FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2005
OR
[ ]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: 1-13923
WAUSAU PAPER CORP.
(Exact name of registrant as specified in charter)
WISCONSIN 39-0690900
(State of incorporation) (I.R.S. Employer Identification
Number)
100 PAPER PLACE
MOSINEE, WISCONSIN 54455-9099
(Address of principal executive office)
Registrant's telephone number, including area code: 715-693-4470
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 report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No ____
The number of common shares outstanding at July 29, 2005 was 51,471,251.
WAUSAU PAPER CORP.
AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations, Three Months and Six Months Ended
June 30, 2005 (unaudited) and
June 30, 2004 (unaudited) 1
Condensed Consolidated Balance
Sheets, June 30, 2005 (unaudited)
and December 31, 2004 (derived from
audited financial statements) 2
Condensed Consolidated Statements
of Cash Flows, Six Months Ended
June 30, 2005 (unaudited) and
June 30, 2004 (unaudited) 3
Notes to Condensed Consolidated
Financial Statements (unaudited) 3-9
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 10-18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits 20
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Wausau Paper Corp. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
(all amounts in thousands, except per share data) 2005 2004 2005 2004
NET SALES $275,291 $264,109 $543,032 $515,924
Cost of products sold 258,445 235,973 503,051 461,090
GROSS PROFIT 16,846 28,136 39,981 54,834
Selling and administrative expenses 18,376 19,754 35,903 38,638
Restructuring expense 177 0 177 0
OPERATING (LOSS) PROFIT (1,707) 8,382 3,901 16,196
Interest expense (2,687) (2,550) (5,337) (5,077)
Other income, net 122 98 237 292
(LOSS) EARNINGS BEFORE INCOME TAXES (4,272) 5,930 (1,199) 11,411
(Credit) provision for income taxes (1,581) 2,193 (444) 4,222
NET (LOSS) EARNINGS ($ 2,691) $ 3,737 ($ 755) $ 7,189
NET (LOSS) EARNINGS PER SHARE-BASIC ($ 0.05) $ 0.07 ($ 0.01) $ 0.14
NET (LOSS) EARNINGS PER SHARE-DILUTED ($ 0.05) $ 0.07 ($ 0.01) $ 0.14
Weighted average shares outstanding-basic 51,589 51,663 51,640 51,640
Weighted average shares outstanding-diluted 51,589 51,929 51,640 51,867
Dividends declared per common share $ 0.17 $ 0.17 $ 0.17 $ 0.17
See Notes to Condensed Consolidated Financial Statements.
1
Wausau Paper Corp. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(all dollar amounts in thousands) JUNE 30, December 31,
2005 2004
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 20,435 $ 51,914
Receivables, net 107,395 95,731
Inventories 143,494 126,932
Deferred income taxes 13,149 8,592
Other current assets 3,398 4,123
Total current assets 287,871 287,292
Property, plant and equipment, net 536,347 551,160
Other assets 45,812 43,782
TOTAL ASSETS $ 870,030 $ 882,234
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 89 $ 115
Accounts payable 85,972 74,558
Accrued and other liabilities 61,961 73,077
Total current liabilities 148,022 147,750
Long-term debt 161,449 161,833
Deferred income taxes 105,226 105,885
Postretirement benefits 58,942 57,303
Pension 28,948 30,996
Other noncurrent liabilities 22,488 21,375
Total liabilities 525,075 525,142
Stockholders' equity 344,955 357,092
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 870,030 $ 882,234
See Notes to Condensed Consolidated Financial Statements.
2
Wausau Paper Corp. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
(all dollar amounts in thousands) 2005 2004
Net cash (used in) provided by operating activities ($ 4,498) $ 40,085
Cash flows from investing activities:
Capital expenditures (15,631) (9,471)
Proceeds from property, plant and equipment disposals 222 12
Cash used in investing activities ( 15,409) (9,459)
Cash flows from financing activities:
Payments under capital lease obligation (47) (55)
Dividends paid (8,787) (8,773)
Payments for purchase of company stock (2,738) 0
Proceeds from stock option exercise 0 1,279
Cash used in financing activities (11,572) (7,549)
Net (decrease) increase in cash and cash equivalents (31,479) 23,077
Cash and cash equivalents, beginning of period 51,914 36,305
Cash and cash equivalents, end of period $20,435 $ 59,382
Interest-net of amount capitalized $ 5,227 $ 5,330
Income taxes paid 9,102 3,597
See Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. The condensed consolidated financial statements include the results of
Wausau Paper Corp. and our consolidated subsidiaries. All significant
intercompany transactions have been eliminated. The accompanying
condensed financial statements, in the opinion of management, reflect
all adjustments, which are normal, and recurring in nature and which
are necessary for a fair statement of the results for the periods
presented. Results for the interim period are not necessarily
indicative of future results. In all regards, the financial statements
have been presented in accordance with accounting principles generally
accepted in the United States of America. Refer to notes to the
financial statements, which appear in the Annual Report on Form 10-K
for the year ended December 31, 2004, for the Company's accounting
policies and other disclosures, which are pertinent to these
statements.
3
Note 2. Basic and diluted (loss) earnings per share are reconciled as follows:
(all amounts in thousands, Three Months Six Months
except per share data) Ended June 30, Ended June 30,
2005 2004 2005 2004
Net (loss) earnings ($ 2,691) $ 3,737 ($ 755) $ 7,189
Basic weighted average common
shares outstanding 51,589 51,663 51,640 51,640
Dilutive securities:
Stock compensation plans 0 266 0 227
Dilutive weighted average common
shares outstanding 51,589 51,929 51,640 51,867
Net (loss) earnings per share-basic ($ 0.05) $ 0.07 ($ 0.01) $ 0.14
Net (loss) earnings per share-diluted ($ 0.05) $ 0.07 ($ 0.01) $ 0.14
For the three months ended June 30, 2005 and 2004, 1,950,729 and
432,911 shares under stock compensation plans, respectively, were
excluded from the diluted EPS calculation because the shares were
antidilutive. For the six months ended June 30, 2005 and 2004,
1,950,729 and 449,140 shares, respectively, were excluded from the
diluted EPS calculation because the options were antidilutive.
Note 3. Net earnings or loss include provisions, or credits, for stock-based
compensation plans calculated by using the average price of the
Company's stock at the close of each calendar quarter as if all grants
under such plans had been exercised on that day. In addition, fixed
compensation expense is recognized for certain stock-based compensation
plans over the remaining service or vesting period of the grant. For
the three months ended June 30, 2005, the credit for stock-based
compensation plans on a pretax basis was $0.8 million. For the three
months ended June 30, 2004, the provision for stock-based compensation
plans on a pretax basis was $2.0 million. For the six months ended June
30, 2005, the credit for stock-based compensation plans on a pretax
basis was $2.7 million. For the six months ended June 30, 2004, the
provision for stock-based compensation plans on a pretax basis was $2.2
million.
As permitted under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company continues to measure compensation cost for
stock-option plans using the "intrinsic value based method" prescribed
under APB No. 25, "Accounting for Stock Issued to Employees."
4
Pro forma net (loss) earnings and (loss) earnings per share had the
Company elected to adopt the "fair-value based method" of SFAS No. 123
are as follows:
(all dollar amounts in thousands, except per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
Net (loss) earnings, as reported ($ 2,691) $ 3,737 ($ 755) $ 7,189
Add: Total stock-based employee
compensation expense (credit)
under APB No. 25, net of
related tax effects (518) 1,269 (1,714) 1,365
Deduct: Total stock-based
compensation (expense) credit
determined under fair-value
based method for all awards,
net of related tax effects 379 (1,345) 1,429 (1,485)
Proforma ($ 2,830) $ 3,661 ($ 1,040) $ 7,069
(Loss) earnings per share - basic:
As reported ($ 0.05) $ 0.07 ($ 0.01) $ 0.14
Pro forma ($ 0.05) $ 0.07 ($ 0.02) $ 0.14
(Loss) earnings per share - diluted:
As reported ($ 0.05) $ 0.07 ($ 0.01) $ 0.14
Pro forma ($ 0.05) $ 0.07 ($ 0.02) $ 0.14
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123 (revised
2004), "Share-Based Payment" ("SFAS 123R"), which was to be effective
for the Company on July 1, 2005. On April 14, 2005, the Securities and
Exchange Commission ("SEC") announced the adoption of a rule that defers
the effective date of SFAS 123R. The Company plans to adopt SFAS 123R
in the first quarter of 2006 and is currently evaluating which method of
adoption will be utilized.
Note 4. Accounts receivable consisted of the following:
(all dollar amounts in thousands) JUNE 30, December 31,
2005 2004
Trade $107,950 $ 95,787
Other 1,566 1,778
109,516 97,565
Less: allowances for doubtful accounts (2,121) (1,834)
$107,395 $ 95,731
5
Note 5. The various components of inventories were as follows:
(all dollar amounts in thousands) JUNE 30, December 31,
2005 2004
Raw materials $ 40,084 $ 38,247
Work in process and finished goods 105,557 89,992
Supplies 29,104 28,731
Inventories at cost 174,745 156,970
Less: LIFO reserve (31,251) (30,038)
$143,494 $ 126,932
Note 6. The accumulated depreciation on fixed assets was $714.7 million as of
June 30, 2005, and $685.9 million as of December 31, 2004. The
provision for depreciation, amortization and depletion for the three
months ended June 30, 2005 and June 30, 2004 was $18.8 million and
$14.9 million, respectively. The provision for depreciation,
amortization and depletion for the six months ended June 30, 2005 and
June 30, 2004 was $34.1 million and $29.9 million, respectively.
Quarter-over-quarter and year-over-year increases in depreciation
expense are primarily the result of accelerated depreciation recorded
in the three months ended June 30, 2005 in connection with the closure
of Printing & Writing's sulfite pulp mill located in Brokaw, Wisconsin.
See Note 8 for additional pulp mill closure information.
Note 7. The components of net periodic benefit costs recognized in the
Condensed Consolidated Statements of Operations for the three months
ended June 30, 2005 and 2004 are as follows:
(all dollar amounts in thousands) Other
Post-retirement
Pension Benefits Benefits
2005 2004 2005 2004
Service cost $1,815 $1,720 $ 628 $ 671
Interest cost 2,396 2,423 1,185 1,505
Expected return on plan assets (2,708) (2,504) 0 0
Amortization of:
Prior service cost 549 488 (764) (87)
Actuarial loss 465 420 338 447
Transition (asset) 0 (12) 0 0
Net periodic benefit cost $2,517 $2,535 $1,387 $2,536
6
The components of net periodic benefit costs recognized in the Condensed
Consolidated Statements of Operations for the six months ended June 30,
2005 and 2004 are as follows:
(all dollar amounts in thousands) Other
Post-retirement
Pension Benefits Benefits
2005 2004 2005 2004
Service cost $3,625 $3,440 $1,257 $1,342
Interest cost 4,792 4,846 2,370 3,046
Expected return on plan assets (5,416) (5,005) 0 0
Amortization of:
Prior service cost 1,098 975 (1,528) (174)
Actuarial loss 931 839 676 894
Transition (asset) 0 (26) 0 0
Settlement 305 0 0 0
Net periodic benefit cost $5,335 $5,069 $2,775 $5,108
The Company previously disclosed in its consolidated financial
statements for the year ended December 31, 2004, that although it does
not have a minimum funding requirement for defined benefit pension plans
in 2005, it may elect to make contributions of up to $16.0 million to
pension plans. As of June 30, 2005, the Company has made payments of
$6.3 million to its pension plans. In addition, as previously reported,
the Company expects to contribute $4.1 million directly to post-
retirement plans. As of June 30, 2005, the Company has contributed $2.4
million to its post-retirement plans.
Note 8. Pulp Mill Closure
In July 2005, the Company announced plans to permanently close the
sulfite pulp mill at its Brokaw, Wisconsin, papermaking facility. The
pulp mill closure is expected to be substantially completed by the end
of 2005 and will result in the elimination of approximately 60 permanent
jobs, or 11% of the facility's total workforce. The related long-lived
assets will be abandoned. The cost of products sold for the period ended
June 30, 2005, as reflected in the Condensed Consolidated Statements of
Operations include $9.3 million in pre-tax charges for accelerated
depreciation and an adjustment of pulp mill inventory to net realizable
value. Restructuring expense for the period ended June 30, 2005 reflects
a pre-tax charge of $0.2 million for certain assets disposed as a direct
result of the closure. Additional pre-tax closure charges of
approximately $35 million are expected to be recognized over the next 12
months, of which $23 million is expected to be recorded in the third
quarter of 2005, $11 million in the fourth quarter of 2005 and $1
million in the first half of 2006.
7
The following table sets forth information with respect to pulp mill
closure charges:
(all dollar amounts in thousands)
Expected in
THREE MONTHS Third Fourth
ENDED Quarter Quarter
JUNE 30, 2005 2005 2005
Depreciation on equipment to be
abandoned $3,680 $22,000 $7,450
Inventory write-down 5,611 0 0
Employee severance 0 100 50
Other associated costs 177 900 3,500
Total $9,468 $23,000 $11,000
Note 9. Interim Segment Information
The Company has reclassified certain prior-year interim segment
information to conform to the 2005 presentation. The reclassification
is the result of a change in the management of two converting facilities
from the Printing & Writing segment to the Specialty Products segment.
FACTORS USED TO IDENTIFY REPORTABLE SEGMENTS
The Company's operations are classified into three principal reportable
segments: Specialty Products, Printing & Writing, and Towel & Tissue,
each providing different products. Separate management of each segment
is required because each business unit is subject to different
marketing, production, and technology strategies.
PRODUCTS FROM WHICH REVENUE IS DERIVED
Specialty Products produces specialty papers at its manufacturing
facilities in Rhinelander, Wisconsin; Mosinee, Wisconsin; and Jay,
Maine. Specialty Products also includes two converting facilities that
produce laminated roll wrap and related specialty finishing and
packaging products. Printing & Writing produces a broad line of premium
printing and writing grades at manufacturing facilities in Brokaw,
Wisconsin; Groveton, New Hampshire; and Brainerd, Minnesota. Printing &
Writing also includes a converting facility which converts printing and
writing grades. Towel & Tissue produces a complete line of towel and
tissue products that are marketed along with soap and dispensing systems
for the "away-from-home" market. Towel & Tissue operates a paper mill
in Middletown, Ohio, and a converting facility in Harrodsburg, Kentucky.
8
RECONCILIATIONS
The following are reconciliations to corresponding totals in the
accompanying consolidated financial statements:
Three Months Six Months
Ended June 30, Ended June 30,
(all dollar amounts in thousands) 2005 2004 2005 2004
Net sales external customers
Specialty Products $113,981 $118,528 $232,345 $232,665
Printing & Writing 95,246 88,424 187,850 175,319
Towel & Tissue 66,064 57,157 122,837 107,940
$275,291 $264,109 $543,032 $515,924
Operating (loss) profit
Specialty Products $ 3,829 $ 4,760 $ 7,769 $ 9,743
Printing & Writing (13,100) 586 (17,669) 1,605
Towel & Tissue 9,922 8,131 17,806 13,432
Corporate & eliminations (2,358) (5,095) (4,005) (8,584)
(Loss) earnings before income taxes ($1,707) $ 8,382 $ 3,901 $ 16,196
JUNE 30, December 31,
2005 2004
Segment assets:
Specialty Products $346,207 $342,724
Printing & Writing 290,909 281,378
Towel & Tissue 173,503 171,080
Corporate & Unallocated* 59,411 87,052
$870,030 $882,234
* Segment assets do not include intersegment accounts receivable, cash,
deferred tax assets and certain other assets, which are not
identifiable with segments.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
In the second quarter of 2005, the Company reported a net loss of $2.7 million
or $0.05 per share compared to prior year net earnings of $3.7 million or $0.07
per share. The net loss for the second quarter of 2005 included an after-tax
charge of $6.0 million, or $0.12 per share related to the July 6, 2005
announced closure of the Printing & Writing segment's sulfite pulp mill in
Brokaw, Wisconsin due to the unit's high cost of operation and capital
investment requirements related to aging plant and equipment and after-tax
losses of $2.4 million, or $0.05 per share, related to the operation of the
Printing & Writing segment's mill in Brainerd, Minnesota, which was acquired in
October 2004. For the six months ended June 30, 2005, the Company reported a
net loss of $0.8 million or $0.01 per share compared to net earnings of $7.2
million or $0.14 per share in the first six months of 2004. In addition to
sulfite pulp mill closure charges of $0.12 per share, results for the first
half of 2005 included after-tax losses of $5.6 million or $0.11 per share for
the Brainerd mill. While second quarter market conditions were strong for the
Company's towel and tissue products, demand was weaker for the Company's
printing and writing and specialty products. Market conditions remained
weakest within the Company's Printing &Writing business segment with uncoated
freesheet demand declining in each of the first six months of the year.
Despite challenging business conditions, the Company increased both shipments
and sales compared with the prior year, with two of the Company's three
business segments posting increases.
Effective with the first quarter of 2005, the Specialty Products business
segment includes the results from two of the Company's converting facilities,
which were previously included in the Printing &Writing business segment. As a
result, the Company has reclassified certain prior-year interim segment
information to conform to the 2005 presentation.
OPERATIONS REVIEW
Net Sales
Three Months Six Months
Ended June 30, Ended June 30,
(all dollar amounts in thousands) 2005 2004 2005 2004
Net sales $275,291 $264,109 $543,032 $515,924
Percent increase 4% 9% 5% 7%
Consolidated net sales of $275.3 million for the three months ended June 30,
2005 improved 4% over consolidated net sales of $264.1 million for the three
months ended June 30, 2004. Shipments were essentially flat quarter-over-
quarter with 222,081 tons shipped during the second quarter of 2005 and 221,317
tons shipped during the second quarter of 2004. During the same comparative
periods, average net selling price improved nearly 4%, or approximately
$11 million, with a slight decline in overall product mix offsetting actual
product selling price increases.
10
For the six months ended June 30, 2005 and 2004, consolidated net sales were
$543.0 million and $515.9 million, respectively, or a 5% improvement year-over-
year. Year-to-date shipments at June 30, 2005 were 443,316 tons which
represented a 2% increase over the 436,565 tons shipped during the same six-
month period in 2004. During the first six months of 2005, average net selling
price improved approximately 4%, or $20 million, with actual selling price
increases of approximately 5% offset by a slight decline in product mix.
Specialty Products' net sales for the second quarter of 2005 were $114.0
million, a decline of nearly 4% from net sales of $118.5 million reported
during the same period in 2004. Reduced non-core shipments and weakness in
several core product categories resulted in an 8% decline in shipments during
the three months ended June 30, 2005 compared to the three months ended June
30, 2004, with 100,404 tons and 109,704 tons shipped during the quarter ended
June 30, 2005 and 2004, respectively. Partially offsetting the decline in
volume was an increase in average net selling price of 5%, or approximately $6
million, with actual selling price increases generating more than one-half of
the improvement.
For the first half of 2005, Specialty Products' net sales were similar at
$232.3 million compared to $232.7 million in the first half of 2004. Shipment
volume declined 5% to 205,192 tons during the first half of 2005 compared to
216,339 tons shipped during the first half of 2004. The decline in volume
year-over-year was offset by a like increase in average net selling price of
5%. While the traditional markets in which this segment competes remain price
sensitive, the improvement in average net selling price is due in part to the
segment's focus on new product development and the introduction of new products
in the market place. To date, approximately one-third of the improvement in
average net selling price is due to product mix enhancements.
For the three months ended June 30, 2005, Printing & Writing reported net sales
of $95.2 million, an increase of 8% over reported net sales in the second three
months of 2004 of $88.4 million. The current quarter improvement in net sales
was due to a 10% increase in volume as 80,411 tons were shipped during the
second quarter of 2005 compared to 72,903 tons during the second quarter of
2004. The improvement in shipment tons quarter-over-quarter was due primarily
to increased shipments from the Brainerd mill, acquired in the fourth quarter
of 2004, and was somewhat offset by a decline in average net selling price of
nearly 3%. The decrease in average net selling price is principally due to the
commodity-oriented product mix produced and shipped from the Brainerd mill.
Actual product selling prices increased approximately 3%, or approximately $3
million, as compared with last year as continued year-over-year declines in the
uncoated freesheet paper markets have made it difficult to increase selling
prices.
Year-to-date net sales for Printing & Writing increased 7% to $187.9 million in
2005 from $175.3 million in 2004. Shipment volume improved 10% year-over-year
with 160,571 tons shipped during the six months ended June 30, 2005 and 146,093
tons shipped during the six months ended June 30, 2004. As in the quarterly
comparison, the increase in volume is due primarily to increased shipments from
the Brainerd mill which is somewhat offset by a decline in average net selling
price of nearly 3% due to the commodity-oriented product mix produced and
shipped from the Brainerd mill.
11
Towel & Tissue reported net sales of $66.1 million for the three-month period
ended June 30, 2005, an increase of 16% from net sales of $57.2 million
reported in the same three-month period of 2004. Shipments of higher-margin
value added products increased 12% in the current quarter as total shipments
increased 7% to 41,266 tons from 38,710 tons during the same period last year,
despite minimal growth in the "away-from-home" towel and tissue market in which
this business segment competes. Average net selling price increased nearly 9%,
or approximately $5 million, in the second quarter of 2005 over the second
quarter of 2004 with modest mix improvement adding to the more significant
pricing gains experienced in this business segment.
Net sales for the first six months of 2005 and 2004 were $122.8 million and
$107.9 million, respectively, for Towel & Tissue-an improvement of 14%.
Product selling price increases of nearly 8% drove an increase in average net
selling price of more than 9% as compared to 2004. In addition, shipments of
77,553 tons during the first half of 2005 increased 3,420 tons or 5% over
shipments of 74,133 tons during the first half of 2004.
Gross Profit
Three Months Six Months
Ended June 30, Ended June 30,
(all dollar amounts in thousands) 2005 2004 2005 2004
Gross profit on sales $16,846 $28,136 $39,981 $54,834
Gross profit margin 6% 11% 7% 11%
Gross profit for the three months ended June 30, 2005, was $16.8 million
compared to $28.1 million for the three months ended June 30, 2004. Gross
profit margins decreased compared to those reported in the same period last
year as the announced closing of Printing & Writing's sulfite pulp mill located
in Brokaw, Wisconsin, losses at Printing & Writing's Brainerd mill and
increases in energy and fiber-related costs more than offset improvements in
average net selling price and volume gains. The pulp mill closure charge and
Brainerd mill results unfavorably impacted gross profit margin by nearly 5
percentage points in the second quarter of 2005. In total, natural gas prices
increased approximately 15% resulting in an additional cost of $1.2 million in
the second quarter of 2005 compared to the second quarter of 2004. In
addition, market pulp prices increased $25 per air-dried metric ton, or
approximately $2.5 million, pulpwood prices were more than 20% higher, or $1.3
million, linerboard increased $0.8 million, or approximately 10 %, and
purchased towel and tissue parent roll prices increased more than 14%, or $1.8
million.
Year-to-date, gross profit decreased from $54.8 million, or 11% of consolidated
net sales, to $40.0 million, or 7% of consolidated net sales. As in the
quarterly comparison, pulp mill closure charges, losses at Printing & Writing's
acquired Brainerd mill and unfavorable energy and fiber-related costs
negatively impacted the gross profit margin year-over-year. These negative
factors more than offset average net selling price increases, volume gains and
continuing cost reduction efforts. Year-over-year, market pulp prices
increased 8%, or $39 per air-dried metric ton.
Specialty Products' average selling price increase and cost-reduction efforts
were more than offset by higher current year manufacturing costs, including
market pulp, linerboard and energy,
12
and lower shipment volumes resulting in lower gross margins of 8% in the second
quarter and first six months of 2005 compared to 9% in the second quarter and
first six months of 2004.
Printing & Writing's gross profit was unfavorably impacted by a $9.3 million
pre-tax charge to cost of products sold as a result of the announced closure of
the sulfite pulp mill located in Brokaw, Wisconsin. The pulp mill closure
charge included accelerated depreciation on pulp mill related assets that will
be abandoned as a result of the closure and a write-down of related pulp mill
inventory to net realizable value. Excluding this closure charge, gross margin
for the second quarter of 2005 was 2% of net sales compared to 6% of net sales
for the second quarter of 2004. In addition to the unfavorable impacts of
energy and market pulp prices described in the consolidated comparison, the
Printing & Writing business segment absorbed operational losses incurred at the
Brainerd mill which was acquired in October 2004. Second quarter operating
efficiencies at the Brainerd mill improved from the first quarter of 2005 when
difficulties were encountered in ramping-up production at the mill.
Year-to-date, excluding the pre-tax pulp mill closure charge recorded in the
second quarter of 2005, the gross profit margin for Printing & Writing was 2%
in 2005 compared to 7% in 2004. As in the quarter-over-quarter comparison,
operational losses at the segment's Brainerd mill, unfavorable impacts of
energy and market pulp prices were also factors in the year-over-year
comparison.
The gross profit margin for Towel & Tissue was 22% in both the second quarter
of 2005 and the second quarter of 2004. Increased average selling price and
improved operations offset unfavorable increases in purchased towel and tissue
parent roll and energy prices described in the consolidated comparison.
Towel & Tissue gross profit margin improved to 22% during the first six months
of 2005 compared to 20% reported during the first six months of 2004. The
year-over-year comparison was impacted by similar factors as the quarter-over-
quarter comparison; however, year-over-year improvements in average net selling
price were greater than year-over-year increases in purchased towel and tissue
parent roll and energy prices.
Consolidated order backlogs decreased to approximately 43,200 tons at June 30,
2005, from approximately 49,600 tons at June 30, 2004. Backlog tons at June
30, 2005 represent $52.7 million in sales compared to $59.2 million in sales at
June 30, 2004. Quarter-over-quarter improvements in customer backlog were
evident in Printing & Writing and Towel & Tissue, while Specialty Products'
customer backlogs declined. Specialty Products' backlog tons declined from
37,400 tons as of June 30, 2004, to 29,700 tons at June 30, 2005. Printing &
Writing backlog tons improved to 10,100 tons at the end of the second quarter
of 2005 compared to 9,100 tons at the end of the second quarter of 2004. Towel
& Tissue experienced slightly improved backlogs with 3,400 tons and 3,100 tons
reported at the end of the second quarter of 2005 and 2004, respectively. The
change in customer order backlogs does not necessarily indicate business
conditions as a large portion of orders are shipped directly from inventory
upon receipt and do not impact backlog numbers.
13
Selling and Administrative Expenses
Three Months Six Months
Ended June 30, Ended June 30,
(all dollar amounts in thousands) 2005 2004 2005 2004
Selling and administrative expense $18,376 $19,754 $35,903 $38,638
Percent increase(decrease) (7%) 13% (7%) 15%
As a percent of net sales 7% 7% 7% 7%
Selling and administrative expenses in the second quarter of 2005 were $18.4
million compared to $19.8 million in the same period of 2004. Stock-based
incentive compensation programs resulted in a credit of $0.8 million for the
three months ended June 30, 2005 compared to a provision of $2.0 million for
the three months ended June 30, 2004. After adjusting for stock-based
incentive compensation programs, the balance of the increase is due to Brainerd
mill expenses as well as higher wage and benefit costs, particularly health-
care related costs, legal, audit and consulting expenses.
Selling and administrative expenses for the six months ended June 30, 2005 were
$35.9 million compared to $38.6 million in the same period of 2004. Stock-
based incentive compensation programs resulted in a credit of $2.7 million for
the three months ended June 30, 2005 compared to a provision of $2.2 million
for the three months ended June 30, 2004. As in the quarterly comparison,
after adjusting for incentive compensation programs, the balance of the year-
over-year change is due to Brainerd mill expenses as well as higher wage and
benefit costs, particularly health-care related costs, legal, audit and
consulting expenses.
Restructuring Charge
The Company recorded a pre-tax $0.2 million closure charge in the second
quarter of 2005 for certain assets disposed as a direct result of the announced
closing of the sulfite pulp mill located at Printing & Writing's Brokaw
papermaking mill. Additional restructuring charges related to the pulp mill
closure are expected to be recorded in the third and fourth quarters of 2005 as
a result of employee severance costs and other associated costs.
14
Other Income and Expense
Three Months Six Months
Ended June 30, Ended June 30,
(all dollar amounts in thousands) 2005 2004 2005 2004
Interest expense $2,687 $2,550 $5,337 $5,077
Other income 122 98 237 292
Interest expense was slightly higher between comparable quarterly periods of
2005 and 2004 at $2.7 million and $2.6 million, respectively, as well as
comparable year-to-date periods of 2005 and 2004 at $5.3 million and $5.1
million, respectively. The increase was due to slightly higher interest rates
in 2005 compared to 2004. Long-term debt was $161.4 million and $161.8 million
at June 30, 2005 and 2004, respectively. Long-term debt at December 31, 2004,
was $161.8 million. Interest expense in 2005 is expected to be similar to 2004
levels. Other income, consisting principally of interest income, in the second
quarter of 2005 is similar to the same period last year. Year-to-date other
income is slightly lower in 2005 compared to 2004 due to reduced interest
income as a result of lower cash and cash equivalent balances in the current
period.
Income Taxes
Three Months Six Months
Ended June 30, Ended June 30,
(all dollar amounts in thousands) 2005 2004 2005 2004
Provision for income taxes ($1,581) $2,193 ($444) $4,222
Effective tax rate 37% 37% 37% 37%
The effective tax rates for the periods presented are indicative of the
Company's normalized tax rate. The effective rate for 2005 is expected to
remain at 37%.
On October 22, 2004, the American Jobs Creation Act of 2004 (the "Act") was
signed into law. The Act contains $137 billion in tax cuts over a ten year
period beginning in 2005, which are mainly U.S. manufacturing businesses and
multinational companies. The Company has not yet completed its assessment of
how the Act might impact its future results of operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows and Capital Expenditures
Six Months Ended June 30,
(all dollar amounts in thousands) 2005 2004
Cash (used in) provided by operating activities ($ 4,498) $40,085
Capital expenditures 15,631 9,471
For the six months ended June 30, 2005, cash used in operating activities was
$4.5 million compared to cash provided by operating activities of $40.1 million
for same period in 2004. Inventory increased approximately $17 million during
the first half of 2005 compared to a
15
decline in inventory of approximately $6 million during the first half of 2004
accounting for approximately one-half of the change in cash used in operating
activities year-over-year. The increase in inventory levels is attributable to
seasonal inventory builds in all business segments, as well as, inventory
requirements to support the operations of the Brainerd mill which was acquired
in October 2004. The remaining use of cash is related to accounts payable,
accrued and other liabilities and income taxes. On a combined basis, these
items decreased approximately $4 million during the first half of 2005 compared
to an increase of nearly $17 million during the first half of 2004.
The Company has established an average internal rate of return target of 17% on
all capital projects approved in 2005. This objective was achieved on projects
approved during the first six months of the year. Capital spending for the
first six months of 2005 was $15.6 million compared to $9.5 million during the
first six months of 2004. Total capital spending for the full-year of 2005 is
expected to be between $30 million and $35 million.
For 2005, capital expenditures for projects with total spending expected to
exceed $1.0 million occurred in all three business segments. Specialty Products
spent $1.2 million on paper mill related equipment at the Rhinelander and
Mosinee, Wisconsin mills. Printing & Writing spent $0.3 million on a palletizer
project at the Groveton, New Hampshire facility and Towel & Tissue spent $1.4
million on various converting lines.
The balance of spending for the first six months of 2005 was related to
projects that individually are expected to cost less than $1.0 million. These
expenditures included approximately $8.8 million for essential non-or low-
return projects, and approximately $3.9 million on projects expected to provide
a return on investment that exceeds the Company's cost of capital.
For the first six months of 2004, capital expenditures for projects with total
spending expected to exceed $1.0 million were $0.6 million in Printing &
Writing as part of a capital project to expand premium papers production
capabilities at the Brokaw mill and $1.3 on a digester replacement. In Towel &
Tissue, $0.2 million was spent on a screw press project and $1.7 million was
spent for various converting lines.
The balance of spending during the first six months of 2004 was related to
projects that individually are expected to cost less than $1.0 million. These
expenditures included approximately $4.3 million for essential non or low-
return projects, and approximately $1.4 million on projects expected to provide
a return on investment that exceeds the Company's cost of capital.
During the second quarter, the Company announced its intent to sell
approximately 12,000 acres of timberlands, or 10% of the Company timberland
holdings, generating expected after-tax earnings of $16 million, or $0.31 per
share, over the next three years. During the three months and year-to-date
periods ended June 30, 2005, timberland sales activity was not significant.
With the planned closure of the sulfite pulp mill in Brokaw, Wisconsin, the
Company may increase the number of acres included in the sales program to
include lands that supported the supply of pulpwood to that pulp mill.
16
Debt and Equity
JUNE 30, December 31,
(all dollar amounts in thousands) 2005 2004
Short-term debt $ 89 $ 115
Long-term debt 161,449 161,833
Total debt 161,538 161,948
Stockholders' equity 344,955 357,092
Total capitalization 506,493 519,040
Long-term debt/capitalization ratio 32% 31%
On June 28, 2005, the Company and the required holders of the Company's $138.5
million Senior Notes agreed to amend certain financial covenants included in
the related Note Purchase Agreement in order to bring the covenants into
conformity with the financial covenants under the Company's existing $100.0
million senior credit facility which will expire on August 31, 2008. At the
time of the amendment, the Company was in full compliance with the terms of all
financial and other covenants under the Senior Notes and the credit facility
and remains in compliance with the amended terms. As of June 30, 2005, there
was no significant change in total debt as compared to December 31, 2004.
On June 30, 2005, the Company had approximately $100 million available
borrowing capacity under a bank facility that expires on August 31, 2008. The
Company's cash position and borrowing capacity is expected to provide
sufficient liquidity to support operations, meet capital spending requirements,
fund dividend payments to shareholders, and continue to repurchase shares of
the Company's common stock.
Early in the second quarter of 2005, the Company announced its intent to
reactivate its common stock buy-back program. As a result, during the three
months ended June 30, 2005, a total of 224,000 shares were repurchased in the
open market under authorizations approved by the Board of Directors in 1998 and
2000. At June 30, 2005, there are 2.4 million shares remaining under the
authorization approved in 2000 and no shares remaining under the 1998
authorization. Repurchases may be made from time to time in the open market or
through privately negotiated transactions.
Dividends
On December 17, 2004, the Board of Directors declared a quarterly cash dividend
of $0.085 per common share. The dividend was paid on February 15, 2005, to
shareholders of record on February 1, 2005. On April 21, 2005, the Board of
Director's declared a cash dividend in the amount of $0.085 per share. The
dividend was paid on May 16, 2005, to shareholders of record on May 2, 2005. At
a meeting held on June 13, 2005, the Board of Directors declared a quarterly
cash dividend of $0.085 per common share which is payable on August 15, 2005,
to shareholders of record on August 1, 2005.
17
INFORMATION CONCERNING FORWARD LOOKING STATEMENTS
This report contains certain of management's expectations and other forward-
looking information regarding the Company pursuant to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. While the
Company believes that these forward-looking statements are based on reasonable
assumptions, such statements are not guarantees of future performance, and all
such statements involve risk and uncertainties that could cause actual results
to differ materially from those contemplated in this report. The assumptions,
risks, and uncertainties relating to the forward-looking statements in this
report include general economic and business conditions, changes in the prices
of raw materials or energy, competitive pricing in the markets served by the
Company as a result of economic conditions, overcapacity in the industry and
the demand for paper products, manufacturing problems at Company facilities and
various other risks and assumptions. These and other assumptions, risks, and
uncertainties are described under the caption "Cautionary Statement Regarding
Forward-Looking Information" in Item 1 of the Company's Annual Report on Form
10-K for the year ended December 31, 2004, and from time to time, in the
Company's other filings with the Securities and Exchange Commission. The
Company assumes no obligation to update or supplement forward-looking
statements that become untrue because of subsequent events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the information provided in response to
Item 7A of the Company's Form 10-K for the year ended December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management, under the
supervision, and with the participation, of the Company's President and Chief
Executive Officer and the Chief Financial Officer, evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 under the Securities Exchange Act of 1934. Based upon
such evaluation, the President and Chief Executive Officer and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective in all material respects as of the end of the period
covered by this report. There were no changes in the Company's internal
control over financial reporting during the fiscal quarter covered by this
report that materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
18
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities - Quarter ending June 30, 2005
Maximum number
Total number (or approximate
of shares (or dollar value) of
Total number units) purchased shares (or units)
of shares Average price as part of publicly that may yet be
(or units) paid per share announced plans purchased under the
purchased (or unit) or programs plans or programs
Period (a) (b) (c)(1) (d)(2)
April 0 0 0 0
May 224,000 $12.191 224,000 2,414,674
June 0 0 0 0
Quarterly Totals 224,000 $12.191 224,000 2,414,674
(1) Includes 67,674 shares purchased pursuant to program announced on August
31, 1998, pursuant to which the Board of Directors authorized the repurchase of
up to 5,650,000 shares in open market or privately negotiated transactions (the
"1998 Plan"). Also includes 156,326 shares purchased pursuant to program
announced on April 20, 2000, pursuant to which the Board of Directors
authorized the repurchase of up to 2,571,000 shares in open market or privately
negotiated transactions (the "2000 Plan"). No price or expiration date was
specified for either program's purchases.
(2) No authorized shares are remaining for purchase under the 1998 Plan.
2,414,674 shares may yet be purchased under the 2000 Plan.
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on April 21, 2005.
The matters voted upon, including the number of votes cast for, against or
withheld, as well as the number of abstentions and broker non-votes, as to each
such matter were as follows:
Matter Shares Voted
For Withheld
1. Election of Class III Directors
(a) Gary W. Freels 47,606,687 1,296,605
(b) Thomas J. Howatt 48,546,713 356,579
(c) Michael M. Knetter 48,677,503 225,789
Shares Voted
Matter Broker
For Against Abstention Non-Vote
2. Amendment to restated articles
of incorporation to change name
to "Wausau Paper Corp." 48,717,614 146,885 38,793 0
ITEM 6. EXHIBITS
Exhibits required by Item 601 of Regulation S-K
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of
2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of
2002
32.1 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley
Act of 2002
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAUSAU PAPER CORP.
August 9, 2005 SCOTT P. DOESCHER
Scott P. Doescher
Senior Vice President-Finance,
Secretary and Treasurer
(On behalf of the Registrant and as
Principal Financial Officer)
21
EXHIBIT INDEX
TO
FORM 10-Q
OF
WAUSAU PAPER CORP.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. Section 232.102(d))
The following exhibits are filed as part of this report:
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act of
2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act of
2002
32.1 Certification of CEO and CFO pursuant to Section 906 of Sarbanes-Oxley
Act of 2002
22