Clearwater Paper Corp. Q1 2010 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010. Clearwater Paper Corporation is a leading producer of private label tissue products, bleached paperboard for the packaging industry, and bleached pulp and wood products. The company spun off from Potlatch Corporation in December 2008. Effective January 1, 2010, the Wood Products segment was consolidated into the Pulp and Paperboard segment.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Sales | $330.6 million | $286.7 million |
| Net Earnings | $0.5 million | $13.6 million |
| Earnings Per Share (Diluted) | $0.04 | $1.19 |
| Operating Cash Flow | $71.0 million | $34.8 million |
| Cash and Short-Term Investments | $250.3 million | $190.8 million (Dec 31, 2009) |
| Long-Term Debt | $148.3 million | $148.3 million (Dec 31, 2009) |
| Effective Tax Rate | 92.7% | 37.0% |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 15.3% year-over-year, driven by a 24.9% increase in paperboard shipments and a 37.1% increase in pulp prices, partially offset by lower selling prices for consumer products.
- Profitability Decline: Net earnings dropped 96.7% to $0.5 million. This was primarily due to a $4.4 million discrete tax charge related to the Patient Protection and Affordable Care Act of 2010, which eliminated a future tax deduction for retiree drug subsidies.
- Cost Increases: Cost of sales rose to 91.3% of net sales (from 85.7% in 2009) due to higher pulp costs and a scheduled major maintenance shutdown at the Idaho mill costing $16.9 million.
- Cash Flow Surge: Operating cash flow more than doubled to $71.0 million, largely due to a $37.2 million cash receipt from the Federal Government for alternative fuel mixture tax credits earned in 2009.
- Segment Performance: The Consumer Products segment operating income decreased by $4.3 million due to higher pulp costs. The Pulp and Paperboard segment reported an operating loss of $6.8 million, compared to a profit of $2.2 million in the prior year, driven by maintenance costs and higher freight expenses.
Outlook, Risks, and Unusual Items
- Expansion Plans: The company announced plans to build a tissue converting facility in the Southeastern U.S. at an estimated cost of $30 million, with 40% of costs expected in 2010. They are also evaluating a new TAD paper machine.
- Business Interruption: A fiberline blow tank collapse on March 22, 2010, caused a 14-day shutdown at the Idaho mill. The company incurred $2.2 million in incremental costs, partially offset by a $1.2 million insurance claim. A $3.7 million partial insurance prepayment was received subsequent to the quarter end.
- Capital Expenditures: Estimated 2010 capital expenditures are between $40 million and $45 million.
- Liquidity: The company maintains a revolving credit facility with $106.8 million available as of March 31, 2010. No borrowings were outstanding under the facility at period end.
- Risks: Key risks include volatility in wood fiber and energy costs, cyclical industry conditions, and the potential loss of major customers. The company also faces uncertainty regarding future cash flows in an uncertain economic environment.
Investor Verification Checklist
- Verify the sustainability of the $37.2 million tax credit cash inflow, as the alternative fuel mixture tax credit terminated at the end of 2009.
- Monitor the impact of the $4.4 million non-cash tax charge on future effective tax rates and cash tax payments starting in 2013.
- Assess the timeline and cost overruns for the new Southeastern converting facility and potential paper machine construction.
- Review the status of the insurance claim for the Idaho mill blow tank incident to ensure full recovery of lost profits and repair costs.
- Track pulp and energy price trends, which significantly impact the Pulp and Paperboard segment margins.