Clearwater Paper Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. Clearwater Paper makes private-label tissue and premium bleached paperboard, with Consumer Products and Pulp and Paperboard segments.
Financial results
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $1,874.3 million | $1,928.0 million |
| Operating income | $145.4 million (7.8% margin) | $115.4 million (6.0%) |
| Net earnings | $64.1 million | $39.7 million |
| Diluted EPS | $2.72 | $1.66 |
| Operating cash flow | $198.7 million | $68.4 million |
| Capital expenditures | $207.1 million | $137.7 million |
Cost of sales declined to 85.8% of sales from 88.3%; net margin was 3.4%, versus 2.1%. Cash flow from operations less reported additions to plant and equipment was approximately negative $5.1 million. Adjusted EBITDA, a non-GAAP measure, was $227.8 million versus $195.5 million.
At year-end, cash was $12.6 million and short-term investments were $20.0 million. Current assets were $468.5 million and current liabilities $174.7 million (about 2.7x current ratio). Long-term debt was $523.9 million; debt to total capitalization, excluding accumulated other comprehensive loss, was 44.4%. The $125 million secured revolver had no borrowings, $5.9 million in letters of credit, and approximately $119.1 million available. The company reported a 3.6x fixed-charge coverage ratio.
Fourth-quarter results
| Metric | Q4 2012 | Q4 2011 |
|---|---|---|
| Net sales | $462.7 million | $466.4 million |
| Operating income | $35.5 million | $32.7 million |
| Net earnings | $19.9 million | $11.5 million |
| Diluted EPS | $0.84 | $0.48 |
Material changes and operating drivers
- Annual sales fell 2.8%, principally because the 2011 comparison included $80.3 million in sales from the Lewiston sawmill, sold in November 2011. Excluding that effect, the company said sales increased, supported by higher tissue shipments and prices and greater paperboard shipments.
- Consumer Products sales rose 3.9% to $1,134.6 million; operating income more than doubled to $93.3 million. Tissue shipments increased 3.1%, while lower pulp, energy, transportation and packaging costs and Cellu Tissue synergies supported profitability.
- Pulp and Paperboard sales declined 11.5% to $739.7 million, largely reflecting the sawmill sale and lower external pulp shipments as more internally produced pulp was used in tissue. Operating income increased 11.9% to $103.9 million; paperboard shipments rose 2.3%, while paperboard selling prices fell 2.0%.
- Cellu Tissue integration generated $31.0 million of net cost savings in 2012. Management expected annual savings of $35–$40 million beginning in 2013.
Outlook, risks and unusual items
- The North Carolina TAD tissue machine began production in December 2012, with two additional converting lines completed in Q4. The overall project was estimated at $270 million excluding capitalized interest; $253.8 million had been incurred by year-end, with about $16 million expected in 2013. Management expected approximately $91 million of 2013 capital expenditures, including project completion.
- Management expected 2013 effective tax rate of about 40%, pension contributions of about $20 million, and approximately $14 million of planned major maintenance. Depreciation was expected to rise with a full year of TAD machine operation. The filing does not provide a specific full-year revenue or earnings forecast.
- Subsequent to year-end, the company issued $275 million of 4.5% senior notes due 2023 and redeemed its $150 million of 10.625% notes due 2016 for approximately $166 million, including make-whole premium and accrued interest. It also authorized a $100 million share repurchase program. These are post-year-end events, not FY 2012 balance-sheet amounts.
- Key exposures include customer concentration (three customers represented about 19% of total sales), volatile pulp, wood fiber, chemical, energy and freight costs, competitive pricing and increased TAD capacity. The company warned that new TAD equipment start-up, product acceptance and market supply could affect results.
- The IRS was auditing 2008–2011 tax years. Accrued taxes on uncertain positions were $78.7 million, including uncertainty relating to alternative-fuel and cellulosic-biofuel credits. The filing describes uncertainty over eligibility, retention, use and tax treatment of those credits.
- The EPA referred alleged Clean Air Act violations at the Lewiston pulp facility to the Department of Justice. Discussions were ongoing under a tolling agreement expiring March 29, 2013 unless extended; potential penalties or operational remedies were not quantified.
- Company-sponsored pension plans were underfunded by $78.7 million; the filing also flags potential multiemployer-plan withdrawal liabilities. No cash dividends were paid, and none were anticipated for 2013.
Important facts for investors to verify
- Whether the TAD machine and converting lines reach expected production, quality, customer acceptance and cost targets, and whether remaining project spending stays near plan.
- Whether Cellu Tissue synergy savings reach the $35–$40 million annual target and translate into sustained segment margins.
- Developments and ultimate cash or operational consequences of the IRS tax-credit audit and Lewiston environmental matter.
- Customer retention, pulp and other input-cost trends, paperboard pricing, and the impact of competitor capacity on tissue and paperboard margins.
- Post-year-end note refinancing, redemption costs and planned share repurchases, including their effect on leverage, liquidity and outstanding shares.