Form 10-Q  (00155390.DOC;1)

FORM 10-Q


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549


(Mark One)

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2007


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   T No   £


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer , or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   £

Accelerated filer   S

Non-accelerated filer   £


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


The number of common shares outstanding at October 31, 2007 was 50,249,847.





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, 2007 (unaudited) and

 
  

September 30, 2006 (unaudited)

1

    
  

Condensed Consolidated Balance

 
  

Sheets, September 30, 2007 (unaudited)

 
  

and December 31, 2006 (derived from

 
  

audited financial statements)

2

    
  

Condensed Consolidated Statements

 
  

of Cash Flows, Nine Months Ended

 
  

September 30, 2007 (unaudited) and

 
  

September 30, 2006 (unaudited)

3

    
  

Notes to Condensed Consolidated

 
  

Financial Statements (unaudited)

4-14

    

Item 2.

 

Management’s Discussion and

 
  

Analysis of Financial Condition

 
  

and Results of Operations

15-24

    

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

24

    

Item 4.

 

Controls and Procedures

24

    

PART II.

OTHER INFORMATION

    

Item 1A.

 

Risk Factors

25

    

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

25

    

Item 6.

 

Exhibits

25




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 amounts in thousands, except per share data)

2007

2006

2007

2006

     

Net sales

$ 319,342 

$ 306,699 

$ 935,970 

$ 887,648 

Cost of products sold

286,316 

270,721 

842,853 

799,566 

     

Gross profit

33,026 

35,978 

93,117 

88,082 

Selling and administrative expenses

21,070 

21,768 

63,250 

62,479 

Restructuring expense

–    

17 

–    

226 

     

Operating profit

11,956 

14,193 

29,867 

25,377 

Interest expense

(2,861)

(2,904)

(8,518)

(8,496)

Other income, net

235 

121 

567 

210 

     

Earnings before income taxes and

    

cumulative effect of a change in

    

accounting principle

9,330 

11,410 

21,916 

17,091 

Provision (credit) for income taxes

3,251 

4,222 

(3,881)

6,324 

     

Earnings before cumulative effect of

    

a change in accounting principle

6,079 

7,188 

25,797 

10,767 

Cumulative effect of a change in accounting

    

principle (net of income taxes)

–    

–    

–    

(427)

     

Net earnings

$     6,079 

$     7,188 

$   25,797 

$   10,340 

     

Earnings per share before

    

cumulative effect of a change in

    

accounting principle – basic and diluted

$       0.12 

$       0.14 

$       0.51 

$       0.21 

Cumulative effect of a change in accounting

    

principle (net of income taxes), per share

–    

–    

–    

(0.01)

     

Net earnings per share – basic and diluted

$       0.12 

$       0.14 

$       0.51 

$       0.20 

Weighted average shares outstanding-basic

50,457 

50,889 

50,625 

50,990 

Weighted average shares outstanding-diluted

50,679 

51,162 

50,937 

51,282 

     

Dividends declared per common share

$        –     

$        –     

$       0.17 

$       0.17 


See Notes to Condensed Consolidated Financial Statements.



1


______________________________________________________________________________

Wausau Paper Corp. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

______________________________________________________________________________


 

September 30,

December 31,

 

2007

2006

(all dollar amounts in thousands)

(unaudited)

 

Assets

  
   

Current assets:

  

Cash and cash equivalents

$    19,486

$    26,122

Receivables, net

122,886

104,801

Refundable income taxes

607

737

Inventories

111,553

122,531

Deferred income taxes

5,824

7,444

Other current assets

33,418

32,612

   

Total current assets

293,774

294,247

   

Property, plant, and equipment, net

450,318

468,372

Other assets

39,761

36,495

   

Total Assets

$ 783,853

$ 799,114

   

Liabilities and Stockholders’ Equity

  
   

Current liabilities:

  

Current maturities of long-term debt

$        190

$        184

Accounts payable

88,506

83,441

Accrued and other liabilities

65,184

71,557

   

Total current liabilities

153,880

155,182

   

Long-term debt

151,081

160,287

Deferred income taxes

49,688

66,574

Post-retirement benefits

103,274

101,513

Pension

2,345

14,259

Other noncurrent liabilities

33,894

27,225

   

Total liabilities

494,162

525,040

Stockholders’ equity

289,691

274,074

   

Total Liabilities and Stockholders’ Equity

$ 783,853

$ 799,114


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)

2007

2006

   

Net cash provided by operating activities

$ 32,146 

$ 17,080 

   

Cash flows from investing activities:

  

Capital expenditures

(19,196)

(17,387)

Proceeds from property, plant, and equipment disposals

7,146 

10,562 

   

Cash used in investing activities

(12,050)

(6,825)

   

Cash flows from financing activities:

  

Net issuances of commercial paper

6,490 

–    

Borrowings under credit agreements

20,000 

–    

Payments under capital lease obligation and notes payable

(35,146)

(162)

Dividends paid

(12,930)

(13,017)

Proceeds from stock option exercises

–    

1,437 

Excess tax benefits related to share-based compensation

35 

99 

Payments for purchase of company stock

(5,181)

(5,258)

   

Cash used in financing activities

(26,732)

(16,901)

   

Net decrease in cash and cash equivalents

(6,636)

(6,646)

Cash and cash equivalents, beginning of period

26,122 

15,500 

   

Cash and cash equivalents, end of period

$ 19,486 

$   8,854 

   

Supplemental Cash Flow Information:

  

Interest paid-net of amount capitalized

$ 10,767 

$ 10,712 

Income taxes paid

11,463 

4,893 


Noncash investing and financing activities:  A capital lease obligation of $393 was recorded in the first quarter of 2006 when we entered into a new lease agreement for equipment.


See Notes to Condensed Consolidated Financial Statements.



3


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


Note 1.

Basis of Presentation

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 consolidated financial statements, which appear in the Annual Report on Form 10-K for the year ended December 31, 2006, for our accounting policies and other disclosures, which are pertinent to these statements.


Note 2.

New Accounting Pronouncements

On January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities.”  This FSP prohibits companies from recognizing planned major maintenance costs under the “accrue-in-advance” method that allowed the accrual of a liability over several reporting periods before the maintenance is performed.  We have adopted the direct expensing method, under which the costs of planned major maintenance activities are expensed in the period in which the costs are incurred.  The condensed consolidated financial statements for 2006 have been adjusted to apply the new method retrospectively.  The application of FSP AUG AIR-1 will effect our 2006 interim period reporting and will not result in a cumulative effect adjustment to our annual consolidated financial statements.  The following tables illustrate the effect of applying the direct expensing method on individual line items in the condensed consolidated financial statements:


 

Before

 

After

 

Application of

 

Application of

 

FSP AUG

 

FSP AUG

(all amounts in thousands, except per share data)

AIR-1

Adjustment

AIR-1

Condensed Consolidated Statement of Operations

   

Three Months Ended September 30, 2006

   

Cost of products sold

$ 270,213

 

$   508 

 

$ 270,721

 

Provision for income taxes

4,409

 

(187)

 

4,222

 

Net earnings

7,509

 

(321)

 

7,188

 

Net earnings per share – basic and diluted

0.15

 

(0.01)

 

0.14

 




4



 

Before

 

After

 

Application of

 

Application of

 

FSP AUG

 

FSP AUG

(all amounts in thousands, except per share data)

AIR-1

Adjustment

AIR-1

Condensed Consolidated Statement of Operations

   

Nine Months Ended September 30, 2006

   

Cost of products sold

$ 800,497

 

$ (931)

 

$ 799,566

 

Provision for income taxes

5,979

 

345 

 

6,324

 

Net earnings

9,754

 

586 

 

10,340

 

Net earnings per share – basic and diluted

0.19

 

0.01 

 

0.20

 


The effect of applying the direct expensing method retrospectively will result in a decrease in net earnings of $0.6 million, or $0.01 per basic and diluted share, for the three months ended December 31, 2006.  


Note 3.

Income Taxes

On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Income Tax Uncertainties” (“FIN 48”).  FIN 48 clarifies whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a taxing authority.  As a result of the implementation of FIN 48, we recognized a $0.04 million decrease in the liability for unrecognized tax benefits, which was accounted for as an increase to retained earnings at January 1, 2007.


On January 1, 2007, the liability for uncertain tax positions was $4.8 million, all of which would impact our effective tax rate if recognized, and was recorded as a current liability.  We record penalties and accrued interest related to uncertain tax positions in miscellaneous expense and interest expense, respectively.  At September 30, 2007, the total liability for uncertain tax positions was $4.9 million, with approximately $0.8 million included for the possible payment of interest and penalties.  At September 30, 2007, $3.1 million of the liability for uncertain tax positions was recorded as a current liability and $1.8 million was recorded as a noncurrent liability.  


The Internal Revenue Service (“IRS”) has commenced examinations of our 1998 to 2003 tax returns that are anticipated to be concluded by the end of 2007.  These examinations relate to certain research and development credits recorded during these respective tax return years.  In addition, we are currently open to audit under the statute of limitations by the IRS for the years ending December 31, 2004 through 2006.  We also file income tax returns in numerous state jurisdictions with varying statutes of limitations.  The anticipated charges with respect to the aforementioned items are included in the liability for uncertain tax positions recorded at September 30, 2007.  



5



Note 4.

Reorganization

Effective January 1, 2007, we reorganized the various subsidiaries which comprised our operating segments to align more closely with our operating structure.  Each segment is now organized as a single member limited liability company and operates as a direct subsidiary of Wausau Paper Corp.  The new structure allowed us to utilize state net operating loss and credit carryovers of certain subsidiaries for which valuation allowances had been previously established due to the fact that separate state tax returns were filed under our previous structure.  During the first quarter of 2007, we recorded state income tax benefits of $12.0 million primarily as a result of the reversal of these valuation allowances.  In the second quarter of 2007, we recorded state income tax charges of $0.4 million as a result of the recognition of a change in our effective state tax rate from our previous tax structure to our single member limited liability company tax structure.


The major temporary differences that give rise to our deferred tax assets and liabilities were as follows:


 

September 30,

December 31,

(all dollar amounts in thousands)

2007

2006

   

Deferred tax assets:

  

Accrued compensated absences

$      4,466 

 

$      4,281 

 

Pensions

117 

 

1,648 

 

Post-retirement benefits

42,783 

 

40,522 

 

State net operating loss carry forward

15,039 

 

15,466 

 

Other

25,641 

 

25,088 

 

Gross deferred tax asset

88,046 

 

87,005 

 

Less valuation allowance

(1,591)

 

(12,267)

 

Net deferred tax assets

86,455 

 

74,738 

 

Deferred tax liabilities:

    

Property, plant, and equipment

(115,203)

 

(120,271)

 

Other

(15,116)

 

(13,597)

 

Gross deferred tax liability

(130,319)

 

(133,868)

 

Net deferred tax liability

$   (43,864)

 

$   (59,130)

 




6



Note 5.

Earnings Per Share

The following table reconciles basic weighted average outstanding shares to diluted weighted average outstanding shares:


 

Three Months

Nine Months

 

Ended September 30,

Ended September 30,

(all amounts in thousands, except per share data)

2007

2006

2007

2006

     

Net earnings

$  6,079  

$  7,188 

$ 25,797 

$ 10,340  

     

Basic weighted average common shares outstanding

50,457  

50,889 

50,625 

50,990  

Effect of dilutive securities:

    

Share-based compensation awards

222  

273 

312 

292  

     

Diluted weighted average common shares outstanding

50,679  

51,162 

50,937 

51,282  

     

Net earnings per share:

    

Basic

$    0.12  

$    0.14 

$    0.51 

$    0.20  

Diluted

$    0.12  

$    0.14 

$    0.51 

$    0.20  


Share-based compensation awards for which the exercise price exceeds the average market price over the applicable period have an antidilutive effect on EPS, and accordingly, are excluded from the calculation of diluted EPS.  For the three and nine months ended September 30, 2007, 1,066,311 and 695,516 shares, respectively, under share-based compensation plans were excluded from the diluted EPS calculation because the shares were antidilutive.  For the three and nine months ended September 30, 2006, 795,311 and 736,622 shares, respectively, under share-based compensation plans were excluded from the diluted EPS calculation because the shares were antidilutive.  


Note 6.

Receivables

Accounts receivable consisted of the following:


 

September 30,

December 31,

(all dollar amounts in thousands)

2007

2006

   

Trade

$  120,887 

 

$  104,049 

 

Other

3,044 

 

2,113 

 
 

123,931 

 

106,162 

 

Less:  allowances for doubtful accounts

(1,045)

 

(1,361)

 
     
 

$  122,886 

 

$  104,801 

 




7



Note 7.

Inventories

The various components of inventories were as follows:


 

September 30,

December 31,

(all dollar amounts in thousands)

2007

2006

   

Raw materials

$    37,060 

 

$    37,393 

 

Work in process and finished goods

108,539 

 

114,584 

 

Supplies

5,692 

 

9,457 

 

Inventories at cost

151,291 

 

161,434 

 

Less:  LIFO reserve

(39,738)

 

(38,903)

 
     
 

$  111,553 

 

$  122,531 

 


Note 8.

Property, Plant, and Equipment

The accumulated depreciation on fixed assets was $746.3 million as of September 30, 2007, and $712.0 million as of December 31, 2006.  The provision for depreciation, amortization, and depletion for the three months ended September 30, 2007, and September 30, 2006 was $15.3 million and $14.5 million, respectively.  The provision for depreciation, amortization, and depletion for the nine months ended September 30, 2007 and September 30, 2006 was $44.6 million and $43.4 million, respectively.


Included in cost of sales for the three and nine months ended September 30, 2007, were net gains on sales of property, plant, and equipment of $2.9 million and $6.7 million, respectively, including gains on sales of timberlands of $2.8 million and $6.4 million, respectively.  Included in cost of sales for the three and nine months ended September 30, 2006, were net gains on sales of property, plant, and equipment of $6.5 million and $8.7 million, respectively, including gains on sales of timberlands of $6.5 million and $9.3 million, respectively.


Note 9.

Debt

As of September 30, 2007, we had approximately $6.5 million of commercial paper outstanding under an existing unrated commercial paper placement agreement with a bank.  This agreement requires unused credit availability under our $125 million unsecured revolving-credit agreement that expires July 27, 2011, equal to the amount of outstanding commercial paper.


As of September 30, 2007, we had $20.0 million of outstanding borrowings under our $125 million unsecured revolving-credit facility that expires on July 27, 2011.  Under this facility, we have the ability and the intent to refinance on a long-term basis the amount of outstanding commercial paper at September 30, 2007.  As a result, we have classified the amount as long-term on our Condensed Consolidated Balance Sheets.



8



Note 10.

Pension and Other Post-retirement Benefit Plans

The components of net periodic benefit costs recognized in the Condensed Consolidated Statements of Operations for the three months ended September 30, 2007 and 2006, were as follows:

   

Other

   

Post-retirement

 

Pension Benefits

Benefits

 

2007

2006

2007

2006

     

Service cost

$ 2,033 

$ 1,958 

$    629 

$    800 

Interest cost

2,759 

2,596 

1,286 

1,311 

Expected return on plan assets

(3,354)

(3,003)

–    

–    

Amortization of:

    

Prior service cost (benefit)

702 

539 

(957)

(831)

Actuarial loss

636 

797 

583 

492 

     

Net periodic benefit cost

$ 2,776 

$ 2,887 

$ 1,541 

$ 1,772 


The components of net periodic benefit costs recognized in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2007 and 2006, were as follows:

   

Other

   

Post-retirement

 

Pension Benefits

Benefits

 

2007

2006

2007

2006

     

Service cost

$   5,849 

$ 5,875 

$ 1,887 

$ 2,401 

Interest cost

8,269 

7,787 

3,859 

3,932 

Expected return on plan assets

(10,062)

(9,009)

–    

–    

Amortization of:

    

Prior service cost (benefit)

1,789 

1,617 

(2,871)

(2,493)

Actuarial loss

1,872 

2,392 

1,748 

1,475 

     

Net periodic benefit cost

$   7,717 

$ 8,662 

$ 4,623 

$ 5,315 


We previously disclosed in our consolidated financial statements for the year ended December 31, 2006, that although we do not have a minimum funding requirement for defined benefit pension plans in 2007, we may elect to make contributions of up to $16.2 million directly to pension plans.  As of September 30, 2007, we have made payments of approximately $12.0 million to our pension plans.  In addition, we previously reported that we expected to contribute $4.1 million directly to other post-retirement plans in 2007.  We now expect to contribute $4.7 million directly to other post-retirement plans in 2007.  As of September 30, 2007, we have contributed $3.5 million to our post-retirement plans.



9



Note 11.

Share-Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective application transition method.  Prior to January 1, 2006, we measured compensation cost for stock-based compensation plans using the “intrinsic value based method” prescribed under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”  


Under SFAS 123R, share-based payment awards that are settled in cash continue to be classified as a liability; however, rather than remeasuring the award at the intrinsic value each reporting period, the award is remeasured at its fair value each reporting period until final settlement.  The difference between the liability as previously computed (i.e., intrinsic value) and the fair value of the liability award on January 1, 2006, was $0.4 million, net of any related tax effects ($0.7 million pretax), and was recorded as a cumulative effect of a change in accounting principle in the accompanying Condensed Consolidated Statements of Operations.


Stock Options, Restricted Stock Awards, and Performance Units

During the three and nine months ended September 30, 2007, share-based compensation expense related to fixed option grants and performance unit awards was approximately $0.2 million and $0.8 million, respectively.  During the three and nine months ended September 30, 2006, share-based compensation expense related to fixed option grants and performance unit awards was approximately $0.2 million and $0.4 million, respectively.  


During the nine months ended September 30, 2007, we granted 40,000 fixed stock options to certain employees and directors with a weighted-average exercise price of $13.75 per share.  In addition, as a component of the director compensation policy, we awarded 8,110 of performance units during the nine months ended September 30, 2007.


No grants of restricted stock were made during the nine months ended September 30, 2007.


On an annual basis, we generally grant stock options and performance unit awards as part of a performance-based compensation award to certain employees of Wausau Paper.  The vesting of these performance-based awards is subject to (1) achieving certain operating profit levels and (2) completion of a service requirement.  During the nine months ended September 30, 2007, we granted 413,102 performance-based stock options with a weighted-average exercise price of $15.17 per share, and 37,410 performance unit awards as part of a performance-based compensation award for the year ending December 31, 2007.  During the three and nine months ended September 30, 2007, we have recognized approximately $0.1 million and $0.3 million, respectively, in share-based compensation expense related to the



10


performance-based awards for 2007, as it is probable a portion of the awards will vest as performance criteria are met.  


Share-based compensation expense related to fixed option grants and performance unit awards are included as a component of selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.  We recognize compensation expense on grants of stock options, restricted stock, and performance unit share-based compensation awards on a straight-line basis over the requisite service period of each award.  Forfeiture rates are estimated based upon our historical experience for each grant type.  As of September 30, 2007, total unrecognized compensation cost related to share-based compensation awards was approximately $0.5 million, net of estimated forfeitures, which we expect to recognize over a weighted average period of approximately 0.8 years.


Stock Appreciation Rights and Dividend Equivalents

Share-based compensation provisions or credits related to stock appreciation rights and dividend equivalents are determined based upon a remeasurement to their fair value at each interim reporting period in accordance with the provisions of SFAS 123R.  During the three and nine months ended September 30, 2007, we recognized a credit of approximately $0.8 million and $1.2 million, respectively, in share-based compensation related to stock appreciation rights and dividend equivalents.  During the three and nine months ended September 30, 2006, we recognized approximately $0.4 million and $0.7 million, respectively, in share-based compensation expense related to stock appreciation rights and dividend equivalents.  Share-based compensation related to stock appreciation rights and dividend equivalents is included as a component of selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.


Note 12.

Pulp Mill Closure

In July 2005, we announced plans to permanently close the sulfite pulp mill at our Brokaw, Wisconsin, facility.  The pulp mill was closed in November 2005 and the related long-lived assets were abandoned.  No closure-related charges impacting cost of sales were incurred during the three months ended September 30, 2006.  The cost of sales for the nine months ended September 30, 2006, include pre-tax pulp mill closure charges of $0.1 million.  Restructuring expense for the three and nine months ended September 30, 2006, reflect pre-tax charges of $0.01 million and $0.2 million, respectively, for other associated closure costs.  There were no charges to cost of sales or restructuring expense for the nine months ended September 30, 2007.  No additional charges related to the pulp mill closure are anticipated.


Note 13.

Interim Segment Information

We have reclassified certain prior-year interim segment information to conform to the 2007 presentation.  The adjustments and reclassifications are the result of a reporting change, effective January 1, 2007, to reflect the adoption of FSP AUG AIR-1, and as a result of restructuring the assets and operating results of one facility from the Corporate and Unallocated segment to the Towel & Tissue segment.  For additional



11


information on the adoption of FSP AUG AIR-1, please refer to “Note 2 – New Accounting Pronouncements.”  For additional information on the restructuring, please refer to “Note 4 – Reorganization.”


Factors Used to Identify Reportable Segments

Our 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.


Reconciliations

The following are reconciliations to corresponding totals in the accompanying condensed consolidated financial statements:


 

Three Months

Nine Months

 

Ended September 30,

Ended September 30,

(all dollar amounts in thousands)

2007

2006

2007

2006

     

Net sales external customers:

    

Specialty Products

$ 120,711 

$ 119,030 

$ 370,616 

$ 352,459 

Printing & Writing

119,548 

109,580 

339,621 

320,931 

Towel & Tissue

79,083 

78,089 

225,733 

214,258 

     
 

$ 319,342 

$ 306,699 

$ 935,970 

$ 887,648 

     

Operating profit (loss):

    

Specialty Products

$     2,236 

$      (328)

$     7,104 

$     4,471 

Printing & Writing

(1,279)

1,106 

(5,387)

(9,132)

Towel & Tissue

11,080 

11,534 

32,114 

32,087 

Corporate & eliminations

(81)

1,881 

(3,964)

(2,049)

     
 

$   11,956 

$   14,193 

$   29,867 

$   25,377 




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September 30,

December 31,

 

2007

2006

   

Segment assets:

  

Specialty Products

$ 314,930

 

$ 319,387

 

Printing & Writing

237,562

 

243,362

 

Towel & Tissue

185,510

 

184,140

 

Corporate & Unallocated*

45,851

 

52,225

 
     
 

$ 783,853

 

$ 799,114

 


*

Segment assets do not include intersegment accounts receivable, cash, deferred tax assets, and certain other assets, which are not identifiable with segments.


Note 14.

Future Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans” (“SFAS 158”), which requires that we recognize in our financial statements the overfunded or underfunded status of a defined benefit post-retirement plan as an asset or liability and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  SFAS 158 also requires additional disclosures regarding certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service credits, and transition assets or obligations.  We adopted the recognition and disclosure provisions of SFAS 158 on December 31, 2006.  In addition, SFAS 158 requires the measurement of the funded status of a plan as of the date of the financial statements.  SFAS 158’s provisions regarding the change in measurement date of post-retirement plans will require us to change our measurement date from September 30 to our fiscal year end date beginning with fiscal year 2008.  We are currently evaluating whether we will early adopt the measurement provisions in fiscal 2007.


In September 2007, the FASB ratified Emerging Issues Task Force (“EITF”) 06-11 “Accounting for the Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”).  EITF 06-11 provides that tax benefits associated with dividends on share-based payment awards be recorded as a component of additional paid-in capital.  EITF 06-11 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007.  We are currently evaluating the impact of EITF 06-11 on our financial statements.


Note 15.

Subsequent Events

On October 19, 2007, the minimum net worth covenants under the $125 million unsecured revolving-credit facility (“Credit Facility”) and the $138.5 million note purchase agreement (“Note Purchase Agreement”) were amended.  Under the amendments, the minimum consolidated net worth covenant is initially $200.0 million and will be adjusted quarterly to include 25% of quarterly



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consolidated net income and proceeds from equity sales.  At the time of the amendments, we were in compliance with the terms of all financial and other covenants under the Credit Facility and the Note Purchase Agreement and remain compliant under the amended terms.  


On October 23, 2007, we announced a plan to permanently close the Groveton, New Hampshire mill, with manufacturing operations to cease effective December 31, 2007.  Total closure charges are estimated to be approximately $72.0 million, with non-cash charges, primarily related to the write-down of long-lived assets, accounting for approximately $41.0 million  of the total.  The estimated cash expenditures of $31.0 million include one-time termination benefits, lease termination costs, future costs under the gas transmission agreement in place at the mill, and other related closure costs.  Closure charges of approximately $52.0 million are expected in the fourth quarter of 2007, with the remaining charges of approximately $20.0 million expected to occur during the first half of 2008.



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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations


Critical Accounting Policies and Estimates


The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and revenue and expenses during the periods reported.  Actual results could differ from those estimates.  Please refer to the notes to the financial statements, which appear in the Annual Report on Form 10-K for the year ended December 31, 2006, for our accounting policies and other disclosures which are pertinent to these statements.


We have reclassified certain prior-year interim segment information to conform to the 2007 presentation.  The adjustments and reclassifications are the result of a reporting change, effective January 1, 2007, to reflect the adoption of FSP AUG AIR-1, and as a result of restructuring the assets and operating results of one facility from the Corporate and Unallocated segment to the Towel & Tissue segment.  For additional information on the adoption of FSP AUG AIR-1, please refer to “Note 2 – New Accounting Pronouncements” in the Notes to Condensed Consolidated Financial Statements.  For additional information on the restructuring, please refer to “Note 4 – Reorganization” in the Notes to Condensed Consolidated Financial Statements.


Overview


In the third quarter of 2007, net sales reached record levels of $319.3 million, an increase of 4% from net sales of $306.7 million during the third quarter of 2006.  Shipments increased slightly in the same quarter-over-quarter comparison.  Year-to-date, net sales improved to $936.0 million, in 2007 from net sales of $887.6 million during the same period in 2006 – an increase of 5%.  In the same year-to-date comparison, shipments increased 1% in 2007 as compared to 2006.


In the third quarter of 2007, we reported net earnings of $6.1 million, or $0.12 per share, compared to prior year net earnings of $7.2 million, or $0.14 per share.  For the nine months ended September 30, 2007, we reported net earnings of $25.8 million, or $0.51 per share, compared to net earnings of $10.3 million, or $0.20 per share, in the first nine months of 2006.  Included in the first nine months of 2007 were one-time state tax benefits of $11.6 million, or $0.23 per share, related to the January 1, 2007, restructuring of our subsidiaries to realign them more closely with our current operating structure.  The subsidiary realignment allows for the future utilization of previously reserved state net operating loss and credit carryovers.  For additional information on the restructuring, please refer to “Note 4 – Reorganization” in the Notes to Condensed Consolidated Financial Statements.  Net earnings for the first nine months of 2006 include a charge for the cumulative effect of a change in accounting principle, net of related income taxes, of $0.4 million, or $0.01 per share, as a result of our adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” on January 1, 2006.




15


In the quarter-over-quarter consolidated comparison, net earnings was impacted by overall improvements in product pricing, however, those improvements were unable to offset more significant increases in fiber-related costs and other manufacturing cost increases experienced during 2007 compared to 2006.  In the nine month year-over-year comparison, improvements in product pricing and volume gains, combined with overall lower energy costs and increased productivity, more than offset fiber-related cost and other manufacturing cost increases experienced during 2007 compared to the same period in 2006.  


Operations Review


Net Sales

 

Three Months

Nine Months

 

Ended September 30,

Ended September 30,

(all dollar amounts in thousands)

2007

2006

2007

2006

     

Net sales

$ 319,342

$ 306,699

$ 935,970

$ 887,648

Percent increase

4%

7%

5%

7%


Consolidated net sales of $319.3 million for the three months ended September 30, 2007, improved 4% over consolidated net sales of $306.7 million for the three months ended September 30, 2006.  Shipments improved less than 1% quarter-over-quarter with 234,572 tons shipped during the third quarter of 2007 and 233,543 tons shipped during the third quarter of 2006.  During the same comparative periods, average net selling price improved approximately 4%, or more than $11 million.


For the nine months ended September 30, 2007 and 2006, consolidated net sales were $936.0 million and $887.6 million, respectively, a 5% improvement year-over-year.  Year-to-date shipments at September 30, 2007 were 699,018 tons which represented a 1% increase over the 689,755 tons shipped during the same nine-month period in 2006.  During the first nine months of 2007, average net selling price improved 4%, or approximately $37 million.


Specialty Products’ net sales for the third quarter of 2007 were $120.7 million, an increase of 1% from net sales of $119.0 million reported during the same period in 2006.  Quarter-over-quarter, average net selling price improved approximately 8%, or more than $9 million, with more than half of the increase due to product mix improvement.  Specialty Products’ shipments declined 6% to 94,227 tons in the three months ended September 30, 2007, from 100,548 tons shipped in the three months ended September 30, 2006.  The decline in shipments quarter-over-quarter was due in part to shipments of generally lower basis weight products and by a decrease in paper mill packaging shipments.


For the first nine months of 2007, Specialty Products’ net sales improved 5% to $370.6 million from $352.5 million in the first nine months of 2006.  Shipment volume declined 1% to 294,456 tons during the first nine months of 2007, compared to 297,555 tons shipped during the first nine months of 2006.  As in the quarterly comparison, lower basis weight products and a decrease in paper mill packaging shipments accounted for the year-over-year decline in volume. The decline in total shipments year-over-year was offset by an increase in average net selling price of



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approximately 6%, or more than $21 million, with actual product selling price gains generating the majority of the improvement.  


For the three months ended September 30, 2007, Printing & Writing reported net sales of $119.5 million, an increase of 9% over reported net sales in the third quarter of 2006 of $109.6 million.  The current quarter improvement in net sales was due to a nearly 10% increase in shipment volume as 95,726 tons were shipped during the third quarter of 2007, compared to 87,339 tons during the third quarter of 2006.  Average net selling price for the business segment remained flat quarter-over-quarter, as a less favorable product mix offset actual product selling price improvements.


Year-to-date net sales for Printing & Writing increased 6% to $339.6 million in 2007 from $320.9 million in 2006.  Shipment volume improved 4% year-over-year with 275,572 tons shipped during the nine months ended September 30, 2007, and 264,281 tons shipped during the nine months ended September 30, 2006.  Average net selling price improved nearly 2%, or approximately $6 million, with actual product selling price increases more than offsetting a weaker product mix.


Towel & Tissue reported net sales of $79.1 million for the three-month period ended September 30, 2007, an increase of 1% from net sales of $78.1 million reported in the same three-month period of 2006.  For the third quarter of 2007, total shipments declined 2% to 44,619 tons from 45,656 tons during the same period last year.  The quarter-over-quarter decrease in shipments is primarily due to reduced commodity-oriented product volumes.  The reduced shipment volumes were offset by average net selling price increases of approximately 4%, or more than $3 million, in the third quarter of 2007 over the third quarter of 2006, due to a combination of actual product selling price improvements and product mix enhancements.


Net sales for the first nine months of 2007 and 2006 were $225.7 million and $214.3 million, respectively, for Towel & Tissue – an improvement of 5% year-over-year.  Strong product selling price increases and product mix improvements drove an increase in average net selling price of 5%, or approximately $11 million, as compared to 2006.  In addition, shipments of 128,990 tons during the first three quarters of 2007 increased 1% over shipments of 127,919 tons during the first three quarters of 2006.


Gross Profit

 

Three Months

Nine Months

 

Ended September 30,

Ended September 30,

(all dollar amounts in thousands)

2007

2006

2007

2006

     

Gross profit on sales

$ 33,026

$ 35,978

$ 93,117

$ 88,082

Gross profit margin

10%

12%

10%

10%


Gross profit for the three months ended September 30, 2007, was $33.0 million compared to $36.0 million for the three months ended September 30, 2006.  On a consolidated basis, overall improvements in average net selling price were unable to offset unfavorable manufacturing cost increases and increases in fiber-related costs, as well as decreases in gains from the timberland sales program.  Fiber-related costs increased approximately $9 million during the third quarter of



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2007 as compared to the same period in 2006, with the most significant increases occurring in market pulp with prices increasing $7 million, and wastepaper prices increasing $2 million.  Gains on sales of timberlands decreased by approximately $4 million during the three months ended September 30, 2007, as compared to the same period in 2006.Over the same quarterly comparative period, energy prices remained nearly flat, with increased electricity costs offsetting a decline in natural gas prices.


Gross profit increased to $93.1 million for the nine months ended September 30, 2007, from $88.1 million reported for the same period in 2006.  Year-over-year, gains in average net selling price and shipments, as well as a decline in energy costs, more than offset increases in fiber-related costs and decreases in gains from the timberland sales program.  In total, energy prices, driven mainly by natural gas, decreased nearly $5 million in the first nine months of 2007, compared to the first nine months of 2006, while fiber-related costs increased approximately $36 million during the same comparative period.  While fiber-related prices increased broadly year-over-year, the most significant increases occurred in market pulp with prices increasing $26 million, and wastepaper prices increasing $6 million.  During the first nine months of 2007, gains on sales of timberlands declined nearly $3 million compared to the first nine months of 2006.


The gross profit margin for Specialty Products was 7% in the third quarter of 2007 compared to 5% in the third quarter of 2006.  Specialty Products’ average net selling price gains more than offset higher manufacturing costs, including market pulp and linerboard.


Specialty Products gross profit margin improved to 7% during the first nine months of 2007 compared to 6% reported during the first nine months of 2006.  The year-over-year nine-month comparison was impacted by similar factors as the third quarter comparison.


In the third quarter of 2007, Printing & Writing’s gross profit as a percent of net sales was 5% compared to 7% of net sales for the third quarter of 2006.  The decrease in gross profit is a result of unfavorable cost pressures with respect to market pulp, while average net selling price remained flat.


Year-to-date, Printing & Writing’s gross profit margin was 4% of net sales in 2007 compared to 3% in 2006.  Year-to-date improvements in product selling price, operational efficiency gains, reduced maintenance spending, and favorable energy prices more than offset increases in market pulp prices for the first nine months of 2007 compared to the same period of 2006.


Towel & Tissue gross profit margin was comparable at 21% in the third quarter of 2007 and 2006.  Quarter-over-quarter, increased average net selling price offset increases in manufacturing costs, including wastepaper and purchased towel and tissue parent rolls.


The gross profit margin for Towel & Tissue was 21% for the first nine months of 2007 compared to 22% for the first nine months of 2006.  Year-to-date, increased average net selling price was unable to offset increases in purchased towel and tissue parent roll and wastepaper costs.  


Consolidated order backlogs decreased to approximately 50,400 tons at September 30, 2007, from approximately 50,800 tons at September 30, 2006.  Backlog tons at September 30, 2007, represent $68.7 million in sales compared to $65.9 million in sales at September 30, 2006.  



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Quarter-over-quarter increases in customer backlog were evident in Specialty Products, while Printing & Writing customer backlogs declined, and Towel & Tissue customer backlogs remained level.  Specialty Products’ backlog tons improved to 35,600 tons as of September 30, 2007, from 32,900 tons at September 30, 2006.  Printing & Writing backlog tons decreased to 11,200 tons at the end of the third quarter of 2007 compared to 14,300 tons at the end of the third quarter of 2006.  Towel & Tissue backlog tons remained stable at 3,600 tons at September 30, 2007 and 2006.  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.



Selling and Administrative Expenses

 

Three Months

Nine Months

 

Ended September 30,

Ended September 30,

(all dollar amounts in thousands)

2007

2006

2007

2006

     

Selling and administrative expense

$ 21,070 

$ 21,768

$ 63,250

$ 62,479

Percent increase (decrease)

(3%)

14%

1%

14%

As a percent of net sales

7% 

7%

7%

7%


Selling and administrative expenses in the third quarter of 2007 were $21.1 million compared to $21.8 million in the same period of 2006.  Stock-based incentive compensation programs resulted in a credit of $1.0 million for the three months ended September 30, 2007, compared to expense of $0.8 million for the three months ended September 30, 2006.  After adjusting for stock-based incentive compensation programs, increased compensation and benefits accounted for the majority of the quarter-over-quarter increase in selling and administrative expense.


Selling and administrative expenses for the nine months ended September 30, 2007, were $63.3 million compared to $62.5 million in the same period of 2006.  Stock-based incentive compensation programs resulted in a credit of $1.0 million for the nine months ended September 30, 2007, compared to expense of $1.4 million for the nine months ended September 30, 2006.  As in the quarterly comparison, after adjusting for stock-based incentive compensation programs, the balance of the year-over-year increase is due to higher compensation and benefits.


Restructuring Charge


We recorded a pre-tax closure charge for the three and nine months ended September 30, 2006, of $0.01 million and $0.2 million, respectively, for other associated costs directly related to the closure of the sulfite pulp mill located at Printing & Writing’s Brokaw papermaking mill.  The permanent closure of the pulp mill facility was announced in July 2005.  The pulp mill was closed in November 2005 and the related long-lived assets were abandoned.  No restructuring expense was incurred for the three and nine months ended September 30, 2007, and no additional restructuring expense with respect to the pulp mill closure is anticipated.  For additional information on the pulp mill closure, please refer to “Note 12 – Pulp Mill Closure” in the Notes to Condensed Consolidated Financial Statements.





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Other Income and Expense

 

Three Months

Nine Months

 

Ended September 30,

Ended September 30,

(all dollar amounts in thousands)

2007

2006

2007

2006

     

Interest expense

$ 2,861  

$ 2,904 

$ 8,518  

$ 8,496 

Other income

235  

121 

567  

210 


Interest expense was similar between comparable quarterly periods of 2007 and 2006 at $2.9 million, respectively, as well as comparable year-to-date periods of 2007 and 2006 at $8.5 million, respectively.  Although average long-term debt balances declined in the quarter-over-quarter and year-to-date analyses, slightly higher interest rates offset the balance declines.  Long-term debt was $151.1 million and $160.5 million at September 30, 2007 and 2006, respectively.  Long-term debt at December 31, 2006, was $160.3 million.  Interest expense in 2007 is expected to be slightly lower than 2006 levels for the remainder of the year.  Other income, consisting principally of interest income, in the third quarter and year-to-date periods of 2007, has increased over the same periods in 2006 as a result of higher average cash and cash equivalent balances in 2007.


Income Taxes

 

Three Months

Nine Months

 

Ended September 30,

Ended September 30,

(all dollar amounts in thousands)

2007

2006

2007

2006

     

Provision (credit) for income taxes

$ 3,251  

$ 4,222 

$(3,881)

$ 6,324 

Effective tax rate

35%  

37% 

(18%)

37% 


Effective January 1, 2007, we reorganized the various subsidiaries which comprised our operating segments to align more closely with our operating structure.  Each segment is now organized as a single member limited liability company and operates as a direct subsidiary of Wausau Paper Corp.  The new structure will allow us to utilize state net operating loss and credit carryovers of certain subsidiaries for which full valuation allowances had been previously established due to the fact that separate state tax returns were filed under our previous structure.  During the first quarter of 2007, we recorded state tax benefits of $12.0 million primarily as a result of the reversal of these valuation allowances.  In the second quarter of 2007, we recorded a deferred state income tax provision of $0.4 million as a result of the impact of a revised estimate to our effective state tax rate used to determine our deferred tax assets and liabilities from our previous tax structure to our single member limited liability company tax structure.  The effective tax rate for the first nine months of 2007, excluding the state tax benefits, was 35%.  The effective rate for the remainder of 2007 is expected to be in the range of 37% to 38%.  



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Liquidity and Capital Resources


Cash Flows and Capital Expenditures

 

Nine Months Ended September 30,

(all dollar amounts in thousands)

2007

2006

   

Cash provided by operating activities

$ 32,146

 

$ 17,080

 

Capital expenditures

19,196

 

17,387

 


Cash provided by operating activities was $32.1 million and $17.1 million for the nine months ended September 30, 2007 and 2006, respectively.  Inventory decreased approximately $11 million during the first nine months of 2007, compared to inventory builds of approximately $13 million during the first nine months of 2006.  Cash provided by operating activities was also impacted by an increase in net earnings, which was offset by increases in accounts receivable and other assets as well as decreases in accounts payable and accrued and other liabilities during the first nine months of 2007 compared to the same period in 2006.  On a combined basis, these items resulted in a reduction of cash provided by operating activities of approximately $3 million during the first three quarters of 2007 compared to the first three quarters of 2006.  In addition, cash paid for income taxes increased from $5 million during the first nine months of 2006 to $11 million during the same period in 2007.  


We have established an average internal rate of return target of 17% on all capital projects approved in 2007.  Capital spending for the first nine months of 2007 was $19.2 million compared to $17.4 million during the first nine months of 2006.  Total capital spending for the full year of 2007 is expected to be less than $30 million.


For 2007, capital expenditures for projects with total spending expected to exceed $1.0 million occurred in all three business segments.  Specialty Products spent $3.4 million on a roll wrap project, stoker boiler project, and other paper mill related equipment at the Rhinelander, Wisconsin facility.  Printing & Writing spent $0.9 million on a sheeter line project at a converting facility and $1.1 million on a color system project at the Brainerd, Minnesota, facility.  Towel & Tissue spent $2.6 million on various converting projects at the Harrodsburg, Kentucky, facility.  


The balance of spending for the first nine months of 2007 was related to projects that individually are expected to cost less than $1.0 million.  These expenditures included approximately $8.0 million for essential non- or low-return projects, and approximately $3.2 million on projects expected to provide a return in excess of our targeted internal rate of return.


During 2005, we announced our intent to sell, over the next three to four years, approximately 42,000 acres of timberlands, generating expected after-tax earnings of $29 million.  Since introducing the timberland sales program, we have sold approximately 18,600 acres and have realized after-tax earnings of approximately $16.2 million.  During the third quarter of 2007, we sold approximately 1,600 acres of timberlands, resulting in an after-tax gain of $1.8 million, compared to sales of approximately 5,800 acres of timberlands, resulting in an after-tax gain of $4.1 million, during the third quarter of 2006.  For the first nine months of 2007, we have sold



21


approximately 3,500 acres of timberlands, resulting in an after-tax gain of $4.0 million, compared to sales of approximately 7,000 acres of timberlands, resulting in an after-tax gain of $5.9 million, during the first nine months of 2006.  We expect our timberland sales program to continue on a pace that will allow for completion of our sales program over the next three years.  We do not plan to consummate additional timberland sales programs in the future.  Gains on sales of timberlands are included in cost of sales in the Condensed Consolidated Statements of Operations.  For additional information on timberland sales gains, please refer to “Note 8 – Property, Plant, and Equipment” in the Notes to Condensed Consolidated Financial Statements.  


Debt and Equity

 

September 30,

December 31,

(all dollar amounts in thousands)

2007

2006

   

Short-term debt

$        190

 

$        184

 

Long-term debt

151,081

 

160,287

 

Total debt

151,271

 

160,471

 

Stockholders’ equity

289,691

 

274,074

 

Total capitalization

440,962

 

434,545

 

Long-term debt/capitalization ratio

34%

 

37%

 


As of September 30, 2007, long-term debt decreased $9.2 million as compared to the $160.3 million borrowed at December 31, 2006.  During the third quarter of 2007, we repaid $35.0 million of the unsecured private placement notes that matured on August 31, 2007.  To fund the retirement of the notes, we borrowed $20.0 million under our $125 million unsecured revolving-credit agreement that expires July 27, 2011.  In addition, we had net borrowings of $6.5 million in commercial paper under an existing unrated commercial paper placement agreement with a bank.  This agreement requires unused credit availability under our $125 million unsecured revolving-credit agreement equal to the amount of outstanding commercial paper.  


At September 30, 2007, $20.0 million was outstanding under our $125 million unsecured revolving-credit facility and $6.5 million was outstanding under an existing unrated commercial paper placement agreement.  Under the unsecured revolving-credit facility, we have the ability and the intent to refinance on a long-term basis the amount of outstanding commercial paper at September 30, 2007.  As a result, we have classified the amounts as long-term on our Condensed Consolidated Balance Sheets.

 

On September 30, 2007, we had approximately $78.8 million available borrowing capacity under the unsecured revolving-credit facility that expires on July 27, 2011.  Our cash position and borrowing capacity is expected to provide sufficient liquidity to support operations, meet capital spending requirements, satisfy current maturities of debt obligations, fund dividend payments to shareholders, and continue to repurchase shares of Wausau Paper common stock.


On October 19, 2007, the minimum net worth covenants under the $125 million unsecured revolving-credit facility and the $138.5 million note purchase agreement were amended.  For additional information on the amendment, please refer to “Note 15 – Subsequent Events” in the Notes to Condensed Consolidated Financial Statements.




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During 2005, we reactivated our common stock buy-back program.  At December 31, 2006, there were approximately 1.5 million shares available for repurchase through an authorization approved by our Board of Directors in 2000.  Under this authorization, we have repurchased 442,100 shares during the nine months ended September 30, 2007, at a total cost of approximately $5.2 million, with 314,100 shares at a cost of approximately $3.5 million repurchased during the third quarter of 2007.  At September 30, 2007, there are approximately 1.1 million shares available for repurchase.  Repurchases may be made from time to time in the open market or through privately negotiated transactions.  We intend to continue repurchasing shares at a similar pace to repurchases in recent years.


Dividends


On December 18, 2006, the Board of Directors declared a quarterly cash dividend of $0.085 per common share.  The dividend was paid on February 15, 2007, to shareholders of record on February 1, 2007.  On April 19, 2007, the Board of Directors declared a quarterly cash dividend in the amount of $0.085 per common share.  The dividend was paid on May 15, 2007, to shareholders of record on May 1, 2007.  On June 22, 2007, the Board of Directors declared a quarterly cash dividend in the amount of $0.085 per common share.  The dividend was paid on August 15, 2007, to shareholders of record on August 1, 2007.  At a meeting held on October 19, 2007, the Board of Directors declared a quarterly cash dividend of $0.085 per common share which is payable on November 15, 2007, to shareholders of record on November 1, 2007.


Commitments and Contractual Obligations


As of September 30, 2007, there have been no significant changes to our commitments and contractual obligations outside the normal course of business from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.  As a result of the announcement to permanently close our Groveton, New Hampshire paper mill which occurred on October 23, 2007, we are currently evaluating the timing of cash settlements with respect to certain previously disclosed commitments and contractual obligations and any new commitments or contractual obligations resulting from the announced paper mill closure.  For additional information on the closure of the Groveton, New Hampshire mill, please refer to “Note 15 – Subsequent Events” in the Notes to Condensed Consolidated Financial Statements.


Subsequent Event


On October 23, 2007, we announced a plan to permanently close the Groveton, New Hampshire mill, with manufacturing operations to cease effective December 31, 2007.  For additional information on the closure of the Groveton, New Hampshire mill, please refer to “Note 15 – Subsequent Events” in the Notes to Condensed Consolidated Financial Statements.




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Information Concerning Forward-Looking Statements


The foregoing discussion and analysis of our financial condition and results of operations contains forward-looking statements that involve risks, uncertainties, and assumptions.  Forward-looking statements are not guarantees of performance.  If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Wausau Paper and our consolidated subsidiaries may differ materially from those expressed or implied by such forward-looking statements and assumptions.  All statements other than statements of historical fact are statements that could be deemed forward-looking statements.  Forward-looking statements may be identified by, among other things, beliefs or expectations that certain events may occur or are anticipated and projections or statements of expectations with respect to various aspects of our business, our plans or intentions, our stock performance, the industry within which we operate, the economy, and any other expressions of similar import or covering other matters relating to our business and operations.  Risks, uncertainties, and assumptions relating to our forward-looking statements include the level of competition for our products, changes in the paper industry, downturns in our target markets, adverse changes in our relationships with large customers and our labor unions, costs of compliance with environmental regulations, our ability to fund our operations, changes in the price or availability of raw materials and energy, the failure to develop new products that meet customer needs, unforeseen operating problems, changes in strategic plans or our ability to execute such plans, maintenance of adequate internal controls, changes in financial accounting standards, unforeseen liabilities arising from current or prospective claims, and the effect of certain organizational anti-takeover provisions.  These and other risks, uncertainties, and assumptions are described under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006, and from time to time in our other filings with the Securities and Exchange Commission after the date of such annual report.  We do not intend to update these forward-looking statements.


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, 2006.


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 (as such term is defined in Rule 13a-15(e)) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) pursuant to Exchange Act Rule 13a-15.  Based upon, and as of the date of such evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.  There were no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




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PART II.  OTHER INFORMATION


Item 1A.

Risk Factors


In addition to the other information set forth in this report, this report should be considered in light of the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition, or future results of operations.  The risks described in our Annual Report on Form 10-K are not the only risks facing Wausau Paper.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.



Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds


Purchases of Equity Securities – Quarter ending September 30, 2007


    

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

  30,000

$11.3725

  30,000

 

August

284,100

$10.9021

284,100

 

September

    
     

Quarterly Totals

314,100

$10.9470

314,100

1,063,474


(1)  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 the open market or privately negotiated transactions (the “2000 Plan”).  No price or expiration date was specified for the program’s purchases.


Item 6.  Exhibits


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



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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, 2007

SCOTT P. DOESCHER

Scott P. Doescher

Senior Vice President-Finance,

Secretary and Treasurer


(On behalf of the Registrant and as

Principal Financial Officer)



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EXHIBIT INDEX

to

FORM 10-Q

of

WAUSAU PAPER CORP.

for the quarterly period ended September 30, 2007

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



{00149110.DOC/1}

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