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 SEPTEMBER 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 ____
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ____ No __X__
The number of common shares outstanding at October 31, 2005 was 51,291,950.
WAUSAU PAPER CORP.
AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations, Three Months and Nine Months Ended
September 30, 2005 (unaudited) and
September 30, 2004 (unaudited) 1
Condensed Consolidated Balance
Sheets, September 30, 2005 (unaudited)
and December 31, 2004 (derived from
audited financial statements) 2
Condensed Consolidated Statements
of Cash Flows, Nine Months Ended
September 30, 2005 (unaudited) and
September 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 6. Exhibits 19
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Wausau Paper Corp. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
(all dollar amounts in thousands, except per share data) 2005 2004 2005 2004
NET SALES $285,624 $262,428 $828,656 $778,352
Cost of products sold 277,482 229,983 780,533 691,073
GROSS PROFIT 8,142 32,445 48,123 87,279
Selling and administrative expenses 19,108 17,158 55,011 55,796
Restructuring expense 226 0 403 0
OPERATING (LOSS) PROFIT (11,192) 15,287 (7,291) 31,483
Interest expense (2,718) (2,608) (8,055) (7,685)
Other income, net 124 191 361 483
(LOSS) EARNINGS BEFORE INCOME TAXES (13,786) 12,870 (14,985) 24,281
(Credit) provision for income taxes (4,794) 4,762 (5,238) 8,984
NET (LOSS) EARNINGS ($ 8,992) $ 8,108 ($ 9,747) $15,297
NET (LOSS) EARNINGS PER SHARE-BASIC ($ 0.18) $ 0.16 ($ 0.19) $ 0.30
NET (LOSS) EARNINGS PER SHARE-DILUTED ($ 0.18) $ 0.16 ($ 0.19) $ 0.29
Weighted average shares outstanding-basic 51,369 51,681 51,548 51,654
Weighted average shares outstanding-diluted 51,369 51,980 51,548 51,905
Dividends declared per common share $ 0 $ 0 $ 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) SEPTEMBER 30, December 31,
2005 2004
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 12,285 $ 51,914
Receivables, net 108,278 95,731
Inventories 141,695 126,932
Deferred income taxes 10,744 8,592
Other current assets 4,536 4,123
Total current assets 277,538 287,292
Property, plant and equipment, net 510,225 551,160
Other assets 46,278 43,782
TOTAL ASSETS $834,041 $882,234
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 60 $ 115
Accounts payable 75,344 74,558
Accrued and other liabilities 58,299 73,077
Total current liabilities 133,703 147,750
Long-term debt 161,268 161,833
Deferred income taxes 98,344 105,885
Postretirement benefits 58,599 57,303
Pension 25,173 30,996
Other noncurrent liabilities 23,181 21,375
Total liabilities 500,268 525,142
Stockholders' equity 333,773 357,092
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $834,041 $882,234
See Notes to Condensed Consolidated Financial Statements.
2
Wausau Paper Corp. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
(all dollar amounts in thousands) 2005 2004
Net cash provided by operating activities $ 3,708 $47,102
Cash flows from investing activities:
Capital expenditures (26,606) (16,579)
Proceeds from property, plant and equipment disposals 1,490 43
Cash used in investing activities (25,116) (16,536)
Cash flows from financing activities:
Payments under capital lease obligation (76) (83)
Dividends paid (13,162) (13,166)
Payments for purchase of company stock (4,983) 0
Proceeds from stock option exercise 0 1,413
Cash used in financing activities (18,221) (11,836)
Net (decrease) increase in cash and cash equivalents (39,629) 18,730
Cash and cash equivalents, beginning of period 51,914 36,305
Cash and cash equivalents, end of period $ 12,285 $55,035
Interest-net of amount capitalized $ 10,441 $10,568
Income taxes paid 9,606 7,701
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 Nine Months
except per share data) Ended September 30, Ended September 30,
2005 2004 2005 2004
Net (loss) earnings ($8,992) $8,108 ($9,747) $15,297
Basic weighted average common
shares outstanding 51,369 51,681 51,548 51,654
Dilutive securities:
Stock compensation plans 0 299 0 251
Dilutive weighted average common
shares outstanding 51,369 51,980 51,548 51,905
Net (loss) earnings per share-basic ($ 0.18) $ 0.16 ($ 0.19) $ 0.30
Net (loss) earnings per share-diluted ($ 0.18) $ 0.16 ($ 0.19) $ 0.29
For the three months ended September 30, 2005 and 2004, 1,949,880
shares and 288,586 shares under stock compensation plans, respectively,
were excluded from the diluted EPS calculation because the shares were
antidilutive. For the nine months ended September 30, 2005 and 2004,
1,949,880 shares and 395,622 shares, respectively, were excluded from
the diluted EPS calculation because the options were antidilutive.
Note 3. Net loss or earnings include provisions, or credits, for certain 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 September 30, 2005, the provision for stock-
based compensation plans on a pretax basis was $0.3 million. For the
three months ended September 30, 2004, the credit for stock-based
compensation plans on a pretax basis was $0.2 million. For the nine
months ended September 30, 2005, the credit for stock-based
compensation plans on a pretax basis was $2.5 million. For the nine
months ended September 30, 2004, the provision for stock-based
compensation plans on a pretax basis was $2.0 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 data)
Three Months Nine Months
Ended September 30, Ended September 30,
2005 2004 2005 2004
Net (loss) earnings, as reported ($8,992) $8,108 ($ 9,747) $15,297
Add: Total stock-based employee
compensation expense (credit)
under APB No. 25, net of
related tax effects 163 (110) (1,551) 1,255
Deduct: Total stock-based
compensation (expense) credit
determined under fair-value
based method for all awards,
net of related tax effects (320) 27 1,109 (1,458)
Proforma ($9,149) $8,025 ($10,189) $15,094
(Loss) earnings per share - basic:
As reported ($ 0.18) $ 0.16 ($ 0.19) $ 0.30
Pro forma ($ 0.18) $ 0.16 ($ 0.20) $ 0.29
(Loss) earnings per share - diluted:
As reported ($ 0.18) $ 0.16 ($ 0.19) $ 0.29
Pro forma ($ 0.18) $ 0.15 ($ 0.20) $ 0.29
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. As a result, the Company is
unable to disclose the impact that adopting this statement will have on
its financial position and results of operations when adopted.
Note 4. Accounts receivable consisted of the following:
(all dollar amounts in thousands) SEPTEMBER 30,December 31,
2005 2004
Trade $108,664 $ 95,787
Other 1,806 1,778
110,470 97,565
Less: allowances for doubtful accounts (2,192) (1,834)
$108,278 $ 95,731
5
Note 5. The various components of inventories were as follows:
(all dollar amounts in thousands) SEPTEMBER 30,December 31,
2005 2004
Raw materials $ 38,935 $ 38,247
Work in process and finished goods 107,173 89,992
Supplies 29,336 28,731
Inventories at cost 175,444 156,970
Less: LIFO reserve (33,749) (30,038)
$141,695 $126,932
Note 6. The accumulated depreciation on fixed assets was $748.3 million as of
September 30, 2005, and $685.9 million as of December 31, 2004. The
provision for depreciation, amortization and depletion for the three
months ended September 30, 2005 and September 30, 2004 was $36.2
million and $14.9 million, respectively. The provision for
depreciation, amortization and depletion for the nine months ended
September 30, 2005 and September 30, 2004 was $70.2 million and $44.9
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 and nine months
ended September 30, 2005, of $22.1 million and $25.8 million,
respectively, 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 September 30, 2005 and 2004 are as follows:
(all dollar amounts in thousands) Other
Post-retirement
Pension Benefits Benefits
2005 2004 2005 2004
Service cost $ 1,813 $ 1,730 $ 628 $ 466
Interest cost 2,396 2,491 1,185 1,183
Expected return on plan assets (2,708) (2,503) 0 0
Amortization of:
Prior service cost 549 549 (763) (899)
Actuarial loss 465 419 338 371
Transition (asset) 0 (12) 0 0
Settlement 12 30 0 0
Net periodic benefit cost $ 2,527 $ 2,704 $ 1,388 $ 1,121
6
The components of net periodic benefit costs recognized in the
Condensed Consolidated Statements of Operations for the nine months
ended September 30, 2005 and 2004 are as follows:
(all dollar amounts in thousands) Other
Post-retirement
Pension Benefits Benefits
2005 2004 2005 2004
Service cost $ 5,438 $ 5,170 $ 1,885 $ 1,808
Interest cost 7,188 7,337 3,555 4,229
Expected return on plan assets (8,124) (7,508) 0 0
Amortization of:
Prior service cost 1,647 1,524 (2,291) (1,073)
Actuarial loss 1,396 1,258 1,014 1,265
Transition (asset) 0 (38) 0 0
Settlement 317 30 0 0
Net periodic benefit cost $ 7,862 $ 7,773 $ 4,163 $ 6,229
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 September 30, 2005, the Company has
made payments of $11.9 million to its pension plans. The Company
previously reported that it expected to contribute $4.1 million
directly to post-retirement plans. As of September 30, 2005, the
Company has contributed $3.8 million to its post-retirement plans and
now expects to contribute, in total, approximately $5.2 million to
post-retirement plans for 2005.
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
three month and nine month periods ended September 30, 2005, as
reflected in the Condensed Consolidated Statements of Operations
include $20.6 million and $29.9 million, respectively, in pre-tax
charges for accelerated depreciation, an adjustment of pulp mill
inventory to net realizable value, and a third quarter revision to the
original pulp mill inventory value based upon additional usage of
inventories. Pre-tax restructuring expense related to certain assets
disposed as a direct result of the closure and other associated costs
were $0.2 million and $0.4 million for the three months and nine months
ended September 30, 2005, respectively. Additional pre-tax closure
charges of approximately $12.1 million are expected to be recognized
over the next three quarters, with $11.5 million in the fourth quarter
of 2005, and $0.6 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 NINE MONTHS
ENDED ENDED Fourth
SEPTEMBER 30, SEPTEMBER 30, Quarter
2005 2005 2005
Depreciation on equipment to be
abandoned $22,078 $25,758 $7,400
Inventory write-down (1,757) 3,854 0
Severance and benefit continuation 383 383 600
Other associated costs 104 281 3,500
Total $20,808 $30,276 $11,500
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 Nine Months
Ended September 30, Ended September 30,
(all dollar amounts in thousands) 2005 2004 2005 2004
Net sales external customers
Specialty Products $115,461 $114,580 $347,806 $347,245
Printing & Writing 100,549 89,361 288,399 264,680
Towel & Tissue 69,614 58,487 192,451 166,427
$285,624 $262,428 $828,656 $778,352
Operating (loss) profit
Specialty Products $ 4,260 $ 6,330 $ 12,029 $16,073
Printing & Writing (23,103) 3,998 (40,772) 5,603
Towel & Tissue 10,776 7,855 28,582 21,287
Corporate & eliminations (3,125) (2,896) (7,130) (11,480)
(Loss) earnings before income taxes ($ 11,192) $ 15,287 ($ 7,291) $31,483
SEPTEMBER 30,December 31,
2005 2004
Segment assets:
Specialty Products $337,423 $342,724
Printing & Writing 271,496 281,378
Towel & Tissue 174,852 171,080
Corporate & Unallocated* 50,270 87,052
$834,041 $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 third quarter of 2005, the Company reported a net loss of $9.0 million
or $0.18 per share compared to prior year net earnings of $8.1 million or $0.16
per share. The net loss for the third quarter of 2005 included an after-tax
charge of $13.6 million, or $0.26 per share related to the previously announced
closure of the Printing & Writing segment's sulfite pulp mill in Brokaw,
Wisconsin and after-tax losses of $1.8 million, or $0.04 per share, related to
the operation of the Printing & Writing segment's mill in Brainerd, Minnesota,
which was acquired in October 2004. While third 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
year-to-date uncoated freesheet demand declining approximately 4%. In response
to weak market conditions, the Printing & Writing segment reduced third quarter
production by approximately 5,000 tons, taking four days of downtime at the
segment's Brainerd mill and nearly one month on a 50,000 ton-per-year paper
machine at the Brokaw paper mill-one of the facility's four machines. The
Brokaw facility's paper machine remains temporarily idle. 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.
For the nine months ended September 30, 2005, the Company reported a net loss
of $9.7 million or $0.19 per share compared to net earnings of $15.3 million or
$0.29 per diluted share in the first nine months of 2004. In addition to
sulfite pulp mill closure charges of $0.38 per diluted share, results for the
first nine months of 2005 included after-tax losses of $7.6 million, or $0.15
per share, for the Brainerd mill.
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 Nine Months
Ended September 30, Ended September 30,
(all dollar amounts in thousands) 2005 2004 2005 2004
Net sales $285,624 $262,428 $828,656 $778,352
Percent increase 9% 5% 6% 6%
Consolidated net sales of $285.6 million for the three months ended September
30, 2005 improved 9% over consolidated net sales of $262.4 million for the
three months ended September 30, 2004. Shipments improved 7% quarter-over-
quarter with 228,775 tons shipped during the third quarter of 2005 and 213,293
tons shipped during the third quarter of 2004.
10
During the same comparative periods, average net selling price improved nearly
1%, or approximately $2 million, with a decline in overall product mix
partially offsetting the benefit of actual product selling price increases.
For the nine months ended September 30, 2005 and 2004, consolidated net sales
were $828.7 million and $778.4 million, respectively, or a 6% improvement year-
over-year. Year-to-date shipments at September 30, 2005 were 672,091 tons which
represented a 3% increase over the 649,858 tons shipped during the same nine-
month period in 2004. During the first nine months of 2005, average net
selling price improved approximately 3%, or $21 million, with actual selling
price increases of approximately 4% partially offset by a slight decline in
product mix.
Quarter-over-quarter net sales and shipments in the Specialty Products'
business segment were essentially unchanged for the third quarters of 2005 and
2004. Net sales were $115.5 million and $114.6 million for the three months
ended September 30, 2005 and 2004, respectively. Third quarter shipments were
101,385 tons and 101,547 tons in 2005 and 2004, respectively.
For the first nine months of 2005, Specialty Products' net sales were similar
at $347.8 million compared to $347.2 million in the first nine months of 2004.
Shipment volume declined 4% to 306,577 tons during the first nine months of
2005 compared to 317,886 tons shipped during the first nine months of 2004.
Approximately one-half of the year-over-year decline in volume was due to
reduced paper mill packaging shipments. The decline in total volume year-over-
year was offset by a like increase in average net selling price of 3%. 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 September 30, 2005, Printing & Writing reported net
sales of $100.5 million, an increase of 13% over reported net sales in the
third quarter of 2004 of $89.4 million. The current quarter improvement in net
sales was due to a more than 16% increase in volume as 84,194 tons were shipped
during the third quarter of 2005 compared to 72,287 tons during the third
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 5%. 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 1%, or
approximately $1 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 9% to $288.4 million in
2005 from $264.7 million in 2004. Shipment volume improved 12% year-over-year
with 244,765 tons shipped during the nine months ended September 30, 2005 and
218,380 tons shipped during the nine months ended September 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
11
decline in average net selling price of approximately 3% due to the
commodity-oriented product mix produced and shipped from the Brainerd mill.
Towel & Tissue reported net sales of $69.6 million for the three-month period
ended September 30, 2005, an increase of 19% from net sales of $58.5 million
reported in the same three-month period of 2004. Total shipments increased 9%
to 43,196 tons from 39,459 tons during the same period last year, despite less
than one percent growth in the "away-from-home" towel and tissue market in
which this business segment competes. Average net selling price increased
nearly 10%, or approximately $6 million, in the third quarter of 2005 over the
third quarter of 2004 due principally to significant pricing gains experienced
in this business segment.
Net sales for the first nine months of 2005 and 2004 were $192.5 million and
$166.4 million, respectively, for Towel & Tissue-an improvement of 16%.
Product selling price increases drove an increase in average net selling price
of more than 9% as compared to 2004. In addition, shipments of 120,749 tons
during the first three quarters of 2005 increased 7,157 tons or 6% over
shipments of 113,592 tons during the first three quarters of 2004.
Gross Profit
Three Months Nine Months
Ended September 30, Ended September 30,
(all dollar amounts in thousands) 2005 2004 2005 2004
Gross profit on sales $8,142 $32,445 $48,123 $87,279
Gross profit margin 3% 12% 6% 11%
Gross profit for the three months ended September 30, 2005, was $8.1 million
compared to $32.4 million for the three months ended September 30, 2004. The
third quarter of 2005 includes $20.6 million in charges related to the planned
closure of Printing & Writing's sulfite pulp mill located in Brokaw, Wisconsin.
The charges, which impacted gross profit by more than 7 percentage points,
consist primarily of accelerated depreciation on assets that will be abandoned
upon closure. Energy-related prices, impacted by the production and supply
disruptions caused by Hurricane Katrina, increased approximately $5 million in
the third quarter of 2005 compared to the third quarter of 2004, with natural
gas prices and fuel surcharges accounting for $1.7 million and $1.2 million of
the increase, respectively. Quarter-over-quarter, fiber prices decreased
approximately $1 million with market pulp declining $1.3 million or 2%;
wastepaper declining $1.3 million or 28%; and linerboard declining $0.4 million
or 6%. Partially offsetting these reductions were increases in pulpwood prices
of $0.9 million or 12% and purchased towel and tissue parent rolls of $0.8
million or 6%.
Year-to-date, gross profit decreased from $87.3 million, or 11% of consolidated
net sales, to $48.1 million, or 6% of consolidated net sales. As in the
quarterly comparison, pulp mill closure charges and unfavorable energy costs
negatively impacted the gross profit margin year-over-year. In addition, on a
year-to-date basis, market pulp costs, pulpwood prices, linerboard and
purchased towel and tissue parent roll prices negatively impacted the gross
profit margin. 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 4%, or $7 million.
12
Specialty Products' cost-reduction efforts were more than offset by higher
current year manufacturing costs, including market pulp, linerboard and energy,
resulting in lower gross margins of 8% in the third quarter and first nine
months of 2005 compared to 10% in the third quarter and first nine months of
2004.
In the third quarter of 2005, Printing & Writing's gross profit as a percent of
net sales was a negative 17% compared to gross profit of 10% of net sales for
the third quarter of 2004. Gross profit margin was unfavorably impacted by a
$20.6 million pre-tax charge to cost of products sold, or a 20 percentage-point
reduction in gross profit, as a result of the planned 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. In addition to the unfavorable impacts of energy
described in the consolidated comparison, the Printing & Writing business
segment absorbed operational losses incurred at the Brainerd mill which was
acquired in October 2004.
Year-to-date, Printing & Writing's gross profit margin was a negative 8% in
2005 compared to 8% for the same nine month period of 2004. The business
segment recorded a pre-tax pulp mill closure charge of $29.9 million to cost of
goods sold, a 10 percentage-point reduction in gross profit. As in the
quarter-over-quarter comparison, operational losses at the segment's Brainerd
mill and unfavorable impacts of energy prices drove the current-year gross
profit margin lower. In addition, year-over-year unfavorable market pulp
prices were also a factor in deterioration of the gross profit margin for the
first nine months of 2005.
The gross profit margin for Towel & Tissue was 22% in the third quarter of 2005
compared to 20% in the third quarter of 2004. Increased average selling price,
improved operations and a decline in wastepaper prices offset 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 nine months
of 2005 compared to 20% reported during the first nine months of 2004. The
year-over-year comparison was impacted by similar factors as the quarter-over-
quarter comparison.
Consolidated order backlogs were similar year-over-year with approximately
46,400 tons at September 30, 2005, and approximately 46,300 tons at September
30, 2004. Backlog tons at September 30, 2005 represent $58.0 million in sales
compared to $57.3 million in sales at September 30, 2004. Improvements in
customer backlog were evident in Printing & Writing and Towel & Tissue, while
Specialty Products' customer backlogs declined. Specialty Products' backlog
tons declined from 33,900 tons as of September 30, 2004, to 31,800 tons at
September 30, 2005. Printing & Writing backlog tons improved to 9,600 tons at
the end of the third quarter of 2005 compared to 7,500 tons at the end of the
third quarter of 2004. Towel & Tissue experienced slightly improved backlogs
with 5,000 tons and 4,900 tons reported at the end of the third 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 Nine Months
Ended September 30, Ended September 30,
(all dollar amounts in thousands) 2005 2004 2005 2004
Selling and administrative expense $19,108 $17,158 $55,011 $55,796
Percent increase (decrease) 11% 4% (1%) 11%
As a percent of net sales 7% 7% 7% 7%
Selling and administrative expenses in the third quarter of 2005 were $19.1
million compared to $17.2 million in the same period of 2004. Stock-based
incentive compensation programs resulted in a provision of $0.3 million for the
three months ended September 30, 2005 compared to a credit of $0.2 million for
the three months ended September 30, 2004. After adjusting for stock-based
incentive compensation programs, the balance of the increase is due to Brainerd
mill expenses, as well as, advertising and promotional expenses associated with
new product introductions.
Selling and administrative expenses for the nine months ended September 30,
2005 were $55.0 million compared to $55.8 million in the same period of 2004.
Stock-based incentive compensation programs resulted in a credit of $2.5
million for the nine months ended September 30, 2005 compared to a provision of
$2.0 million for the nine months ended September 30, 2004. After adjusting for
incentive compensation programs, the balance of the year-over-year change is
due to Brainerd mill expenses, as well as, increased advertising and
promotional expenses, wage and benefit costs, legal, audit and consulting
expenses.
Restructuring Charge
The Company recorded a pre-tax $0.2 million closure charge in the third quarter
of 2005 for employee severance benefits and other associated closure costs
directly related to the announced closing of the sulfite pulp mill located at
Printing & Writing's Brokaw papermaking mill. For the first nine months of
2005, the Company has recorded pre-tax restructuring charges of $0.4 million.
Additional restructuring charges related to the pulp mill closure are expected
to be recorded in the fourth quarter of 2005 as a result of employee severance
costs and other associated costs.
Other Income and Expense
Three Months Nine Months
Ended September 30, Ended September 30,
(all dollar amounts in thousands) 2005 2004 2005 2004
Interest expense $2,718 $2,608 $8,055 $7,685
Other income 124 191 361 483
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 $8.1 million and $7.7
million, respectively. The increase was due to slightly higher interest rates
in 2005 compared to 2004. Long-term debt was $161.3 million and $161.5 million
14
at September 30, 2005 and 2004, respectively. Long-term debt at December 31,
2004, was $161.8 million. Interest expense in 2005 is expected to be
comparable to 2004 levels for the remainder of the year. Other income,
consisting principally of interest income, in the third 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 Nine Months
Ended September 30, Ended September 30,
(all dollar amounts in thousands) 2005 2004 2005 2004
(Credit) provision for income taxes ($4,794) $4,762 ($5,238) $8,984
Effective tax rate 35% 37% 35% 37%
The effective tax rates for the periods presented are indicative of the
Company's normalized tax rate. The change in the effective tax rate for 2005
is due to minor adjustments to the Company's deferred income taxes. The
effective rate for 2005 is expected to remain at 35%.
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 for 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
Nine Months Ended September 30,
(all dollar amounts in thousands) 2005 2004
Cash provided by operating activities $ 3,708 $47,102
Capital expenditures 26,606 16,579
For the nine months ended September 30, 2005, cash provided by operating
activities was $3.7 million compared to cash provided by operating activities
of $47.1 million for same period in 2004. Inventory increased approximately
$15 million during the first nine months of 2005 compared to flat year-over-
year inventories during the first nine months of 2004. The increase in
inventory levels are primarily attributable to the Printing & Writing business
segment where weak demand, as well as, an inventory build at the Brainerd mill
which was acquired in October 2004, have driven inventories to higher levels.
The remaining use of cash is related to year-over year decreases in accounts
payable, accrued and other liabilities and income taxes. On a combined basis,
these items decreased approximately $20 million during the first three quarters
of 2005 compared to an increase of nearly $7 million during the first three
quarters 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 nine months of the year. Capital spending for the
first nine months of 2005 was $26.6 million
15
compared to $16.6 million during the first nine 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 $2.1 million on paper mill related equipment at the Rhinelander,
Wisconsin, Mosinee, Wisconsin and Jay, Maine mills. Printing & Writing spent
$1.1 million on a palletizer project at the Groveton, New Hampshire facility
and $0.2 million as part of a capital project to expand premium papers
production capabilities at the Brokaw, Wisconsin paper mill. Towel & Tissue
spent $4.5 million on various converting lines.
The balance of spending for the first nine months of 2005 was related to
projects that individually are expected to cost less than $1.0 million. These
expenditures included approximately $13.2 million for essential non or low-
return projects, and approximately $5.5 million on projects expected to provide
a return on investment that exceeds the Company's cost of capital.
For the first nine months of 2004, capital expenditures for projects with total
spending expected to exceed $1.0 million were $1.2 million in Printing &
Writing as part of a capital project to expand premium papers production
capabilities at the Brokaw mill and $1.3 million for a digester replacement at
the Brokaw mill. In Towel & Tissue, project spending included $0.2 million on
a screw press project, $0.3 million on production equipment, and $3.2 million
for various converting lines.
The balance of spending during the first nine months of 2004 was related to
projects that individually are expected to cost less than $1.0 million. These
expenditures included approximately $5.1 million for essential non or low-
return projects, and approximately $5.3 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. During the third quarter of 2005, the Company sold approximately 670
acres of timberlands for $1.2 million, generating an after-tax gain of $0.7
million. Year-to-date through September 30, 2005, the Company has sold
approximately 750 acres for $1.4 million, recording an after-tax gain of
approximately $0.9 million.
On October 24, 2005, the Company announced that due to the planned fourth
quarter closure of the sulfite pulp mill in Brokaw, Wisconsin, lands that
supported the supply of pulpwood to that pulp mill are no longer strategic to
the operations of the Company. As a result, the timberland divesture program
will be expanded from 12,000 acres to 42,000 acres. Under this expanded
program, the Company expects to generate proceeds of $46 million and an after-
tax gain of approximately $29 million or $0.57 per share over the next three to
four years.
16
Debt and Equity
SEPTEMBER 30, December 31,
(all dollar amounts in thousands) 2005 2004
Short-term debt $ 60 $ 115
Long-term debt 161,268 161,833
Total debt 161,328 161,948
Stockholders' equity 333,773 357,092
Total capitalization 495,101 519,040
Long-term debt/capitalization ratio 33% 31%
As of September 30, 2005, there was no significant change in total debt as
compared to December 31, 2004.
On September 30, 2005, the Company had approximately $100 million available
borrowing capacity under a credit 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 and nine months ended September 30, 2005, a total of 180,000 shares and
404,000 shares, respectively, were repurchased in the open market under
authorizations approved by the Board of Directors in 1998 and 2000. At
September 30, 2005, there are 2.2 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 June 13, 2005, the Board of Directors declared a quarterly cash dividend of
$0.085 per common share. The dividend was paid on August 15, 2005, to
shareholders of record on August 1, 2005. At a meeting held on October 21,
2005, the Board of Director's declared a cash dividend in the amount of $0.085
per share on its common stock. The dividend is payable on November 15, 2005,
to shareholders of record on November 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 September 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)(1)
July 10,000 $12.63 10,000
August 170,000 $12.43 170,000
September 0 0 0
Quarterly Totals 180,000 $12.44 180,000 2,234,674
(1) Includes shares purchased under a 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 the program's purchases.
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
19
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.
November 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)
20
EXHIBIT INDEX
TO
FORM 10-Q
OF
WAUSAU PAPER CORP.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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
21