Clearwater Paper Corporation — Q2 2011 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2011. Clearwater manufactures tissue, pulp, paperboard and wood products at 15 locations in the U.S. and Canada. Results include Cellu Tissue, acquired December 27, 2010; the comparable 2010 periods do not, making year-over-year comparisons materially affected by the acquisition.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $494.6m | $343.9m | $960.5m | $674.5m |
| Operating income | $33.8m | $37.3m | $57.3m | $47.9m |
| Operating margin | 6.8% | 10.8% | 6.0% | 7.1% |
| Net earnings | $13.9m | $20.6m | $19.5m | $21.0m |
| Diluted EPS | $1.17 | $1.75 | $1.65 | $1.78 |
| Operating cash flow | Not separately provided | Not separately provided | $44.9m | $165.1m |
- Q2 sales rose about 44%, while operating income fell about 9% and net earnings fell about 32%. Cost of sales increased to 87.6% of sales from 83.3%; net margin declined to 2.8% from 5.9%.
- For the first half, sales rose about 42%, operating income about 20%, and net earnings declined about 7%. Cost of sales was 88.3% of sales versus 87.2%; net margin was 2.0% versus 3.1%.
- Q2 EBITDA, a non-GAAP measure, was $52.4m versus $49.2m; first-half EBITDA was $94.2m versus $71.6m.
- Segment results: Q2 Consumer Products sales were $269.1m and operating income $6.9m, versus $145.4m and $25.6m. Pulp and Paperboard sales were $225.5m and operating income $34.5m, versus $198.5m and $22.7m. First-half Consumer Products operating income declined to $20.7m from $51.6m; Pulp and Paperboard rose to $50.1m from $14.7m.
Cash, debt and liquidity
- At June 30, cash was $34.5m, short-term investments $92.0m and restricted cash $1.7m. Working capital was approximately $387.8m.
- Debt carrying value totaled approximately $538.8m, including $15.2m of IRBs classified as current after the company decided to redeem them. Long-term debt was $523.6m. Senior notes include $375m at 7.125% due 2018 and $150m at 10.625% due 2016.
- No revolver borrowings were outstanding; $8.4m supported standby letters of credit, and $116.6m was available to draw. The company reported a trailing fixed-charge coverage ratio of 1.2x; the revolver’s 1.0x minimum applies if specified default or availability triggers occur.
- First-half operating cash flow fell to $44.9m from $165.1m, largely because 2010 included a $101.3m federal tax-credit cash receipt and 2011 had a $28.7m increase in receivables. Capital spending was $64.3m versus $15.5m. Cash increased $15.5m to $34.5m.
Material changes, outlook and risks
- Cellu Tissue drove much of the sales growth and increased tissue shipment volume, but lower-priced product mix reduced Consumer Products selling prices by about 20% in Q2 and first-half comparisons. Integration, labor, packaging, transportation, pulp and depreciation costs weighed on that segment’s earnings.
- Pulp and Paperboard benefited from higher paperboard pricing and lower wood-fiber and maintenance costs. Q2 paperboard prices increased 10.4% and shipments 7.3%; first-half prices rose 11.1%.
- The Shelby, North Carolina expansion is estimated at $260–$280m. Two converting lines began operating in Q2; $59.0m had been incurred by June 30. The company expected about $93m of spending in the rest of 2011, with substantially all remaining project spending in 2012. Full-year 2011 capital expenditures were forecast at $175–$185m, including an estimated $133m for the expansion.
- Management said cash, operating cash flow and borrowing capacity were expected to cover the next 12 months’ needs, while cautioning that future cash generation and borrowing availability were uncertain. Interest expense was expected to increase significantly versus 2010; estimated cash interest on the 2009 and 2010 notes was $21.3m for the second half of 2011 and $42.7m for 2012.
- CityForest was required to replace the IRB letter of credit by September 30, 2011; failure would trigger default under its reimbursement agreement. Clearwater had determined to redeem the IRBs and was initiating that process.
- Key exposures include wood-fiber, chemical, energy and transportation costs; competitive pricing, cyclical demand, customer concentration, acquisition integration, facility completion and operating disruptions, pension funding, environmental matters, debt restrictions and tax-credit treatment. No material change to previously disclosed risk factors was reported. Ordinary-course legal proceedings were not considered material.
- After quarter-end, the board announced a two-for-one stock split, payable August 26, 2011, and authorized up to $30m of share repurchases. The filing provides no explicit earnings or revenue guidance.
Most important facts for investors to verify
- Whether Cellu Tissue integration and the acquired product mix can improve Consumer Products margins.
- Progress, remaining costs and schedule for the Shelby expansion, and whether projected capital spending is maintained.
- Resolution of the IRB redemption and timely replacement of the letter of credit, if required.
- Operating cash flow and working-capital trends, given the sharp year-over-year cash-flow decline and higher receivables.
- Debt-service capacity, revolver availability and compliance with applicable covenants as interest and capital spending rise.
- Potential variability in pension contributions, input costs and tax-credit benefits.