Clearwater Paper Corp (CLW) FY 2024 MD&A

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 related notes 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.

Overview of Business

We are a premier manufacturer and supplier of Solid Bleached Sulfate (SBS) paperboard packaging products to independent converters. We believe we are well positioned to capitalize on sustainability trends towards renewable and recyclable materials. We focus on food service and folding carton markets and provide limited distribution and sheeting services. Additionally, we sell minor amounts of pulp to outside customers. We believe our status as an independent, non-integrated supplier is core to our value proposition. We strive to develop new products and innovative solutions to expand and diversify our paperboard portfolio. In 2024, our business and production capabilities, we completed the acquisition of a paperboard manufacturing facility and associated business in Augusta Georgia.

Reclassification of Our Tissue Operations

In 2024, we completed the sale of our tissue operations. This sale represents a strategic shift in our operations and financial results requiring discontinued operations accounting treatment for this division. The financial information presented below reflects reclassifications from previously reported information based upon discontinued operations. Historically, we have shown certain intercompany pulp costs as offsets to cost of sales as they represented intercompany transactions between the tissue operations and the pulp and paperboard manufacturing operations. Based upon discontinued operations treatment, such transfers of pulp and other inputs have been recast to Net Sales on the Consolidated Statements of Operations.

Significant Factors That Impact Our Business and Results of Operations

The paperboard industry is affected by macro-economic conditions around the world and has historically experienced cyclical market conditions. As a result, prices for products and sales volumes have historically 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. During 2023 and 2024, the paperboard industry saw significant weakness due to customer destocking after a lengthy period of constrained supply given high demand coupled with increasing supply.

Our operating costs include raw materials, labor and selling, general and administrative expenses. We manage these costs through cost saving and productivity initiatives, sourcing programs, and pricing actions. Additionally, our operations, as do all pulp and paperboard manufacturing operations, require regular planned maintenance outages. During 2024, we incurred planned maintenance outages at our Lewiston, Idaho and our Augusta, Georgia facilities. During 2023, we incurred a planned maintenance outage at our Cypress Bend, Arkansas facility. During 2022, we incurred a planned maintenance outage at our Lewiston, Idaho facility. Starting in 2025, we plan to move to annual outages for each of our facilities.

Critical Accounting Policies and Significant Estimates

A discussion of our significant accounting policies and significant accounting estimates and judgments is presented in Note 1, "Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in Item 8 of this report. Throughout the preparation of the financial statements, we employ significant judgments in the application of accounting principles and methods. We believe that the accounting estimates discussed below represent the accounting estimates requiring the exercise of judgment where a different set of judgments could result in the greatest changes to reported results. We reviewed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board of Directors. For 2024, these significant accounting estimates and judgments include:

Business Acquisitions

We use the acquisition method of accounting for acquired businesses. Under the acquisition method of accounting, we allocated the purchase consideration to the tangible assets acquired and liabilities assumed based on their estimated fair values on the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. The estimates used to determine the fair value of long-lived assets can be

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complex and require significant judgments. Therefore, we use information available to us to make fair value determinations and often engage independent valuation specialists, when necessary, to assist in the fair value determination of significant, acquired long-lived assets. The determination of fair value requires estimates about discount rates, growth and retention rates, expected future cash flows and other future events that are judgmental in nature. While we use our best estimates and assumptions as a part of the purchase price allocation process, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we are permitted to record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of income.

On May 1, 2024, we completed the acquisition of a paperboard manufacturing facility and associated business, located in Augusta, Georgia (Augusta) from Graphic Packaging International, LLC for cash of $708 million. Augusta’s results of operations have been included in our financial results since the acquisition date. We allocated the fair value of purchase consideration transferred to the tangible assets acquired and liabilities assumed based on their estimated fair values on the date of the acquisition. We identified that the acquired assets were assigned a fair value of $695 million. The majority of these assets were property, plant and equipment valued using the replacement cost method. This method is based on the replacement cost of comparable assets at the time of the acquisition adjusted for depreciation and economic and functional obsolescence of the asset. The Company believes the estimates are based on reasonable assumptions, but which are inherently uncertain. The remainder of the purchase price was allocated to working capital assets (primarily inventory) and goodwill. As a result, actual results may differ from the assumptions and judgments used to determine fair value of the assets acquired, which could result in material impairment losses in the future. Additional information regarding our acquisitions is included in "Note 3 - Business Acquisition" in the Notes to Consolidated Financial Statements included herein under “Item 8. Financial Statements and Supplementary Data.”

Retirement Plans and Postretirement Benefits

We have a number of defined benefit pension plans in the United States covering many of our employees. Benefit accruals under most of our defined benefit pension plans in the United States were frozen prior to January 2014.

We account for the consequences of our sponsorship of these plans using assumptions to calculate the related assets, liabilities and expenses recorded in our financial statements. Net actuarial gains and losses occur when actual experience differs from any of the assumptions used to value defined benefit plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value obligations as of the measurement date and the differences between expected and actual returns on pension plan assets. This accounting method results in the potential for volatile and difficult to forecast gains and losses.

We record amounts relating to these defined benefit plans based on various actuarial assumptions, including discount rates, assumed rates of return, compensation increases and life expectancy. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current economic conditions and trends. We believe that the assumptions utilized in recording our obligations under our plans are reasonable based on our experience and on advice from our independent actuaries; however, differences in actual experience or changes in the assumptions may materially affect our financial condition or results of operations.

The following table illustrates the estimated impact on hypothetical pension obligations and expenses that would have resulted from a 25-basis point reduction in two key assumptions for the year ended December 31, 2024:

It is not possible to forecast or predict whether there will be actuarial gains and losses in future periods, and if required, the magnitude of any such adjustment. These gains and losses are driven by differences in actual experience or changes in the assumptions that are beyond our control, such as changes in interest rates and the actual return on pension plan assets.

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Non-GAAP Financial Measures

In evaluating our business, we utilize several non-GAAP financial measures. A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so excluded or included under applicable GAAP guidance. In this report on Form 10-K, we disclose income (loss) from operations before interest expense, net, non-operating pension and other post employment benefit costs, income tax expense, depreciation and amortization, other operating charges, net, and debt retirement costs as Adjusted EBITDA from continuing operations which is a non-GAAP financial measure. Adjusted EBITDA from continuing operations is not a substitute for the GAAP measure of net income or for any other GAAP measures of operating performance.

We have included Adjusted EBITDA from continuing operations in this report because we use it as an important supplemental measure of our performance and believe that it is frequently used by securities analysts, investors and other interested persons in the evaluation of companies in our industry, some of which present Adjusted EBITDA when reporting their results. We use Adjusted EBITDA from continuing operations to evaluate our performance as compared to other companies in our industry that have different financing and capital structures and/or tax rates. It should be noted that companies calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA from continuing operations measure may not be comparable to Adjusted EBITDA reported by other companies. Our Adjusted EBITDA from continuing operations measure has material limitations as a performance measure because it excludes interest expense, net, income tax (benefit) expense and depreciation and amortization which are necessary to operate our business or which we otherwise incur or experience in connection with the operation of our business. In addition, we exclude other income and expense items which are outside of our core operations.

The following table provides our Adjusted EBITDA from continuing operations for the periods presented and a reconciliation to net income.

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OPERATING RESULTS FROM CONTINUING OPERATIONS

The financial information below reflects reclassifications from previously reported information based upon discontinued operations. Historically, the Company has shown certain intercompany pulp costs as offsets as they represent intercompany transactions between our tissue business and the pulp and paperboard manufacturing operations. Based upon discontinued operations treatment, such transfers of pulp and other inputs have been recast to Net Sales on the Consolidated Statements of Operations.

(1) See Note 10, "Other operating charges," of the Notes to the Consolidated Financial Statements included in Item 8 of this report for additional information.

Net Sales

Net sales increased 21.8% for the year ended December 31, 2024 compared to December 31, 2023 due the inclusion of the Augusta operations (see Note 3, "Business Acquisition" of the Notes to the Consolidated Financial Statements included in Item 8 of this report for additional information). This increase was driven by higher sales volume offset by decreases in sales prices due to previously announced price decreases and changes in our product mix.

Net sales decreased 4.9% for the year ended December 31, 2023 compared to December 31, 2022 due to weaker demand as customers rebalanced inventory levels. Pulp sales volumes increased for the year ended December 31, 2023 as we managed our paperboard production resulting in additional pulp to be sold.

Cost of sales

Costs included in our cost of sales include input costs (principally raw materials and energy), labor and overhead, supply chain costs (principally freight and outside warehousing). The table below provides the details of our cost of sales for the years ended December 31, 2024, 2023 and 2022.

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Cost of sales increased 39.8% for the year ended December 31, 2024 compared to the year ended December 31, 2023 due to the inclusion of the Augusta operations. Input costs increased due to higher sales volume with reductions on a per ton basis across fiber, energy and chemicals due to deflation. Our labor and overhead increased due to the inclusion of the Augusta operation as well as planned annual maintenance at both our Lewiston, Idaho and our Augusta, Georgia facilities. Depreciation increased due to the inclusion of the Augusta operations. Supply chain cost increased due to higher volumes offset by lower freight costs per ton due to deflation.

Cost of sales decreased 4.8% from the year ended December 31, 2023 compared to the year ended December 31, 2022 due to lower volumes offset by higher inflation. Input costs on a per ton basis increased due to higher fiber and chemical costs on a per ton basis offset by lower energy costs. Our labor and overhead increased due to inflation. Supply chain cost decreased due to lower volumes offset by lower freight costs per ton due to deflation.

Gross profit

Gross profit declined 62.1% for the year ended December 31, 2024 compared to the year ended December 31, 2023 due to previously announced price decreases and higher costs due to our planned major maintenance outage at our Lewiston, Idaho and Augusta, Georgia facilities offset by lower input costs due to deflation.

Gross profit declined 5.6% for the year ended December 31, 2023 compared to the year ended December 31, 2022 due to reduced sales volumes and planned production downtime to manage inventory partially offset by deflation in input and supply chain costs.

Selling, general and administrative

Selling, general and administrative expenses decreased 2.3% for the year ended December 31, 2024 compared to the year ended December 31, 2023 primarily as a result of lower incentive pay due to lower operational performance partially offset by higher wages and benefits related to additional sales costs associated with the Augusta acquisition.

Selling, general and administrative expenses increased 8.5% for the year ended December 31, 2023 compared the year ended December 31, 2022 primarily related to costs associated with business improvement projects including information technology and other projects and higher wages partially offset by lower incentives due to lower operating performance.

Other operating charges

See Note 10, "Other Operating Charges, net" of the Notes to the Consolidated Financial Statements included in Item 8 of this report for additional information.

Overall income from continuing operations and Adjusted EBITDA

Operating income from continuing operations and Adjusted EBITDA from continuing operations decreased for the year ended December 31, 2024 as compared to the year ended December 31, 2023 due to lower sale prices and planned major maintenance at both our Lewiston and Augusta facilities partially offset by higher volume. Additionally, impacting operating income from continuing operations were the transaction and integration cost associated with the acquisition of the Augusta facility.

Operating income from continuing operations and Adjusted EBITDA from continuing operations decreased for the year ended December 31, 2023 as compared to the year ended December 31, 2022 due to lower sales volume and planned production downtime to manage inventory and increase costs associated with business improvement projects.

OPERATING RESULTS FROM DISCONTINUED OPERATIONS

For the year ended December 31, 2024 as compared to the year ended December 31, 2023, retail sales volume declined

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due to the sale of our tissue business on November 1, 2024. Retail sales prices decreased due to changes in our product mix and reductions resulting from contract pricing indexed to certain cost inputs. Operating income decreased predominately due to lower sales prices offset by lower input costs, primarily in pulp, freight and energy costs.

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, retail sales volumes in our tissue business increased due to the increased demand for private label versus branded products. Retail sales prices increased in our tissue business due to previously announced price increases and improved product mix. Operating income increased due to higher volumes and pricing and lower freight costs.

POTENTIAL IMPAIRMENTS

We review from time-to-time possible dispositions or reorganization of various assets in light of current and anticipated

economic and industry conditions, our strategic plan and other relevant factors. Because a determination to dispose or reorganize particular assets may require management to make assumptions regarding the transaction structure of the disposition or reorganization and to estimate the net sales proceeds, which may be less than previous estimates of undiscounted future net cash flows, we may be required to record impairment charges in connection with decisions to dispose of assets.

2025 OPERATIONS

For 2025, we expect a continued improvement in demand for SBS paperboard products. Various industry publications suggest demand will return to pre-COVID levels by the end of 2025. We expect this increase in demand will be offset by additional market capacity expected to come online at the beginning in the second quarter of 2025. SBS is currently in a downcycle, which we believe to be a temporary condition until supply and demand come back into balance. As we navigate the current environment, we are focused on actions that are in our control, including improving our operational performance, reducing cost, and strengthening our product offering. We are taking actions to reduce our cost structure and are targeting $30 to $40 million in cost savings in 2025 across selling, general and administrative and operations. We continue to explore ways to broaden our product offering to better service our converter customers. Near-term initiatives include compostability, increasing the recycled content of our products, and lightweighting. Over the longer term, we are also exploring options to diversify into other substrates that may include beverage carrier grades, white top, or recycled board. We remain confident in the long term fundamentals of the paperboard market and our ability to deliver strong margins and cash flows through the cycle.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our principal sources of liquidity are existing cash, cash generated by our operations and our ability to borrow under such credit facilities as we may have in effect from time to time. At times, we may also issue equity, debt or hybrid securities or engage in other capital market transactions. 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 Credit Agreements will be adequate to fund debt service requirements and provide cash to support our ongoing operations, capital expenditures and working capital needs for the next twelve months.

Our principal uses of liquidity are paying the costs and expenses associated with our operations, servicing outstanding indebtedness and making capital expenditures. We may also from time to time prepay or repurchase outstanding indebtedness or shares or acquire assets or businesses that are complementary to our operations. Any such prepayments, repurchases or acquisitions may be commenced, suspended, discontinued, or resumed, and the method or methods of effecting any such prepayments or repurchases may be changed at any time or from time to time without prior notice.

Operating Activities

During 2024, we generated $61.4 million of cash from operations, as compared to $190.7 million in 2023. This decrease was driven by lower operating performance and changes in working capital. Accounts receivable and accounts payable agings have remained relatively consistent with balances as of December 31, 2023.

During 2023, we generated $190.7 million in cash from operations, as compared to $150.2 million in 2022. This increase was driven by improved operating performance and changes in working capital.

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Investing Activities

During 2024, we generated $167.7 million in cash from investing activities, as compared to a use of $73.7 million in 2023. This includes a use of $708.2 million for the acquisition of the Augusta operations and business and net proceeds of $992.5 million received from the divestiture of our tissue business. Included in accounts payable and accrued liabilities was $25.8 million related to capital expenditures that had not yet been paid at December 31, 2024.

During 2023 we used $73.7 million in cash for investing activities, as compared to $33.5 million in cash for investing activities in 2022. In both years, cash used for investing activities was related to capital expenditures. Included in accounts payable and accrued liabilities was $13.0 million related to capital expenditures that had not yet been paid at December 31, 2023.

In 2025, we expect cash paid for capital expenditures to be approximately $80 million to $90 million.

Financing Activities

Net cash flows used in financing activities were $191.4 million for 2024. We received net proceeds of $753.4 million from the issuance of long-term debt related to the Augusta acquisition and to cover short term cash requirements. We repaid $931.1 million of long-term debt. Additionally, we used $5.6 million for debt issuance costs and $10.0 million to repurchase stock under our stock repurchase program during the year ended December 31, 2024.

Net cash flows used in financing activities were $129.4 million for 2023 as compared to $88.6 million for 2022. The

increase was due to higher debt repayments in 2023 driven by improved operating results which provided additional available cash to fund debt repayments. Additionally, we used $17.9 million for common stock repurchases under our stock repurchase program during the year ended December 31, 2023.

Commitments

As of December 31, 2024, we have purchase commitments of $102.6 million, of which $53.4 million is payable within 12 months, related to contracts with natural gas and electricity providers, contracts for the purchase of chemicals and pulp, and contracts associated with IT services that are legally binding on us and specify fixed or minimum quantities. Additionally, we have $35.6 million, all of which is payable within 12 months, in purchase commitments associated with capital expenditures.

Credit Agreements

We are party to an amended and restated credit agreement (which may be amended from time to time, the “PCA Credit Agreement”) that consists of a term revolver commitment in the amount of $270 million. We may also increase term revolver commitments under the PCA Credit Agreement in an aggregate amount of up to $60 million, subject to obtaining commitments from any participating lenders and certain other conditions. The obligations under the PCA Credit Agreement are secured by liens on substantially all of our personal property assets and each of our domestic subsidiaries that are guarantors of the PCA Credit Agreement. Borrowings under the PCA Credit Agreement are subject to mandatory prepayment in certain circumstances. We may, at our option, prepay and reborrow any borrowings under the PCA Credit Agreement, in whole or in part, at any time and from time to time without premium or penalty (except in certain circumstances). The PCA Credit Agreement matures on May 1, 2029, subject to a springing maturity beginning on the date that is 91 days prior to the maturity of the Company’s 2020 Notes if the outstanding principal amount of the 2020 Notes plus $50 million is at any time during such 91 day period great than the sum of our available borrowing liquidity and unrestricted cash.

We are also party to an asset-based loan credit agreement (which may be amended from time to time, the “ABL Credit Agreement,” and together with the PCA Credit Agreement, the “Credit Agreements”)) that consists of a $375 million revolving loan commitment, subject to borrowing base limitations. Borrowings under the ABL Credit Agreement are subject to mandatory prepayment in certain circumstances. We may also increase the revolving commitments under the ABL Credit Agreement in an aggregate amount of up to $100 million, subject to obtaining commitments from any participating lenders and certain other conditions. The obligations under the ABL Credit Agreement are secured by liens on substantially all of our personal property assets and each of our domestic subsidiaries that are guarantors of the ABL Credit Agreement. We may, at our option, prepay and reborrow any borrowings under the ABL Credit Agreement, in whole or in part, at any time and from time to time without premium or penalty (except in certain circumstances). The ABL Credit Agreement matures on November 7, 2027. As of December 31, 2024, we had no outstanding borrowings under this facility and $3.7 million drawn to support our letters of credit.

Both Credit Agreements contain customary representations, warranties, and affirmative and negative covenants. The

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ABL Credit Agreement also contains a financial covenant, which requires us to maintain a consolidated fixed charge coverage ratio of not less than 1.10x to 1.00x, provided that the financial covenant under the ABL Credit Agreement is only applicable during an event of default or if availability, as calculated under the ABL Credit Agreement, is at any time less than or equal to the greater of (i) 10.0% the Line Cap (as defined above) and (ii) $25 million.

At December 31, 2024, we were in compliance with the covenants in the Credit Agreements, and based on our current financial projections, we expect to remain in compliance. However, if our financial position, results of operations or market conditions deteriorate, we may not be able to remain in compliance. There can be no assurance that we will be able to remain in compliance with the Credit Agreements. See Note 9, "Debt," to the Notes to Consolidated Financial Statements included in Item 8 of this report for additional information.

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