Clearwater Paper Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are to the corresponding 2020 periods. Dollar amounts are in millions unless noted.
Business context and results
Clearwater Paper operates Pulp and Paperboard and Consumer Products segments. Q3 net sales were $450.5, versus $457.4 a year earlier. Nine-month sales were $1,282.8, versus $1,415.9.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating income (loss) | $13.8 | $49.2 | $(15.6) | $116.2 |
| Net income (loss) | $1.9 | $21.4 | $(37.6) | $54.5 |
| Diluted EPS | $0.11 | $1.28 | $(2.25) | $3.27 |
| Adjusted EBITDA (non-GAAP) | $49.9 | $77.2 | $119.0 | $211.5 |
| Operating cash flow | Not separately stated here | Not separately stated here | $64.4 | $176.1 |
Q3 operating margin was 3.1% (calculated from reported sales and operating income), compared with 10.8% in Q3 2020. Nine-month operating results included substantial mill-closure charges. Consumer Products operating margin was 1.7% in Q3 and 1.9% for nine months; Pulp and Paperboard operating margin was 14.6% and 10.6%, respectively.
Segment performance and material changes
- Pulp and Paperboard: Q3 sales rose 9.3% to $237.5 and operating income increased to $34.6 from $32.6. Higher pricing and product mix helped, partly offset by higher chemical, freight and energy costs and a maintenance outage. Nine-month sales increased 4.2% to $684.6, but operating income fell 20.0% to $72.6, reflecting inflation and planned maintenance shutdowns.
- Consumer Products: Q3 sales fell 12.9% to $214.2; operating income declined to $3.7 from $31.5. Nine-month sales fell 22.6% to $603.2 and operating income fell to $11.5 from $82.9. Management cited lower tissue volumes as COVID-related demand eased, higher input costs—particularly pulp—and production adjustments to balance supply and demand.
- Neenah closure: The company announced closure of its Neenah, Wisconsin tissue and converting operations in Q2 2021. The closure reduces annual tissue and converting capacity by approximately 54,000 and 70,000 tons, respectively. Nine-month closure-related charges were $47.1, including $31.6 of PP&E impairment, $5.3 of inventory write-downs and $10.3 of employee and other cash costs.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $64.4, down from $176.1, which management attributed to lower earnings and inventory increases. Investing cash outflow was $29.9, including capital expenditures; financing cash outflow was $42.5.
- Cash and cash equivalents were $27.8 at September 30, 2021, compared with $35.9 at December 31, 2020. Current assets were $483.6 and current liabilities $256.9.
- Total debt on the balance sheet was approximately $678.1, including $1.6 current and $676.5 long-term, versus approximately $718.1 at year-end 2020. The company made $40.0 of voluntary Term Loan principal prepayments since year-end.
- The $250 revolving ABL facility matures July 2024. At quarter-end, borrowing-base availability was $246.4, no borrowings were outstanding and $3.9 was used for letters of credit. Its fixed-charge coverage covenant applies when unused availability falls below $25; the reported ratio was approximately 4.10x.
- Management expected 2021 cash capital expenditures of approximately $42–$47. A 1 percentage-point interest-rate change on $89.3 of variable-rate credit-agreement borrowings would affect annual interest expense by approximately $0.9.
Outlook, risks and other items
The filing provides a capital-expenditure expectation but no specific revenue or earnings guidance. Management identified risks including COVID-19 effects on operations, suppliers and demand; pricing competition; customer concentration or order changes; wood fiber and pulp costs and availability; transportation and energy costs; manufacturing disruptions; labor and cyber risks; pension and environmental obligations; and the company’s substantial indebtedness and covenant restrictions. Management stated there were no material changes to the risk factors in its 2020 Form 10-K.
Legal proceedings may arise in the ordinary course; management believed their aggregate outcome would not materially adversely affect financial condition based on currently available information. Disclosure controls were considered effective, and no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Progress, timing, asset-sale proceeds and remaining costs associated with the Neenah closure and its effect on tissue capacity and segment performance.
- Whether Consumer Products volumes and margins stabilize as COVID-related demand effects recede, and whether higher input costs can be offset through pricing or other actions.
- Cash conversion and inventory levels, given the sharp year-over-year decline in nine-month operating cash flow.
- Debt balances, voluntary repayments, ABL borrowing-base availability and covenant headroom.
- Actual 2021 capital expenditures versus the stated $42–$47 expectation, and the assumptions behind impairment estimates.
- Adjusted EBITDA is a non-GAAP measure; compare it with GAAP results and review the filing’s reconciliation.