Clearwater Paper Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in millions of dollars unless stated otherwise.
Business context and results
Clearwater Paper operates Pulp and Paperboard and Consumer Products segments. Third-quarter net sales rose 20% year over year to $538.8 million. Net income was $20.6 million, or $1.21 per diluted share, versus $1.9 million, or $0.11 per diluted share, a year earlier. Adjusted EBITDA, a non-GAAP measure, increased to $77.3 million from $49.9 million.
For the first nine months, net sales increased 21% to $1.553 billion. Net income was $51.9 million, or $3.04 per diluted share, compared with a net loss of $37.6 million, or $2.25 per share, in 2021. Adjusted EBITDA increased to $199.2 million from $119.0 million.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $538.8 | $450.5 | $1,553.3 | $1,282.8 |
| Income (loss) from operations | $48.9 | $13.8 | $113.3 | $(15.6) |
| Net income (loss) | $20.6 | $1.9 | $51.9 | $(37.6) |
| Adjusted EBITDA | $77.3 | $49.9 | $199.2 | $119.0 |
| Operating cash flow | $13.3 | $16.3 | $132.8 | $64.4 |
| Capital expenditures, net | $6.7 | $8.9 | $19.9 | $29.9 |
Consolidated operating margin was approximately 9.1% in Q3 2022, versus 3.1% in Q3 2021; for the first nine months it was approximately 7.3%, versus a loss-making margin in 2021. Cash and cash equivalents were $50.8 million at quarter-end. Total debt, including current maturities, was $565.9 million, down from $639.2 million at December 31, 2021. The company reported no ABL borrowings, with $3.7 million used for letters of credit; the borrowing base supported up to $250 million of availability. Working capital was $275.1 million.
Changes and operating drivers
- Pulp and Paperboard: Q3 sales grew 26.7% to $300.8 million and segment operating income rose to $63.7 million from $34.6 million. Higher prices and shipment volume, and the absence of prior-year maintenance outages, supported results; inflation partly offset the gains. Paperboard price per short ton increased 27.5% and shipments rose 2.4%.
- Consumer Products: Q3 sales rose 12.5% to $241.0 million and operating income increased to $5.2 million from $3.7 million. Higher retail prices and improved mix helped, partly offset by higher pulp and freight costs. Nine-month segment operating income and Adjusted EBITDA declined year over year as input-cost increases outweighed pricing and volume gains.
- The nine-month 2021 comparison included $47.1 million of Neenah mill-closure charges. Other operating charges were $8.5 million in the first nine months of 2022, versus $55.1 million in 2021; 2022 charges included $5.8 million of equipment impairment.
- Corporate expenses increased to $17.8 million in Q3 and $53.8 million year to date, primarily due to higher incentive compensation.
Cash, debt, outlook, and risks
Nine-month operating cash flow improved to $132.8 million, primarily reflecting stronger operating performance, partly offset by higher cash taxes and working-capital changes, including a $49.1 million inventory cash use. The company prepaid its $50.0 million term loan, repaid $80.8 million of long-term debt in total, purchased $30.0 million of its 2014 Notes in the open market, and used $4.9 million for share repurchases. It expects 2022 cash capital expenditures of approximately $30 million to $40 million.
Management cited inflation and elevated pulp and freight costs as pressures. Other disclosed risks include competitive pricing, wood fiber and pulp availability, transportation costs and disruptions, customer demand and concentration, manufacturing interruptions, labor, cyber-security, pension obligations, climate and environmental matters, and substantial indebtedness and covenant constraints. Management said the Inflation Reduction Act was not expected to have a material financial-statement impact based on its current analysis. It also noted potential future impairment charges if asset-disposition or reorganization decisions are made.
The company reported a 36.1% effective tax rate for the first nine months, above the 21% federal statutory rate, primarily due to adjustments involving previously claimed federal tax credits under audit, state taxes, and nondeductible compensation. Management said legal proceedings, in aggregate, were not expected to have a material adverse effect based on currently available information; it reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether price increases can continue to offset inflation, particularly pulp, freight, energy, and other input costs.
- Whether inventory levels and working-capital requirements affect cash conversion and liquidity.
- Progress on the $30 million to $40 million 2022 capital-spending plan and the expected returns from those expenditures.
- Remaining debt obligations, refinancing needs, and the terms and availability of the ABL facility, which matures in July 2024.
- Resolution and potential financial effects of the federal tax-credit positions under audit, as well as any future asset impairments.
- Adjusted EBITDA is non-GAAP and may not be comparable across companies; review its reconciliation to GAAP results.