Clearwater Paper Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report, not a standalone Q4 filing; quarterly figures below are unaudited. Clearwater manufactures tissue, bleached paperboard and pulp through Consumer Products and Pulp and Paperboard segments.
Financial results
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $1,928.0 million | $1,373.0 million |
| Operating income | $115.4 million; 6.0% margin | $98.8 million; 7.2% margin |
| Net earnings | $39.7 million | $73.8 million |
| Diluted EPS | $1.66 | $3.12 |
| Operating cash flow | $68.4 million | $185.6 million |
| Capital expenditures | $137.7 million | $47.0 million |
Revenue grew 40.4%, largely because 2011 included a full year of Cellu Tissue, acquired in late December 2010; 2010 included only four days of its results. Cost of sales rose to 88.3% of revenue from 85.5%, while higher interest expense and a larger tax provision contributed to lower net earnings. The 2010 tax provision benefited from credits related to alternative fuels and cellulosic biofuel. Adjusted EBITDA, a non-GAAP measure, was $195.5 million versus $166.8 million.
Q4 2011: Sales were $466.4 million, operating income $32.7 million and net earnings $11.5 million, compared with $345.6 million, $22.4 million and $37.8 million, respectively, in Q4 2010. Q4 operating income improved, but net earnings fell; the filing’s annual results do not establish a clear quarterly attribution for that decline.
Segments and material changes
- Consumer Products: Sales were $1,092.1 million versus $570.0 million; operating income fell to $42.8 million from $80.8 million, with margin declining to 3.9% from 14.2%. Acquired volume drove sales growth, but lower product mix/pricing and integration, startup, labor, packaging, freight, depreciation and maintenance costs weighed on profits.
- Pulp and Paperboard: Sales were $835.8 million versus $802.9 million; operating income rose to $92.8 million from $64.9 million, and margin increased to 11.1% from 8.1%. Higher paperboard prices and lower maintenance, purchased-paper and wood-fiber costs helped; chemical costs partly offset the gains.
- Operating cash flow fell 63.1%, reflecting the prior-year $101.3 million federal tax-credit cash receipt and an $80.7 million working-capital increase in 2011.
- In November 2011, Clearwater sold its Lewiston sawmill for approximately $30 million and entered a long-term residual-fiber supply agreement with the buyer.
Liquidity, debt and investment
At year-end, cash was $8.4 million, short-term investments $55.0 million, working capital $390.8 million and total debt $523.7 million. The $125 million secured revolver had no borrowings; approximately $117 million was available after letters of credit. The latest fixed-charge coverage ratio was 2.8-to-1.0. Debt consisted principally of $150 million of 10.625% notes due 2016 and $375 million of 7.125% notes due 2018. Total debt to capitalization, excluding accumulated other comprehensive loss, was 46.6%, down from 48.8%.
Management said cash from operations, cash on hand and revolver capacity were expected to fund the next 12 months’ needs, while cautioning that future cash generation and borrowing availability were uncertain. 2012 capital spending was projected at $215–$220 million, including $165–$170 million for Shelby; planned major maintenance spending was $18.3 million. No cash dividend was anticipated for 2012.
Outlook, risks and unusual items
- The Shelby, North Carolina tissue expansion was estimated at $260–$280 million, excluding capitalized interest. Two converting lines were operating; the TAD paper machine was scheduled to start up in Q4 2012. Clearwater expected Cellu Tissue synergies of $15–$20 million in 2012 and to be on track for $35–$40 million annually in future years.
- A competitor’s lawsuit against TAD-machine supplier Metso sought to block delivery. The court denied a preliminary injunction, but the case remained pending with a May 2012 trial date; delivery timing and replacement options remained risks.
- Management cited volatile wood-fiber, pulp, chemical, energy and freight costs, competitive pricing, cyclicality in paperboard, customer concentration, supplier dependence, labor negotiations and manufacturing disruptions. Three customers represented about 19% of total sales in 2011.
- Company-sponsored pension plans were underfunded by $89.1 million; estimated 2012 qualified-plan contributions were approximately $20 million. A multiemployer plan was in the red zone, and withdrawal liability could be material.
- Eligibility, retention and tax treatment of alternative-fuel/cellulosic-biofuel credits remained uncertain. The company reported $74.5 million of unrecognized tax benefits, excluding timing uncertainty in contractual-obligation disclosures.
- Unusual items included the 2010 acquisition-related expense and tax-credit benefit, 2011 sawmill-sale adjustments, and a $10.6 million 2011 earnings benefit from liquidation of LIFO inventory.
Investor verification priorities
- Track Shelby construction, spending, commissioning and the outcome of the Metso/First Quality litigation.
- Assess whether Cellu Tissue integration delivers the stated synergy targets and improves Consumer Products margins.
- Monitor working capital, operating cash flow and the funding plan for 2012 capital expenditures and debt service.
- Verify exposure to input-cost inflation, key customers and suppliers, and the pass-through of cost increases.
- Review tax-credit positions, tax contingencies, pension funding needs and environmental or labor developments.
The financial statements received an unqualified audit opinion; the auditor also reported effective internal control over financial reporting as of December 31, 2011.