Clearwater Paper Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Clearwater Paper manufactures private-label consumer and away-from-home tissue, pulp, and bleached paperboard. Its two reportable segments are Consumer Products and Pulp and Paperboard.
Financial performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $1,761.5 million | $1,724.2 million |
| Gross profit / margin | $164.5 million / 9.3% | $187.5 million / 10.9% |
| Operating income (loss) | $45.4 million | $(97.9) million |
| Net income (loss) | $(5.6) million; $(0.34) per diluted share | $(143.8) million; $(8.72) per diluted share |
| Adjusted EBITDA | $167.3 million | $181.6 million |
| Cash from operations | $55.6 million | $168.9 million |
| Capital expenditures | $140.1 million | $295.7 million |
- Sales increased 2.2% year over year, while Adjusted EBITDA fell about 8%. Management attributed the EBITDA decline to higher maintenance, input costs, and operating disruptions, partly offset by improved pricing and mix and higher tissue shipments.
- Consumer Products sales rose 2.5% to $906.8 million, but the segment recorded a $6.6 million operating loss, compared with $0.3 million operating income in 2018. Higher pulp costs, Shelby expansion ramp-up costs, depreciation, and labor costs weighed on results.
- Pulp and Paperboard sales rose 1.8% to $854.7 million. Operating income declined 11.9% to $115.3 million, reflecting scheduled major maintenance and higher energy costs, partly offset by pricing and lower chemical costs.
- Fourth-quarter 2019 sales were $435.5 million, operating income was $18.1 million, and net income was $2.0 million. Fourth-quarter 2018 included a $195.1 million goodwill impairment; reported net loss was $187.7 million.
Liquidity, debt, and cash flow
- Year-end cash and cash equivalents were $20.0 million, with $1.4 million restricted. Working capital was $185.4 million, versus negative $5.3 million in 2018.
- Debt was approximately $910.5 million at face value ($902.4 million carrying value, including current debt and net of unamortized debt costs). The company entered into a $300 million term loan and a $250 million asset-based revolving facility in July 2019, refinancing prior credit agreements. ABL availability was approximately $217 million at year-end.
- Operating cash flow fell substantially to $55.6 million. The company cited higher pulp, maintenance, and energy costs; Shelby ramp-up costs; additional interest paid; and working-capital effects.
- Management said cash on hand, operating cash flow, and borrowing capacity should be adequate for the next 12 months to fund debt service, operations, working capital, and capital spending. The company was in compliance with its credit agreements at year-end.
Changes, outlook, and notable items
- FY 2018 results included the $195.1 million noncash Consumer Products goodwill impairment and a $24.0 million gain on the Ladysmith facility sale. These items materially affect comparison with 2019.
- FY 2019 included $6.3 million of other operating charges and $2.7 million of debt retirement costs. The company spent $140.1 million on capital expenditures, primarily completing the Shelby tissue expansion and Lewiston pulp optimization project.
- Management expected 2020 cash capital expenditures of approximately $45–$50 million and an estimated 2020 effective tax rate of about 25%. No specific earnings or revenue guidance was provided.
- In January 2020, Lewiston union agreements were ratified through August 2025; the company expected to record $6.6 million of retroactive wage expense in first-quarter 2020. Settlement of the Ladysmith indemnity contingency was expected to release $1.4 million of restricted cash and generate an additional $1.4 million gain.
- The filing identifies COVID-19 as a potential risk to demand, facilities, distribution, and supply chains; it does not quantify the impact. It also reports a 2019 fire at Shelby and a temporary Arkansas mill shutdown following severe weather damage to power lines in early 2020.
Risks and contingencies
- Competition and new capacity in tissue, customer concentration (top 10 customers represented 40% of sales), and limited ability to pass through input-cost increases could pressure pricing and margins.
- Volatile pulp, wood fiber, energy, chemical, and transportation costs; scheduled maintenance and unplanned facility interruptions; and execution and demand risks related to the Shelby expansion and Lewiston continuous digester are significant operating risks.
- Debt service, variable-rate exposure, restrictive covenants, and refinancing needs are material financial risks. A 1 percentage-point interest-rate change on assumed credit-agreement borrowings would affect annual interest expense by about $3.1 million.
- PIUMPF was in critical and declining status and projected to become insolvent in 2030. The company estimated that a complete 2019 withdrawal would entail about $5.7 million in annual payments for 20 years, with present value exceeding $78 million; estimated withdrawal exposure across two multiemployer plans exceeded $82 million. No withdrawal liability was recorded because withdrawal was not considered probable. Potential additional assessment under the plan’s rehabilitation plan is disputed.
- Company-sponsored pension plans were underfunded by $9.9 million at year-end. The company reported no known material environmental liabilities, but noted ongoing regulatory and historical-site exposure. Management and the auditor concluded internal control over financial reporting was effective at year-end; prior-year material weaknesses were reported as remediated.
Important facts for investors to verify
- Whether Shelby reaches expected operating quality, volume, customer acceptance, and returns, and whether the Lewiston digester delivers its anticipated benefits.
- Whether operating cash flow recovers after its sharp decline and whether the company executes planned debt reduction while meeting scheduled principal payments and covenants.
- Actual 2020 capital spending, maintenance costs, input-cost trends, and the effect of COVID-19 or other disruptions on operations and demand.
- Developments in PIUMPF funding, withdrawal-liability litigation and the disputed additional assessment, as well as pension funding requirements.
- First-quarter 2020 recognition of the $6.6 million wage expense and $1.4 million Ladysmith gain, and the resulting effect on reported results.