Clearwater Paper Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are to the corresponding 2012 periods. Clearwater Paper produces private-label tissue, paperboard and pulp at 15 North American manufacturing locations.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $471.0 million | $473.6 million | $931.8 million | $931.4 million |
| Operating income | $29.7 million | $44.5 million | $42.2 million | $70.1 million |
| Operating margin | 6.3% | 9.4% | 4.5% | 7.5% |
| Net earnings | $11.7 million | $21.5 million | $10.8 million | $25.2 million |
| Diluted EPS | $0.52 | $0.91 | $0.47 | $1.07 |
| Adjusted EBITDA | $52.8 million | $66.5 million | $91.1 million | $112.3 million |
Q2 cost of sales rose to 88.0% of sales from 84.2%; first-half cost of sales rose to 88.9% from 86.1%. Net margin was 2.5% in Q2 (4.5% prior year) and 1.2% for the first half (2.7% prior year).
Cash flow and liquidity: First-half operating cash flow was $22.0 million, down from $88.3 million, with $43.8 million used in working capital, principally to build inventory and fund higher receivables. Capital expenditures were $31.4 million, making operating cash flow less capital spending approximately negative $9.4 million. Cash was $1.2 million, restricted cash $1.5 million and short-term investments $80.0 million at quarter-end. Current assets were $546.5 million and current liabilities $167.5 million.
Debt: Long-term debt was $650.0 million, versus $523.9 million at year-end 2012. The company issued $275 million of 4.5% notes due 2023 and used proceeds in part to redeem $150 million of 10.625% notes due 2016; redemption costs were $17.1 million. It also has $375 million of 7.125% notes due 2018. There were no revolver borrowings; approximately $118.4 million was available, after $6.6 million of letters of credit. The revolver fixed-charge coverage ratio was 3.7-to-1.0.
Material changes and operating drivers
- Sales were nearly flat year over year, but operating income and earnings declined substantially. The filing attributes pressure to TAD tissue ramp-up and transition costs, higher energy, packaging, depreciation and employee costs, and Arkansas recovery-boiler operating issues.
- Consumer Products Q2 sales rose 2.3% to $289.7 million, but operating income fell to $14.8 million from $25.7 million. First-half segment income fell to $24.9 million from $52.0 million; TAD transition costs were $13.4 million for the half-year.
- Pulp and Paperboard Q2 sales fell 4.8% to $181.3 million and operating income fell to $24.8 million from $32.0 million, reflecting lower prices and shipments and Arkansas operating issues. First-half segment income was $42.3 million versus $43.7 million.
- First-half results included $17.1 million of debt retirement costs. The $7.7 million income tax benefit for the half-year was largely affected by a $9.8 million net discrete benefit related to fuel tax-credit treatment and uncertain tax positions.
- Share repurchases totaled approximately $60.0 million in first-half cash outflows. The $100 million repurchase authorization had approximately $49 million remaining at June 30, including funds already paid under the accelerated buyback.
Outlook, risks and contingencies
- The Thomaston, Georgia facility closure is proceeding gradually; some operations were expected to continue into Q1 2014. Estimated exit costs are $6–$7 million, with $5–$6 million expected in 2013; savings are expected to be fully realized beginning Q4 2014.
- Management expected Q3 2013 Idaho paper-machine maintenance downtime of 10 days, costing approximately $16.5 million, including $13.0 million of repairs and $3.5 million of other outage costs. SG&A was expected to be $29–$31 million per quarter in Q3 and Q4.
- Management believed operating cash flow, cash and investments, and revolver capacity would fund debt service, operations, capital spending, repurchases and working capital over the next 12 months, while noting uncertainty in cash generation and refinancing availability.
- Key risks include TAD customer acceptance and production optimization; competitive pricing and customer concentration; wood fiber, pulp, energy and transportation costs; operating disruptions; pension funding; debt covenants; and uncertainty over alternative-fuel tax credits. The IRS audit of 2008–2012 tax years was ongoing.
- The EPA/DOJ matter concerning alleged Clean Air Act violations at the Lewiston, Idaho facility remained under discussion; the EPA issued an additional information request in July 2013. The company reported no material changes to previously disclosed risk factors.
Investor verification priorities
- Track TAD ramp-up, customer acceptance, transition costs and the timing of anticipated savings.
- Assess whether working-capital needs and operating cash generation improve after the first-half cash-flow decline.
- Monitor paperboard pricing, tissue margins, input costs, and the effects of planned Idaho maintenance and Arkansas boiler issues.
- Verify final accelerated-buyback share settlement and remaining repurchase authorization against liquidity and debt needs.
- Follow the IRS tax-credit audit and EPA/DOJ environmental matter, including any resulting liabilities or cash costs.