Clearwater Paper Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. Clearwater Paper manufactures tissue and paperboard through its Consumer Products and Pulp and Paperboard segments.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $477.9 million | $428.8 million |
| Income from operations | $18.8 million | $14.4 million |
| Net income | $10.3 million | $3.8 million |
| Diluted EPS | $0.62 | $0.23 |
| Adjusted EBITDA (non-GAAP) | $55.4 million | $39.9 million |
| Cash from operating activities | $12.1 million | $(29.4) million |
| Capital expenditures | $10.5 million | $71.6 million |
Gross profit was $54.9 million, or approximately 11.5% of sales, versus $44.5 million, or approximately 10.4%. Operating margin was approximately 3.9%, compared with 3.4%. Q1 2020 net income included a $6.2 million income tax benefit, including a $7.3 million benefit from the CARES Act; the company reported a 150% effective tax rate.
At March 31, 2020, cash and cash equivalents were $60.8 million. Total debt was $942.0 million, including $58.1 million current debt; long-term debt on the balance sheet was $883.9 million. Cash, cash equivalents and restricted cash totaled $61.8 million. ABL borrowing-base availability was $231.5 million, of which $57.9 million was utilized, including $4.4 million in letters of credit. The company reported compliance with debt covenants.
Material changes and segment results
- Sales rose 11%, primarily on a 21% increase in retail tissue sales amid pandemic-related consumer purchasing. Retail tissue shipments increased 23.8%; retail tissue price per ton declined 2.0%.
- Consumer Products sales increased 18.9% to $265.7 million; operating income rose to $14.3 million from $1.3 million. Higher volume and lower external pulp and freight costs helped, partly offset by Shelby expansion start-up costs.
- Pulp and Paperboard sales increased 3.3% to $212.2 million, while operating income fell 9.9% to $26.5 million. Higher volume was partly offset by a weather-related public utility disruption at Cypress Bend.
- Operating cash flow improved by $41.5 million year over year, primarily from working-capital changes, including lower inventory. Investing cash outflow declined as the Shelby expansion and Lewiston pulp optimization project had been completed in 2019.
- Other operating charges were $8.6 million, including $6.6 million of retroactive union settlement payments and $2.8 million of reorganization costs, partly offset by a $1.4 million gain related to a facility-sale escrow release.
Outlook, risks and contingencies
- Management said near-term tissue demand was expected to remain elevated, but anticipated that consumer demand would flatten and annual tissue and paperboard volumes would eventually normalize. The filing did not provide quantitative earnings or revenue guidance.
- Management expected 2020 capital expenditures of approximately $45 million to $50 million and believed cash, operating cash flow and available borrowing capacity would cover debt service, operations, capital expenditures and working capital needs for the next 12 months.
- COVID-19-related uncertainties include possible demand normalization or decline, supplier and distribution disruptions, facility interruptions, customer payment difficulties and broader economic weakness. The company said it could not reasonably estimate the pandemic’s duration, severity or overall financial impact.
- The Term Loan and ABL maturities are subject to refinancing the 2023 Notes; if those notes are not refinanced 91 days before maturity, the credit agreements become due. The company could not estimate any mandatory 2021 term-loan prepayment tied to excess cash flow.
- A one-percentage-point change in interest rates on $352.8 million of credit-agreement borrowings would affect annual interest expense by approximately $3.5 million. Legal proceedings were described as not expected, in aggregate, to materially affect financial condition.
Key facts for investors to verify
- Whether pandemic-driven retail tissue demand persists or reverses, and how normalization affects volume, pricing and margins.
- Progress and costs of the Shelby expansion, and the operational and financial effects of the Cypress Bend disruption.
- Liquidity, borrowing-base availability, covenant compliance and the potential effect of the 2023 Notes refinancing requirement.
- The sustainability of operating cash flow and the planned $45 million to $50 million of 2020 capital expenditures.
- The impact of the CARES Act tax benefit and unusual operating charges when assessing recurring earnings.