Clearwater Paper Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Clearwater Paper produces private-label tissue and paperboard products at 15 U.S. and Canadian manufacturing locations. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $460.8 | $457.8 |
| Operating income | $12.5 | $25.6 |
| Operating margin | 2.7% | 5.6% |
| Net income (loss) | $(0.9) | $3.7 |
| Diluted EPS | $(0.04) | $0.16 |
| Operating cash flow | $13.5 | $38.4 |
| Capital expenditures | $19.5 | $41.5 |
Cost of sales rose to 89.9% of sales from 88.0%; SG&A increased to $34.1 million from $29.1 million. EBITDA, a non-GAAP measure, was $34.6 million versus $45.2 million; adjusted EBITDA was $38.3 million versus $45.8 million.
At March 31, cash was $9.5 million and short-term investments were $85.0 million. Current assets were $547.3 million and current liabilities $177.7 million. Long-term debt was $650.0 million, versus $523.9 million at year-end; the company reported no revolver borrowings and approximately $118.2 million of borrowing availability, with $6.8 million supporting letters of credit. Cash plus short-term investments less long-term debt was approximately $555.5 million in net debt.
Material changes and drivers
- Sales increased 0.7%, reflecting higher tissue and paperboard shipments, partly offset by lower paperboard and non-retail tissue prices.
- Consumer Products operating income fell to $10.1 million from $26.3 million. Management cited unexpectedly strong conventional tissue demand, inefficient manufacturing and logistics, external paper purchases, changeover and transportation costs, TAD start-up costs, higher pulp costs and labor costs.
- Pulp and Paperboard operating income increased to $17.6 million from $11.7 million, primarily because major maintenance costs were lower than in the prior-year quarter. Lower paperboard pricing partly offset higher shipments.
- Operating costs also reflected higher purchased pulp, energy, transportation and depreciation. Working capital used $9.9 million of cash, compared with generating $15.8 million in Q1 2012.
Financing, outlook and risks
- The company issued $275 million of 4.5% senior notes due 2023 and redeemed $150 million of 10.625% notes due 2016. The redemption produced a one-time $17.1 million debt-retirement charge, including cash charges and non-cash write-offs. Management expects annual interest savings of approximately $3.6 million from the refinancing, partly offset by lower capitalized interest.
- A new $100 million share-repurchase authorization was announced. Q1 repurchases totaled 829,766 shares for approximately $50.2 million; about $59 million remained authorized at quarter-end, including $9.2 million already paid under the accelerated buyback.
- Management expects cash from operations, cash and short-term investments, and revolver availability to cover the next 12 months’ debt service, operations, capital expenditures, repurchases and working capital needs. This is subject to operating and market uncertainty. Expected 2013 debt interest payments were $33.2 million.
- The Thomaston, Georgia converting and distribution facility is planned to close gradually, with some operations continuing into Q1 2014. Expected exit costs are $6–$7 million, including $4–$5 million in 2013; savings from relocation and optimization are expected to be fully realized beginning Q4 2014. Q1 costs were $0.2 million.
- Management planned $11–$13 million of additional major maintenance at the Idaho facility in Q3 2013 and estimated approximately $15 million of required qualified pension contributions for the remainder of 2013. It contributed $3.0 million in Q1 and $1.6 million in April.
- Tax results were materially affected by discrete alternative-fuel and cellulosic-biofuel credit adjustments. The Q1 tax benefit was $14.7 million, including a net $9.0 million discrete tax benefit; the IRS audit of 2008–2012 returns was ongoing. The company noted uncertainty over eligibility for and tax treatment of these credits.
- Other risks include TAD start-up and optimization, customer concentration, raw-material and energy costs and availability, pricing pressure, transportation disruption, pension funding, debt covenants and environmental matters. EPA/DOJ discussions over alleged Clean Air Act violations at the Lewiston, Idaho facility were ongoing; the parties had agreed to toll the statute of limitations through October 31, 2013, unless extended.
Important facts for investors to verify
- Whether tissue demand and TAD ramp-up improve Consumer Products profitability and restore margins.
- Actual Thomaston closure costs, relocation schedule and timing and scale of expected savings.
- IRS audit outcomes and the company’s ability to retain claimed alternative-fuel and biofuel tax benefits.
- Remaining share-repurchase execution and its effect on liquidity and leverage.
- Planned pension funding, Idaho maintenance spending and revolver availability under applicable conditions.
- Developments in the EPA/DOJ matter and any resulting financial or operational exposure.