Clearwater Paper Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The company manufactures tissue, pulp, paperboard and wood products. Results include Cellu Tissue, acquired December 27, 2010; the comparable 2010 periods do not include its operations.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $501.1 million | $352.9 million | $1,461.6 million | $1,027.4 million |
| Income from operations | $25.4 million | $28.5 million | $82.7 million | $76.4 million |
| Operating margin | 5.1% | 8.1% | 5.7% | 7.4% |
| Net earnings | $8.6 million | $15.0 million | $28.2 million | $36.0 million |
| Diluted EPS | $0.37 | $0.64 | $1.19 | $1.52 |
| Operating cash flow | Not separately provided | Not separately provided | $72.3 million | $189.8 million |
| Capital expenditures | Not separately provided | Not separately provided | $87.3 million | $23.1 million |
Q3 cost of sales was 89.6% of sales versus 86.0% a year earlier; nine-month cost of sales was 88.8% versus 86.8%. Nine-month EBITDA was $140.4 million, compared with $111.9 million; adjusted EBITDA was the same as EBITDA in 2011, while 2010 adjusted EBITDA was $115.0 million.
Material changes and segment results
- Reported sales growth chiefly reflects the inclusion of Cellu Tissue and higher shipments, rather than an equivalent increase on a comparable-company basis. Consumer Products sales increased 98% in Q3 and 93% year to date, while operating income fell to $7.1 million from $17.9 million in Q3 and to $27.8 million from $69.5 million year to date. Lower tissue selling prices and product mix, integration and expansion costs, and higher input expenses weighed on results.
- Pulp and Paperboard Q3 sales rose 3.3% to $215.9 million and operating income increased to $26.3 million from $21.1 million. For nine months, sales rose 6.3% to $638.0 million and operating income increased to $76.4 million from $35.8 million, supported by paperboard pricing and lower maintenance and wood-fiber costs.
- Q3 net earnings declined despite higher sales; nine-month operating income increased modestly, but higher interest expense more than offset the improvement. Interest expense was $12.1 million in Q3 and $34.4 million year to date, up from $3.8 million and $12.2 million, respectively, primarily due to the 2010 senior notes.
- Operating cash flow fell by $117.5 million year over year for the nine-month period. The prior-year period included a $101.3 million government tax-credit receipt; 2011 also had a $32.6 million working-capital cash outflow. Operating cash flow less capital expenditures was negative $14.9 million in 2011.
Balance sheet, debt and liquidity
- At September 30, cash was $21.1 million, short-term investments $85.0 million, and restricted cash $0.5 million. Current assets were $569.1 million and current liabilities $195.3 million.
- Long-term debt was $523.6 million, down from $538.3 million at year-end 2010; the remaining $15.2 million of industrial revenue bonds was redeemed during Q3. Senior notes include $375 million due 2018 at 7.125% and $150 million due 2016 at 10.625%.
- The $125 million revolving facility had no borrowings outstanding; $8.4 million supported letters of credit, and $116.6 million was available to draw. Its term was extended to September 2016, subject to the earlier maturity-related condition described in the filing. The trailing fixed-charge coverage ratio was 1.2 to 1.0; a minimum 1.0 ratio applies if availability falls below 20% or a default event occurs.
- Management said cash, operating cash flow and available credit should be adequate for the next 12 months, while noting uncertainty over future cash generation and borrowing availability. The filing estimates interest cash payments of $21.3 million for Q4 2011 and $42.7 million for 2012.
Outlook, unusual items and risks
- The Shelby, North Carolina tissue expansion is estimated to cost $260–$280 million. The first two converting lines began operating in Q2; the TAD paper machine was reported on schedule despite litigation between its supplier and a third party. Management expected about $43.7 million of project spending in Q4 2011, with substantially all remaining spending in 2012. Full-year 2011 capital expenditures were estimated at $140–$150 million, including $98.3 million for the expansion.
- Management estimated the first two Shelby converting lines would contribute approximately $1.7 million to 2011 operating income, excluding startup costs, and include approximately $1.6 million of depreciation.
- On October 26, 2011, the company agreed to sell its Lewiston sawmill and related assets, inventory and timber contracts for approximately $30 million, with closing expected in Q4. A long-term residual-fiber supply agreement is intended to support the Lewiston pulp mill.
- Key exposures include wood-fiber, chemical, energy and transportation costs; cyclical markets, competitive pricing and customer concentration; acquisition integration; expansion cost, timing and execution; pension funding; debt restrictions; environmental and operating disruptions; and tax-credit treatment. The company had no firm-price natural-gas contracts at quarter-end and reported pulp purchase agreements covering about 32% of expected needs.
- Q3 included a $1.3 million foreign-exchange gain. Nine-month tax expense included approximately $4.0 million of net discrete expense, primarily uncertain-tax-position interest and state-tax adjustments related to Cellu Tissue integration.
Most important facts for investors to verify
- How much of reported sales growth reflects Cellu Tissue, and whether consumer-products margins recover as integration proceeds.
- Shelby project spending, commissioning timetable, expected returns and any impact from the supplier litigation.
- Operating cash generation and working-capital trends relative to the substantial capital program and debt-service requirements.
- Availability and covenant headroom under the revolver, and the company’s ability to manage its fixed interest burden.
- Completion and proceeds of the Lewiston sale, and whether the residual-fiber agreement secures adequate supply on acceptable terms.
- Future wood-fiber and other input costs, pension contributions, and resolution of uncertain tax positions and tax-credit matters.