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