Clearwater Paper Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unless noted otherwise, amounts are in millions. Clearwater operates in Pulp and Paperboard and Consumer Products.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $519.9 | $538.8 | $1,569.9 | $1,553.3 |
| Operating income | $54.4 | $48.9 | $141.5 | $113.3 |
| Net income | $36.6 | $20.6 | $90.1 | $51.9 |
| Diluted EPS | $2.17 | $1.21 | $5.29 | $3.04 |
| Adjusted EBITDA (non-GAAP) | $80.6 | $77.3 | $217.6 | $199.2 |
| Operating cash flow | $88.2 | $13.3 | $125.0 | $132.8 |
| Capital expenditures paid | $14.2 | $6.7 | $48.5 | $19.9 |
Q3 operating margin was approximately 10.5% versus 9.1% a year earlier; net margin was approximately 7.0% versus 3.8%. For the nine months, operating margin was approximately 9.0% versus 7.3%, and net margin approximately 5.7% versus 3.3%.
Segments and period-over-period changes
- Pulp and Paperboard: Q3 sales fell 13.1% to $261.4 and operating income declined 32.9% to $42.7. Paperboard shipments fell 9.8%; sales price per short ton fell 3.9%. Management attributed weaker results mainly to softer demand, customer inventory rebalancing, lower prices and planned production downtime; lower wood, energy, chemical and freight costs partly offset these pressures. For nine months, sales declined 5.8% and operating income 14.6%.
- Consumer Products: Q3 sales increased 7.6% to $259.3 and operating income rose to $31.4 from $5.2. Retail tissue volume rose 4.7% and price per short ton rose 3.7%. Management cited private-label demand, prior price increases, improved mix and lower input costs. Nine-month sales rose 9.4% and operating income increased to $60.6 from $9.6.
- Consolidated Q3 sales declined 3.5%, but operating income, net income and Adjusted EBITDA increased. Nine-month sales grew 1.1%; net income and Adjusted EBITDA also improved. Lower interest expense and a lower effective tax rate contributed to the net-income comparison.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $110.2, current assets $627.0 and current liabilities $260.9. Long-term debt was $564.8, plus $0.9 current; stockholders’ equity was $648.5.
- Nine-month operating cash flow was $125.0, compared with $132.8 in 2022. The company used $48.5 for capital expenditures and $20.7 in financing activities, including $15.1 of share repurchases. Cash increased $55.8 from year-end 2022.
- Management expected 2023 cash capital expenditures of approximately $70–$80 and stated that cash, operating cash flow and available borrowing capacity should meet expected needs for the next 12 months. It cautioned that cash generation is uncertain given competitive and cyclical markets.
- The $275 revolving ABL facility is subject to borrowing-base limits. The company reported compliance with its ABL agreement at quarter-end and expected to remain compliant based on current projections, while noting deterioration in results or markets could threaten compliance.
Outlook, notable events and risks
- On October 27, 2023, Clearwater notified holders it would redeem all $270 of its 5.375% Senior Notes due 2025 on November 27. Funding included a new revolving term credit agreement with an initial $150 draw, a $60 draw under the existing ABL facility and cash on hand; funds were deposited with the trustee. The filing states the related indenture obligations were discharged following the deposit.
- Other operating charges were $1.8 in Q3 2023, principally $1.0 of directors’ equity compensation expense and a $0.3 equipment impairment. Nine-month charges were $2.4, down from $8.5 in 2022.
- Management identified pricing and demand, input costs and availability, operational disruptions, significant-customer exposure, labor, cyber and IT risks, environmental obligations, and debt service and covenant compliance among factors that could affect results. It reported no material changes to previously disclosed risk factors and no significant change in market-risk exposure.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It stated that pending claims and proceedings were not expected, in aggregate, to have a material adverse effect based on currently available information.
Important facts for investors to verify
- Whether Pulp and Paperboard demand, shipments and pricing stabilize, and whether planned downtime continues to affect production and margins.
- Whether Consumer Products’ volume, pricing and cost improvements persist as input costs and product mix change.
- Completion and final financing terms of the November 2023 note redemption, including the resulting revolver and ABL balances and borrowing availability.
- Progress against the $70–$80 capital-expenditure outlook, cash-flow needs and ABL covenant requirements.
- Adjusted EBITDA is a non-GAAP measure; review the filing’s reconciliation and limitations when comparing performance.