Clearwater Paper Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Clearwater Paper manufactures consumer tissue and paperboard products and reports Consumer Products and Paperboard segments. Figures are in millions of dollars unless otherwise indicated.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $457.4 | $445.2 | $1,415.8 | $1,326.0 |
| Operating income (loss) | $49.2 | $(2.4) | $116.2 | $27.2 |
| Net income (loss) | $21.4 | $(11.0) | $54.5 | $(7.6) |
| Diluted EPS | $1.28 | $(0.66) | $3.27 | $(0.46) |
| Adjusted EBITDA | $77.2 | $31.5 | $211.6 | $115.6 |
| Operating cash flow | $55.7 | $(31.0) | $176.1 | $(16.2) |
Q3 consolidated operating margin was approximately 10.8%, versus a loss margin of approximately 0.5% a year earlier. Nine-month operating margin was approximately 8.2%, versus 2.1%. Adjusted EBITDA is a non-GAAP measure; the filing cautions that it is not a substitute for GAAP results and may not be comparable with similarly named measures at other companies.
Segments and year-over-year changes
- Consumer Products: Q3 sales rose 8.7% to $248.3; segment operating income was $31.3 versus a $4.4 loss. Nine-month sales increased 16.7% to $789.1, and operating income was $82.1 versus an $8.3 loss. Higher retail tissue demand, production and fixed-cost absorption, plus lower external pulp and freight costs, supported results. Retail tissue volumes benefited from pandemic-related demand; non-retail tissue sales declined.
- Paperboard: Q3 sales fell 3.5% to $209.1, while operating income rose to $32.8 from $17.1. Nine-month sales decreased 3.6% to $626.6, while operating income increased to $91.6 from $80.1. Lower volumes and prices were offset by lower input costs and the absence of prior-year planned major maintenance. COVID-19 weakened commodity food-service demand, partly offset by folding carton and coated cup demand.
- Overall Q3 sales increased 3%; nine-month sales increased 7%. Management attributed much of the earnings improvement to higher retail tissue volume and the absence of major pulp-operation maintenance in the comparable periods.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $47.5, compared with $20.0 at December 31, 2019. Current assets were $492.0 and current liabilities $239.6.
- Reported debt was $787.2, including finance leases, compared with $902.4 at year-end 2019. The balance sheet showed $1.7 of short-term debt and $785.5 of long-term debt.
- During Q3, the company issued $275 million of 4.75% senior notes due 2028 and redeemed its 2013 notes. It also made $100 million of voluntary term-loan prepayments during the first nine months. Debt retirement costs were $4.8 for the nine-month period, including costs associated with the note redemption and term-loan prepayments.
- The ABL facility had no borrowings and reported availability of up to $234.2, with $4.4 used for letters of credit. The company reported compliance with credit covenants; its term-loan leverage ratio was 2.80x and first-lien secured leverage ratio 0.65x.
- Nine-month capital expenditures were $27.5, versus $125.8 in 2019, reflecting completion of the Shelby expansion in 2019. Operating cash flow improved substantially, supported by higher earnings and working-capital changes, including lower inventory.
Outlook, risks and notable items
- Management expected 2020 cash capital expenditures to be at or below $45 million. It believed cash, operating cash flow and available borrowing capacity would cover debt service, operations, capital expenditures and working capital for the next 12 months.
- Management expected pandemic-driven residential tissue demand to normalize and eventually return to pre-pandemic levels. It also described mixed COVID-19 effects on paperboard end markets. The duration and overall business impact of the pandemic were uncertain.
- Key risks include demand normalization or recession, supply-chain and manufacturing disruptions, changes in wood fiber, pulp, energy and transportation costs, customer concentration and payment risk, competitive pricing, pension exposures, substantial indebtedness and covenant compliance.
- Nine-month other operating charges were $11.9, including a $6.6 union settlement, $3.4 of reorganization expenses, and a $1.4 gain on divested assets; Q3 charges were $0.3. The nine-month tax provision included a $7.0 benefit from the CARES Act. The company reported no material adverse effect expected from legal proceedings in the aggregate, based on information then available.
- The filing does not provide a clear numerical earnings or sales guidance range. Management said it was unable to estimate any mandatory excess-cash-flow term-loan prepayment that might be due in 2021.
Investor verification priorities
- Assess how quickly pandemic-related retail tissue demand normalizes and whether segment margins remain sustainable.
- Verify reported debt, refinancing conditions for the 2014 notes, borrowing availability and future covenant compliance.
- Track cash conversion, working-capital movements and capital spending against the stated 2020 expectation.
- Evaluate the recurring versus unusual components of earnings, including debt retirement costs, union settlement, reorganization charges and the CARES Act tax benefit.