Clearwater Paper Corporation — FY2020 Form 10-K
Business and period: The filing covers the fiscal year ended December 31, 2020, not a standalone fourth quarter. Clearwater Paper manufactures private-label consumer tissue and bleached paperboard through its Consumer Products and Pulp and Paperboard segments. Results were significantly affected by COVID-19-related changes in demand.
Financial results and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $1,868.6 million | $1,761.5 million |
| Operating income | $158.1 million | $45.4 million |
| Net income (loss) | $77.1 million; $4.61 diluted EPS | $(5.6) million; $(0.34) diluted EPS |
| Adjusted EBITDA, non-GAAP | $283.2 million | $167.3 million |
| Cash from operations | $247.0 million | $55.6 million |
| Capital expenditures | $39.6 million | $140.1 million |
| Cash and cash equivalents at year-end | $35.9 million | $20.0 million |
| Total debt, including finance leases | $725.0 million face value | $910.5 million face value |
Consumer Products sales rose 13.9% to $1,032.7 million, with operating income of $109.2 million versus a $6.6 million operating loss in 2019; segment operating margin was 10.6%. Retail tissue sales increased 15.4% and shipments increased 15.2%. Pulp and Paperboard sales fell 2.2% to $835.9 million, while operating income rose 9.2% to $126.0 million; segment operating margin was 15.1%.
At year-end, current assets were $474.9 million and current liabilities were $244.8 million. The company reported approximately $227 million of ABL borrowing availability, with no ABL borrowings outstanding and $3.6 million used for letters of credit. It prepaid $170 million of term-loan principal during 2020. Management said cash, operating cash flow and borrowing capacity should cover debt service, operations, capital spending and working capital for the next 12 months, while noting uncertainty in future cash generation.
Changes, outlook and management commentary
- Higher pandemic-driven at-home tissue demand lifted sales volume, production, fixed-cost absorption and margins. Management cautioned that demand could soften or become volatile as consumers use accumulated inventory and activity returns toward normal.
- Consumer Products also benefited from lower external pulp and freight costs. Non-retail tissue sales declined as away-from-home demand and contract manufacturing and parent-roll sales weakened.
- Pulp and Paperboard shipments declined 0.8%; mix and some price reductions contributed to lower sales. Profit improved year over year partly because 2019 included planned major maintenance and 2020 had lower input costs.
- Cash from operations increased substantially, while investing cash outflow fell as the Shelby expansion was completed in late 2019. Financing activities used $192.9 million, principally reflecting debt repayments.
- Management expected 2021 cash capital expenditures of approximately $60 million to $65 million. The company did not anticipate paying a cash dividend in 2021.
- Unusual 2020 items included $14.0 million of other operating charges, including a $6.6 million union settlement, $3.4 million of reorganization expenses and $2.5 million of environmental accruals. Debt retirement costs were $5.9 million. The CARES Act generated a $7.0 million tax benefit.
Risks and contingencies
- COVID-19 could disrupt production, suppliers, logistics, customer demand and collections; the duration and financial impact remained uncertain.
- Customer concentration is significant: the top 10 customers represented 50% of 2020 sales, and one customer represented 14%. Many customer arrangements lack minimum-volume commitments.
- Competitive capacity and pricing, pulp and wood-fiber availability and costs, energy, chemicals, transportation, maintenance and cyclical paperboard demand could pressure margins and cash flow.
- Debt remains substantial. Credit agreements impose covenants; the ABL fixed-charge coverage covenant applies if availability falls below $25 million. The company reported compliance at year-end.
- Multiemployer pension plans pose potentially material exposure. Estimated complete-withdrawal liability exceeded $82 million in aggregate; the company stated it had no current plan to withdraw. PIUMPF’s estimated statutory withdrawal payments were about $5.7 million annually for 20 years, with present value exceeding $78 million, excluding a disputed additional funding-deficiency assessment.
- The company-sponsored salary pension plan was underfunded by $12.5 million at year-end. Environmental compliance and historical remediation, including asbestos matters, may also require expenditures; management said pending legal proceedings were not expected, in aggregate, to materially affect results or cash flows.
Most important facts for investors to verify
- Whether elevated 2020 retail tissue demand and the resulting margins persist as pandemic-related purchasing patterns normalize.
- Whether cash generation supports planned capital spending, debt service and continued deleveraging; review debt maturities, covenant headroom and ABL availability.
- Whether customer concentration, tissue capacity growth and paperboard market conditions affect pricing, volumes and profitability.
- The status and potential cost of PIUMPF and IAM NPF obligations, including the disputed PIUMPF assessment and any legislative changes.
- Cash-flow quality: the company sold $256.2 million of receivables without recourse in 2020 under a customer receivables program; review the program’s availability, cost and effect on reported operating cash flow.
Audit: KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Pension benefit obligation measurement was identified as a critical audit matter.