Clearwater Paper Corporation — Q2 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2020. Clearwater Paper operates Consumer Products and Paperboard segments. Dollar amounts are in millions unless noted.
Financial results
- Q2 revenue: $480.5, up 6% from $452.0 in Q2 2019. Net income was $22.8, versus a $0.4 loss; diluted EPS was $1.36, versus a $0.03 loss. Operating income was $48.1, compared with $15.3.
- First-half revenue: $958.4, up 9% from $880.8. Net income was $33.1, versus $3.4; diluted EPS was $1.99, versus $0.21. Operating income was $67.0, compared with $29.7.
- Margins: Q2 operating margin was approximately 10.0% (3.4% in 2019); first-half operating margin was approximately 7.0% (3.4%). Q2 net margin was approximately 4.7%, versus negative 0.1%; first-half net margin was approximately 3.5%, versus 0.4%.
- Adjusted EBITDA (non-GAAP): Q2 $79.0 versus $44.3; first half $134.3 versus $84.1. Management cautions that this measure is not a substitute for GAAP results and may not be comparable across companies.
- Cash flow: First-half operating cash flow was $121.1, versus $14.7 in 2019. Capital expenditures were $17.8, versus $108.4; financing cash flow was negative $76.5, versus positive $113.0. Q2 operating cash flow was $109.0 and capital expenditures were $7.3.
- Liquidity and debt: June 30 cash and cash equivalents were $48.2. Total debt carrying value was $829.5, including finance leases, versus $902.4 at year-end 2019. The company made a voluntary $60.0 term-loan prepayment in Q2. The ABL had no borrowings outstanding; disclosed availability was $220.6, with $4.4 utilized under letters of credit. Current assets were $484.4 and current liabilities $247.5.
Material changes and segment performance
- Consumer Products sales rose 22.6% in Q2 to $275.1; operating income improved to $36.6 from a $5.1 loss. Retail tissue sales volume increased significantly amid pandemic-driven demand and new customer programs. Higher production improved fixed-cost absorption; lower external pulp and freight costs also helped. Retail tissue prices declined slightly.
- Paperboard Q2 sales fell 9.8% to $205.4 and operating income declined 4.2% to $32.2. Lower shipments reflected reduced commodity food-service demand, partly offset by folding carton and coated cup demand; prices also declined.
- First-half performance similarly reflected strong Consumer Products growth, while Paperboard sales and operating income declined. Corporate expenses increased to $17.6 in Q2 and $31.1 in the first half, primarily due to higher incentive compensation and professional-services costs.
- Other operating charges were $11.5 for the first half, including a $6.6 union settlement, $3.4 of reorganization expenses, a $1.4 gain on divested assets, and directors’ equity-based compensation expense. Q2 charges were $3.0. The company also recorded $1.0 of debt-retirement costs in the first half.
Outlook, risks, and contingencies
- Management expects pandemic-related at-home tissue demand to normalize and eventually return to pre-pandemic levels. It describes paperboard demand as mixed across end markets. The duration and overall business impact of COVID-19 could not be reasonably estimated.
- Management expects 2020 cash capital expenditures of approximately $45–$50. It believes cash flows, cash on hand, and credit availability will be adequate for debt service and operating, capital, and working-capital needs over the next 12 months.
- The company reported compliance with credit-agreement covenants at June 30 and expects to remain compliant based on current projections, but warns deterioration could jeopardize compliance. A potential 2021 excess-cash-flow prepayment is uncertain; the 2020 voluntary prepayment may offset it. The 2023 notes’ refinancing condition could accelerate the term loan and ABL if the notes are not refinanced 91 days before maturity.
- COVID-19 risks include demand normalization or recession-related declines, supply-chain and transport disruption, facility interruptions, customer payment difficulties, and reduced access to capital. Other risks include input-cost and pricing volatility, customer concentration, operational disruptions, pension exposure, and substantial indebtedness. A 1 percentage-point change in applicable rates would have an estimated $2.4 annual interest-expense effect on the specified $239.3 of credit-agreement borrowings.
- The first-half effective tax rate was 11%, including a $7.1 CARES Act benefit and tax credits. Management reported no significant changes to critical accounting policies, effective disclosure controls, and no material change in internal control over financial reporting. It believes pending legal matters will not, in aggregate, materially adversely affect financial condition.
Key facts for investors to verify
- Whether the unusually strong retail tissue demand and improved fixed-cost absorption persist as pandemic purchasing normalizes.
- Paperboard volume, pricing, and end-market trends, particularly food service and commercial print exposure.
- Progress toward the $45–$50 capital-spending outlook and the resulting operating cash flow and debt-repayment capacity.
- Credit-agreement covenant headroom, the potential 2021 excess-cash-flow payment, and refinancing requirements for the 2023 notes.
- The effects of the $7.1 CARES Act tax benefit and other unusual charges on comparisons with future periods.