the competitive and cyclical nature of the markets in which we operate, there is uncertainty regarding the amount of cash flows we will generate during the next twelve months. However, we believe that our cash flows from operations, our cash on hand and our borrowing capacity under our senior secured revolving credit facilities will be adequate to fund debt service requirements and provide cash required to support our ongoing operations, capital expenditures, stock repurchase program and working capital needs for the next twelve months.

We may choose to refinance all or a portion of our indebtedness on or before maturity. We cannot be certain that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

At December 31, 2017 and 2016, our financial position included gross debt of $730.0 million and $710.0 million, respectively. Stockholders’ equity at December 31, 2017 was $575.4 million, compared to $469.9 million at the end of 2016. Our total debt to total capitalization, excluding accumulated other comprehensive loss, was 53.9% at December 31, 2017, compared to 57.5% at December 31, 2016.

Debt Arrangements

$300 Million Senior Notes Due 2025

On July 29, 2014, we issued $300 million aggregate principal amount of Senior Notes due 2025, which we refer to as the 2014 Notes, that mature on February 1, 2025, have an interest rate of 5.375% and were issued at their face value. The issuance of these notes generated net proceeds of approximately $298 million after deducting offering expenses.

Our 2018 expected debt service obligation related to the 2014 Notes, consisting of cash payments for interest, is $16.1 million.

$275 Million Senior Notes Due 2023

On February 22, 2013, we issued $275 million aggregate principal amount of 4.5% senior notes due 2023, which we refer to as the 2013 Notes.

Our 2018 expected debt service obligation related to the 2013 Notes, consisting of cash payments for interest, is $12.4 million.

Revolving Credit Facilities

Our senior secured revolving credit facilities provide in the aggregate, on a combined basis, for the extension of up to $300 million in revolving loans under: (i) a $200 million credit agreement with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (the “Commercial Credit Agreement”); and (ii) a $100 million credit agreement with Northwest Farm Credit Services, PCA, as administrative agent, and the lenders party thereto (the “Farm Credit Agreement”). We refer to both of these credit agreements collectively as the “Credit Agreements.” The revolving credit facilities provided under the Credit Agreements mature on October 31, 2021.

As of December 31, 2017, there were $155 million of borrowings outstanding under the Credit Agreements and we were in compliance with the covenants contained in the Credit Agreements. The borrowings outstanding under the Credit Agreements as of December 31, 2017, consisted of short-term base and LIBOR rate loans and no term loans.

Please see Part II, Note 10, "Debt" of this report for information relating to our senior notes and revolving credit facilities.

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations as of December 31, 2017. Portions of the amounts shown are reflected in our financial statements and accompanying notes, as required by GAAP. See the footnotes following the table for information regarding the amounts presented and for references to relevant financial statement notes that include a detailed discussion of the item.



	Payments Due by Period
(In thousands)	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Revolving lines of credit	$	155,000	$	155,000	$	—	$	—	$	—
Long-term debt¹	575,000		—		—		—		575,000
Interest on long-term debt¹	189,000		28,500		57,000		57,000		46,500
Capital leases²	37,540		2,649		5,359		5,353		24,179
Operating leases²	75,340		12,074		18,500		15,180		29,586
Purchase obligations³	329,875		280,947		40,019		3,552		5,357
Other obligations^4,5	169,477		97,469		16,377		10,824		44,807
Total	$	1,531,232	$	576,639	$	137,255	$	91,909	$	725,429


¹	Included above are the principal and interest payments that were due, as of December 31, 2017, on our 2013 and 2014 Notes. For more information regarding specific terms of our long-term debt, see Note 10, “Debt,” in the notes to the consolidated financial statements.


²	These amounts represent our minimum capital lease payments, including amounts representing interest, and our minimum operating lease payments. See Note 17, “Commitments and Contingencies,” in the notes to the consolidated financial statements.


³	Purchase obligations consist primarily of contracts for the purchase of raw materials (primarily pulp) from third parties, trade accounts payable as of December 31, 2017, contracts for outside wood chipping and contracts with natural gas and electricity providers.


⁴	Included in other obligations are accrued liabilities and accounts payable (other than trade accounts payable) as of December 31, 2017, liabilities associated with supplemental pension and deferred compensation arrangements, and estimated payments on postretirement employee benefit plans.


⁵	Total excludes $2.8 million of unrecognized tax benefits due to the uncertainty of timing of payment. See Note 8, “Income Taxes,” in the notes to the consolidated financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on our financial conditions or consolidated financial statements.

ENVIRONMENTAL

Our operating facilities are subject to rigorous federal and state environmental regulation governing air emissions, wastewater discharges, and solid and hazardous waste management. Our goal is continuous compliance with all environmental regulations and we regularly monitor our activities to ensure compliance with all pertinent rules and requirements. Compliance with environmental regulations is a significant factor in our business and requires periodic capital expenditures as well as additional operating costs as rules change.

Concern over climate change, including the impact of global warming, may lead to future regulations. We believe there are no U.S. rules currently proposed that would have a material impact on our operations.

Our facilities are currently in substantial compliance with applicable environmental laws and regulations. We cannot be certain, however, that situations that may give rise to material environmental liabilities will not be discovered or that the enactment of new environmental laws or regulations or changes in existing laws or regulations will not require significant expenditures by us.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires our management to select and apply accounting policies that best provide the framework to report the results of operations and financial position. The selection and application of those policies requires management to make difficult, subjective and complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. As a result, it is possible that materially different amounts would be reported under different conditions or using different assumptions.

See Note 3, “Recently Adopted and Prospective Accounting Standards” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information regarding recently adopted and new accounting pronouncements.

Goodwill.

As of December 31, 2017, we had $244.2 million of goodwill included on our Consolidated Balance Sheet. Goodwill is not amortized but tested for impairment annually each November 1^st and at any time when events suggest impairment may have occurred. When required, our goodwill impairment test is performed by comparing the fair value of the reporting unit to its carrying value. We incorporate assumptions involving forecasts, future growth rates, discount rates and tax rates in projecting the future cash flows. In the event the carrying value exceeds the fair value of the reporting unit, an impairment loss would be recognized to the extent the carrying amount of the reporting unit’s goodwill exceeds its implied fair value.

As of our November 1, 2017 analysis, we had an excess of fair value of both of the Consumer Products and Pulp and Paperboard reporting units compared to their respective carrying values. One of the primary assumptions in our annual impairment analysis is our EBITDA forecast. Decreasing the EBITDA forecast by 15% resulted in an excess of the carrying amount of each of our reporting unit’s goodwill compared to their respective implied fair values. Refer to Note 7, "Goodwill and Intangible Assets" to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for additional information.

Pension and postretirement employee benefits. The determination of pension plan expense and the requirements for funding our pension plans are based on a number of actuarial assumptions. Note 13, "Savings, Pension and Other Postretirement Employee Benefit Plans," in the notes to the consolidated financial statements includes information for the three years ended December 31, 2017, 2016 and 2015, on the components of pension expense and OPEB income and the underlying actuarial assumptions used to calculate periodic expense, as well as the funded status for our pension and OPEB plans as of December 31, 2017 and 2016.

The assumption that has the largest impact on the determination of plan expense and the funded status of our pension and OPEB plans is the discount rate. The discount rate used in the determination of pension benefit obligations and pension expense is determined based on a review of long-term high-grade bonds and management’s expectations. At December 31, 2017, we calculated obligations using a 3.90% discount rate. The discount rates used at December 31, 2016 and 2015 were 4.45% and 4.70%, respectively. An increase in the discount rate, all other assumptions remaining the same, would decrease pension plan expense, and conversely, a decrease would increase plan expense. As an indication of the sensitivity that pension expense has to the discount rate assumption, a 25 basis point change in the discount rate would affect annual plan expense by approximately $0.6 million. Additionally, a 25 basis point decrease in the discount rate would increase the pension benefit obligation by approximately $9.0 million.

The discount rates used to calculate OPEB obligations, which were determined using the same methodology we used for our pension plans, were 3.95%, 4.30% and 4.50% at December 31, 2017, 2016 and 2015, respectively. As an indication of the sensitivity that OPEB income has to the discount rate assumption, a 25 basis point change in the discount rate would affect plan income by approximately $0.1 million. Additionally, a 25 basis point decrease in the discount rate would increase the OPEB benefit obligation by approximately $1.5 million.

Our company-sponsored pension plans were underfunded by a net $6.8 million at December 31, 2017 and $18.8 million at December 31, 2016. Our OPEB plans are unfunded and represent a liability of $65.1 million and $69.1 million as of December 31, 2017 and 2016.



ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risks

Interest Rate Risk

Our exposure to market risks on financial instruments includes interest rate risk on our secured revolving credit facilities. As of December 31, 2017, there were $155.0 million in borrowings outstanding under our revolving credit facilities. The interest rates applied to borrowings under the credit facilities are adjusted often and therefore react quickly to any movement in the general trend of market interest rates. For example, a one percentage point increase or decrease in interest rates, based on outstanding credit facilities' borrowings of $155.0 million, would have a $1.55 million annual effect on interest expense. During 2017, we alleviated the effect of short-term interest rate fluctuations through the use of a short-term LIBOR Rate option for $100.0 million of our overall outstanding credit facilities' borrowings balance of $155.0 million.

We currently do not attempt to alleviate the effects of short-term interest rate fluctuations on our credit facilities' borrowings through the use of derivative financial instruments.

Commodity Risk

We are exposed to market risk for changes in natural gas commodity pricing, which we partially mitigate through the use of firm price contracts for a portion of the natural gas requirements of our manufacturing facilities. As of December 31, 2017, these contracts covered approximately 17% of the expected average monthly requirements for 2018, including approximately 30% of the expected average monthly requirements for the first quarter of 2018.

Foreign Currency Risk

We have minimal foreign currency exchange risk. Nearly all of our international sales are denominated in U.S. dollars.

Quantitative Information about Market Risks



	Expected Maturity Date
(Dollars in thousands)	2018			2019			2020			2021			2022			Thereafter			Total
Long-term debt:
Fixed rate	$	—		$	—		$	—		$	—		$	—		$	575,000		$	575,000
Average interest rate	—		%	—		%	—		%	—		%	—		%	4.957		%	4.957		%
Fair value at December 31, 2017																			$	569,250



ITEM 8.
Financial Statements and Supplementary Data

Index to Consolidated Financial Statements



	PAGE NUMBER
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015	39
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015	40
Consolidated Balance Sheets at December 31, 2017 and 2016	41
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015	42
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015	43
Notes to Consolidated Financial Statements	44-80
Reports of Independent Registered Public Accounting Firm	81-84

Financial Statement Schedules:
All schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the notes thereto.

CLEARWATER PAPER CORPORATION

Consolidated Statements of Operations

(Dollars in thousands – except per-share amounts)



	For The Years Ended December 31,
	2017			2016			2015
Net sales	$	1,730,408		$	1,734,763		$	1,752,401
Costs and expenses:
Cost of sales	(1,529,621		)	(1,495,627		)	(1,512,849		)
Selling, general and administrative expenses	(128,459		)	(127,819		)	(115,882		)
Total operating costs and expenses	(1,658,080		)	(1,623,446		)	(1,628,731		)
Income from operations	72,328			111,317			123,670
Interest expense, net	(31,374		)	(30,651		)	(31,182		)
Earnings before income taxes	40,954			80,666			92,488
Income tax benefit (provision)	56,385			(31,112		)	(36,505		)
Net earnings	$	97,339		$	49,554		$	55,983
Net earnings per common share:
Basic	$	5.91		$	2.91		$	2.98
Diluted	5.88			2.90			2.97

The accompanying notes are an integral part of these consolidated financial statements.

CLEARWATER PAPER CORPORATION

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)



	For The Years Ended December 31,
	2017			2016			2015
Net earnings	$	97,339		$	49,554		$	55,983
Other comprehensive income (loss), net of tax:
Defined benefit pension and other postretirement employee benefits:
Net gain arising during the period, net of tax of $2,409, $248, and $5,814	6,745			379			8,944
Amortization of actuarial loss included in net periodic cost, net of tax of $1,305, $1,576, and $4,972	1,951			2,321			7,647
Amortization of prior service credit included in net periodic cost, net of tax of $(601), $(669), and $(829)	(926		)	(1,021		)	(1,276		)
Settlement, net of tax of $-, $1,366, and $-	—			2,116			—
Other comprehensive income, net of tax	7,770			3,795			15,315
Comprehensive income	$	105,109		$	53,349		$	71,298

The accompanying notes are an integral part of these consolidated financial statements.

CLEARWATER PAPER CORPORATION

Consolidated Balance Sheets

(Dollars in thousands – except share data)



	At December 31,
	2017			2016
ASSETS
Current assets:
Cash and cash equivalents	$	15,738		$	23,001
Receivables, net	142,065			147,074
Taxes receivable	20,282			9,709
Inventories	266,043			258,029
Other current assets	8,661			8,682
Total current assets	452,789			446,495
Property, plant and equipment, net	1,050,982			945,328
Goodwill	244,161			244,283
Intangible assets, net	32,542			40,485
Other assets, net	21,778			7,751
TOTAL ASSETS	$	1,802,252		$	1,684,342
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Borrowings under revolving credit facilities	$	155,000		$	135,000
Accounts payable and accrued liabilities	256,621			223,699
Current liability for pensions and other postretirement employee benefits	7,631			7,821
Total current liabilities	419,252			366,520
Long-term debt	570,524			569,755
Liability for pensions and other postretirement employee benefits	72,469			81,812
Other long-term obligations	43,275			41,776
Accrued taxes	2,770			2,434
Deferred tax liabilities	118,528			152,172
TOTAL LIABILITIES	1,226,818			1,214,469
Stockholders’ equity:
Preferred stock, par value $0.0001 per share, 5,000,000 authorized shares, no shares issued	—			—
Common stock, par value $0.0001 per share, 100,000,000 authorized shares-16,447,898 and 24,223,191 shares issued	2			2
Additional paid-in capital	1,161			347,080
Retained earnings	618,254			569,861
Treasury stock, at cost, common shares – 0 and 7,736,255 shares	—			(395,317		)
Accumulated other comprehensive loss, net of tax	(43,983		)	(51,753		)
Total stockholders’ equity	575,434			469,873
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,802,252		$	1,684,342

The accompanying notes are an integral part of these consolidated financial statements.

CLEARWATER PAPER CORPORATION

Consolidated Statements of Cash Flows



(in thousands)	For The Years Ended December 31,
	2017			2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings	$	97,339		$	49,554		$	55,983
Adjustments to reconcile net earnings to net cash flows from operating activities:
Depreciation and amortization	104,990			91,090			84,732
Equity-based compensation expense	3,620			12,385			4,557
Deferred taxes	(40,589		)	18,327			16,081
Employee benefit plans	(4,371		)	(1,979		)	3,011
Deferred issuance costs on debt	1,199			1,242			928
Disposal of plant and equipment, net	4,053			1,381			1,492
Other non-cash activity	1,750			758			(1,020		)
Changes in working capital, net of acquisition	21,761			(3,462		)	14,841
Change in taxes receivable, net	(10,573		)	5,142			(13,596		)
Excess tax benefits from equity-based payment arrangements	—			(312		)	(1,433		)
Funding of qualified pension plans	—			—			(3,179		)
Other, net	(1,509		)	(1,375		)	(2,722		)
Net cash flows from operating activities	177,670			172,751			159,675
CASH FLOWS FROM INVESTING ACTIVITIES
Change in short-term investments, net	—			250			49,750
Additions to property, plant and equipment	(199,748		)	(155,349		)	(128,902		)
Acquisition of Manchester Industries, net of cash acquired	—			(67,443		)	—
Proceeds from sale of assets	951			36			604
Net cash flows from investing activities	(198,797		)	(222,506		)	(78,548		)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock	(4,875		)	(65,327		)	(99,990		)
Borrowings on revolving credit facilities	298,308			1,273,959			—
Repayments of borrowings on revolving credit facilities'	(278,308		)	(1,138,959		)	—
Payments for debt issuance costs	—			(1,906		)	—
Payment of tax withholdings on equity-based payment arrangements	(1,127		)	(933		)	(4,152		)
Excess tax benefits from equity-based payment arrangements	—			312			1,433
Other, net	(134		)	—			(139		)
Net cash flows from financing activities	13,864			67,146