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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 June 30, 2011

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)

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

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

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

The number of common shares outstanding at July 31, 2011 was 49,176,197.

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WAUSAU PAPER CORP.

AND SUBSIDIARIES

INDEX

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PART I.  FINANCIAL INFORMATION

Item 1.                    Financial Statements

Wausau Paper Corp. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

See Notes to Condensed Consolidated Financial Statements.

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Wausau Paper Corp. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

See Notes to Condensed Consolidated Financial Statements.

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Wausau Paper Corp. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

See Notes to Condensed Consolidated Financial Statements.

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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 consolidated 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, 2010, for our accounting policies and other disclosures, which are pertinent to these statements.

Note 2.           Earnings Per Share

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

Stock options for which the exercise price exceeds the average market price over the applicable period have an antidilutive effect on earnings per share (“EPS”), and accordingly, are excluded from the calculation of diluted EPS.  For the three months ended June 30, 2011 and 2010, stock-based grants for 1,861,835 shares and 2,102,019 shares, respectively, were excluded from the diluted EPS calculation because the shares were antidilutive.  For the six months ended June 30, 2011 and 2010, stock-based grants for 1,962,792 shares and 1,875,891 shares, respectively, were excluded from the diluted EPS calculation because the shares were antidilutive.

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Note 3.           Receivables

                        Accounts receivable consisted of the following:

Note 4.           Inventories

                        The various components of inventories were as follows:

Note 5.                                  Property, Plant, and Equipment

The accumulated depreciation on fixed assets was $754.9 million as of June 30, 2011, and $736.6 million as of December 31, 2010.  The provision for depreciation, amortization, and depletion for the three months ended June 30, 2011 and 2010 was $14.3 million and $14.1 million, respectively.  The provision for depreciation, amortization, and depletion for the six months ended June 30, 2011 and 2010 was $28.4 million and $28.1 million, respectively.

Included in cost of sales for the three and six months ended June 30, 2011 were net gains on sales of property, plant, and equipment of $0.3 million and less than $0.1 million, respectively.  The gains on sales of property, plant, and equipment recorded in cost of sales included gains on sales of timberlands of $0.3 million during both the three and six months ended June 30, 2011.  Included in cost of sales for both the three and six months ended June 30, 2010, were net gains on sales of property, plant, and equipment of $4.6 million, including gains on sales of timberlands of $3.7 million.

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Note 6.           Debt

                        A summary of total debt is as follows:

On March 31, 2010, we entered into a note purchase and private-shelf agreement.  This agreement provided for the April 9, 2010 issuance of $50 million of unsecured senior notes having an interest rate of 5.69%, and also established a three-year private shelf facility under which up to $125 million of additional promissory notes may be issued at terms agreed upon by the parties at the time of issuance.  On April 4, 2011, we issued an additional aggregate principal amount of $50 million of our senior notes under the terms of this note purchase and private-shelf agreement.  The notes bear interest at 4.68% and mature on April 4, 2018.  At June 30, 2011, $100 million was outstanding under the note purchase and private shelf agreement.

During the second quarter of 2011, we settled our obligations related to the $35.0 million unsecured private placement notes scheduled to expire in August 2011.  The settlement of these obligations resulted in the recognition of a loss on early extinguishment of debt of $0.7 million in the three months ended June 30, 2011, which reflects the premiums paid to retire the unsecured private placement notes, net of unamortized premiums and issuance costs.

On June 23, 2010, we entered into a $125 million revolving-credit agreement with five financial institutions that will expire on June 23, 2014.  At June 30, 2011, there were no amounts outstanding under the revolving-credit agreement.

We are subject to certain financial and other covenants under the revolving-credit agreement and the note purchase and private-shelf agreement.  At June 30, 2011, we were in compliance with all required covenants and expect to remain in full compliance throughout the remainder of 2011.

At June 30, 2011, the amount of commercial paper outstanding has been classified as long-term on our Condensed Consolidated Balance Sheets as we have the ability and intent to refinance the obligations under our revolving-credit agreement.

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Note 7.           Pension and Other Post-retirement Benefit Plans

The components of net periodic benefit cost recognized in the Condensed Consolidated Statements of Operations for the three months ended June 30, 2011 and 2010, are as follows:

The components of net periodic benefit cost recognized in the Condensed Consolidated Statements of Operations for the six months ended June 30, 2011 and 2010, are as follows:

We previously disclosed in our consolidated financial statements for the year ended December 31, 2010, that although we do not expect to have a minimum funding requirement for our defined benefit pension plans in 2011, we may elect to make contributions of up to $3.9 million directly to pension plans.  As of June 30, 2011, we have made payments of approximately $2.3 million to our pension plans.  In addition, as previously reported, we expected to contribute $4.5 million, net of subsidy reimbursements, directly to other post-retirement plans in 2011.  As of June 30, 2011, we have contributed approximately $1.3 million to our other post-retirement plans.  We now expect to contribute approximately $2.6 million to our other post-retirement plans in 2011.

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Note 8.           Share-Based Compensation

We account for share-based compensation pursuant to the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 718-10.

Stock Options, Restricted Stock Awards, and Performance Units

During the three and six months ended June 30, 2011, share-based compensation expense related to non-qualified stock option grants, restricted stock awards, and performance unit awards was approximately $0.5 million and $2.1 million, respectively.  During the three and six months ended June 30, 2010, share-based compensation expense related to non-qualified stock option grants, restricted stock awards, and performance unit awards was approximately $0.9 million and $1.9 million, respectively.  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 June 30, 2011, total unrecognized compensation cost, net of estimated forfeitures, related to share-based compensation awards was approximately $3.1 million, which we expect to recognize over a weighted average period of approximately 1.0 years.

During the six months ended June 30, 2011, we granted 5,000 non-qualified stock options with an exercise price of $8.10.

During the six months ended June 30, 2011, as part of compensation for our directors and certain employees of Wausau Paper, we granted awards of performance units.  Of the awards granted, 40,018 performance units were granted to directors.  The grants to certain employees were comprised of three types of awards.  The first type of award included 82,532 performance units with vesting based upon the completion of a requisite period of service.  The second type of award was comprised of 626,359 performance units with vesting contingent on (1) achieving certain operating profit levels and (2) completion of a service requirement.  We have recognized compensation expense related to these performance-based awards during the three and six months ended June 30, 2011, as it is probable a portion of the awards will vest as performance criteria are met.  The third type of award included 346,201 performance units with vesting of the award subject to achievement of a targeted shareholder return on our common stock over a three-year period.

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 ASC Subtopic 718-10.  During the three and six months ended June 30, 2011, we recognized credits of less than $0.1 million and approximately $0.1 million, respectively, in share-based compensation related to stock appreciation rights and dividend equivalents.  During the three and six months ended June 30, 2010, we recognized credits of approximately $0.1 million and $0.4 million, respectively, in

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share-based compensation related to stock appreciation rights and dividend equivalents.

Note 9.           Interim Segment Information

Factors Used to Identify Reportable Segments

We have evaluated our disclosures of our business segments in accordance with ASC Subtopic 280-10, and as a result we have classified our operations into two principal reportable segments:  Tissue and Paper, 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

The Tissue segment produces a complete line of towel and tissue products that are marketed along with soap and dispensing systems for the away-from-home market.  Tissue operates a paper mill in Middletown, Ohio, and a converting facility in Harrodsburg, Kentucky.  The Paper segment produces specialty and fine printing and writing papers within four core markets — Food, Industrial & Tape, Coated & Liner, and Print & Color.  These products are produced at manufacturing facilities located in Brainerd, Minnesota, and in Rhinelander, Mosinee, and Brokaw, Wisconsin.

Reconciliations

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

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

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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 revenues 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, 2010, for our accounting policies and other disclosures which are pertinent to these statements.

Operations Review

Overview

Consolidated

In the second quarter of 2011, we reported net earnings of $3.2 million, or $0.07 per share, compared to prior-year net earnings of $5.6 million, or $0.11 per share.  Net earnings for the second quarter of 2011 included after-tax capital-related expenses of $0.7 million, or $0.01 per share, due to the rebuild of a paper machine in our Paper segment and the announced expansion of our Tissue segment.  In addition, net earnings for the second quarter of 2011 included after-tax gains on sales of timberlands of $0.2 million, or less than $0.01 per share, compared to after-tax gains of $2.3 million, or $0.05 per share, in the second quarter of 2010.

For the six months ended June 30, 2011, we reported net earnings of $1.8 million, or $0.04 per share, compared to net earnings of $8.5 million, or $0.17 per share, in the first six months of 2010.  Net earnings during the first six months of 2011 included after-tax capital-related expenses of $3.0 million, or $0.06 per share, due to the paper machine rebuild within our Paper segment and an expansion in our Tissue segment; after-tax expenses of $0.4 million, or $0.01 per share, related to the transition to a reduced operating schedule at a paper mill in our Paper segment; and after-tax gains on sales of timberlands of $0.2 million, or less than $0.01 per share.  The first half of 2010 included after-tax gains on sales of timberlands of $2.3 million, or $0.05 per share.  In addition, net earnings during the first six months of 2010 were also impacted by income tax charges of $1.2 million, or $0.02 per share, related to the passage of the “Patient Protection and Affordable Care” and “Health Care and Education Reconciliation” Acts of March 2010.

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On April 4, 2011, we issued $50.0 million of unsecured senior notes under the terms of our existing note purchase and private-shelf agreement.  The proceeds were used, in part, to repay $35.0 million of unsecured private placement notes that were due to mature on August 31, 2011.  The settlement of these obligations resulted in the recognition of a loss on early extinguishment of debt of $0.7 million in the three months ended June 30, 2011, which reflects the premiums paid to retire the unsecured private placement notes, net of unamortized premiums and issuance costs.

Net Sales and Gross Profit on Sales

Consolidated

Consolidated net sales increased by 1% during the three months ended June 30, 2011, as compared to the same period in 2010.  Shipments decreased 3% quarter-over-quarter, due primarily to volume reductions associated with a reduced operating schedule at a paper mill in our Paper segment.  During the same comparative periods, average net selling price increased approximately 4%, or more than $8 million, with approximately $7 million of the increase due to actual selling price increases, and the remaining increase a result of product mix improvements.

Comparing the six months ended June 30, 2011 and 2010, consolidated net sales decreased by 1% year-over-year, while shipments decreased more than 6% over the same comparative period.  The decrease in shipments was partly a result of a particularly strong early part of 2010, as compared to the same period in 2011, due to certain customer restocking activities as the economy began to recover.  We also anticipated volume reductions as a result of downtime associated with the rebuild of a paper machine at our Paper segment, and the transition to a reduced operating schedule at a paper mill in our Paper segment.  During the first six months of 2011, average net selling price increased by nearly 6%, or almost $26 million, as compared to the first six months of 2010.  Actual selling price increases contributed to approximately three-quarters of the increase, while improvements in product mix contributed to the remaining increase.

Gross profit for the three months ended June 30, 2011, was $26.5 million compared to $30.5 million for the three months ended June 30, 2010.  Gross profit in the second quarter of 2011 included capital-related charges of $1.1 million related to a paper machine rebuild at our Paper segment and the announced expansion in our Tissue segment.  Our timberland sales program favorably impacted gross profit in the three months ended June 30, 2011 and 2010, by $0.3 million and $3.7 million, respectively.  Comparing the three months ended June 30, 2011 with the same period in 2010, sales price and mix improvements more than offset fiber and energy cost increases of $4 million and $2 million, respectively.

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Year-to-date, gross profit decreased to $48.1 million in 2011, from $57.5 million reported in 2010.  Gross profit in the six months ended June 30, 2011 included capital-related charges of $4.6 million, mostly due to a paper machine rebuild within our Paper segment, and $0.6 million of charges related to the transition to a reduced operating schedule at a paper mill within our Paper segment.  Our timberland sales program favorably impacted gross profit in the six months ended June 30, 2011 and 2010, by $0.3 million and $3.7 million, respectively.  Gross profit was also impacted by an increase in fiber and energy costs of approximately $12 million in the first half of 2011 compared to the first half of 2010.

Backlog tons at June 30, 2011 represent approximately $70 million in sales compared to approximately $61 million in sales at June 30, 2010.  The entire backlog at June 30, 2011 is expected to be shipped during the remainder of 2011.

Tissue

In April 2011, the Company’s Board of Directors approved plans to expand the Tissue segment’s production capabilities in response to growing demand for its environmentally-friendly, value-added products.  The expansion will include a new paper machine, located at our Harrodsburg, Kentucky converting facility, which will be capable of producing premium towel and tissue products from 100 percent recycled fiber.  The new paper machine is expected to begin production in the first quarter of 2013.

Tissue net sales decreased 1%, while shipments increased 1%, during the second quarter of 2011 compared to the same period in 2010.  Average net selling price decreased approximately 2%, or almost $2 million, in the second quarter of 2011 over the second quarter of 2010, with actual selling price decreases in standard product categories causing nearly the entire decline.  Gross profit margins for Tissue decreased 3 percentage points in the second quarter of 2011 as compared to the second quarter of 2010.  Gross profit for the three months ended June 30, 2011 included $0.4 million of capital-related expenses due to the planned expansion to our facility in

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Harrodsburg, Kentucky.  In addition, a combined increase in wastepaper, purchased parent rolls, and energy costs of almost $3 million negatively impacted gross profit margin in the quarter-over-quarter comparison.

Net sales and shipments for the first six months of 2011, as compared to the same period in 2010, decreased 2% and 1%, respectively.  Average net selling price decreased approximately 1%, or $1 million, in the first half of 2011 compared to the first half of 2010.  Gross profit margin decreased 4 percentage points in the six months ended June 30, 2011, as compared to the same period in 2010.  Gross profit for the first half of 2011 included capital-related expenses of $0.6 million associated with the expansion of production capabilities at our Harrodsburg, Kentucky facility.  During the first half of 2011 as compared to the same period in 2010, a $3 million increase in the cost of wastepaper and purchased parent rolls, as well as a $1 million increase in the cost of energy, negatively affected gross profit margin.

Paper

During the first quarter of 2010, the Board of Directors approved a $27 million capital project to rebuild a paper machine in Brainerd, Minnesota, to add tape-backing paper production capabilities.  The rebuild was completed in the first quarter of 2011, and provides capabilities to produce a wide range of unsaturated tape-backing paper.  This capital investment is expected to improve the overall cost-efficiency and manufacturing flexibility of the Paper segment’s operations.

The Paper segment’s net sales for the second quarter of 2011 increased 1% compared to the same period in 2010, while shipments declined 5%.  The decline in shipments quarter-over-quarter was largely due to a reduced operating schedule at our Brokaw, Wisconsin paper mill.  The decrease in product shipments was more than offset by an increase of 6%, or approximately $10 million, in average net selling price in the second quarter of 2011 as compared to the second quarter of 2010.  The increase in average net selling price was primarily due to actual selling price improvements.

Paper recorded a gross profit margin of 7% in the second quarter of 2011 compared to a gross profit margin of 6% in the second quarter of 2010.  During the second quarter of 2011, gross profit was negatively impacted by $0.7 million of capital-related expenses due to the rebuild of a paper machine at our Brainerd, Minnesota paper mill.  Comparing the second quarter of 2011 to the same period in 2010, gross profit was also unfavorably impacted by an increase in fiber-related costs of approximately $2 million, and an increase in energy costs of approximately $1 million.

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For the first half of 2011, the Paper segment’s net sales and shipments decreased less than 1% and 8%, respectively, compared to the first half of 2010.  The decrease in net shipments was mainly a result of downtime associated with a paper machine rebuild at our Brainerd, Minnesota paper mill, and the transition to a reduced operating schedule at our Brokaw, Wisconsin paper mill.  Average net selling price increased approximately 8%, or almost $27 million, during the six months ended June 30, 2011, as compared to the same period in 2010, with approximately three-quarters of the improvement due to actual selling price improvements, while product mix enhancements resulted in the remaining increase.

Paper’s gross profit margin decreased to 6% during the first six months of 2011, from a gross profit margin of 7% during the first six months of 2010.  Gross profit in the first half of 2011 included capital-related expenses of $4.0 million due to the rebuild of a paper machine in our Brainerd, Minnesota paper mill, and costs of $0.6 million related to the transition to a reduced operating schedule in our Brokaw, Wisconsin paper mill.  In the year-over-year six month comparison, an increase in fiber-related costs of $7 million combined with an increase in energy costs of over $1 million to negatively impact gross profit margin.

Selling and Administrative Expenses