Clearwater Paper Corporation — Q1 2012 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2012, compared with Q1 2011. Clearwater manufactures pulp-based consumer tissue, away-from-home tissue, pulp and paperboard at 15 locations in the U.S. and Canada.
Financial performance
Amounts below are in millions of dollars, except per-share data.
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $457.8 | $465.8 | Down 1.7% |
| Operating income | $25.6 | $23.5 | Up $2.1 |
| Operating margin | 5.6% | 5.1% | Up 0.5 percentage points |
| Net earnings | $3.7 | $5.6 | Down 33.5% |
| Diluted EPS | $0.16 | $0.24 | Down $0.08 |
| Operating cash flow | $38.4 | $38.6 | Nearly unchanged |
| Capital expenditures | $41.5 | $23.5 | Up $18.0 |
- Segments: Consumer Products sales rose 3.2% to $277.8 million and operating income increased to $26.3 million from $13.8 million, helped by higher selling prices and lower pulp costs. Pulp and Paperboard sales fell 8.4% to $180.0 million and operating income declined to $11.7 million from $15.6 million, primarily reflecting $15.5 million of major maintenance expense versus $11.4 million a year earlier.
- Margins and costs: Cost of sales declined to 88.0% of sales from 89.1%. Lower purchased-pulp and energy costs helped; higher chemical costs and maintenance partly offset the benefit. SG&A increased to $29.1 million from $27.4 million, attributed to Cellu Tissue integration, benefit rates and incentive compensation.
- Cash generation: Investing activities used $11.5 million, including $41.5 million of plant additions, partly offset by $30.0 million converted from short-term investments to cash. Financing activities used $10.8 million, principally $13.0 million of employee equity-award tax withholdings. Operating cash flow less capital expenditures was negative $3.1 million.
Balance sheet and liquidity
- At March 31, cash was $24.5 million and short-term investments were $25.0 million. Total debt was $523.8 million; the filing reports no revolver borrowings and approximately $117 million of available borrowing capacity, with $7.7 million supporting letters of credit.
- Current assets were $527.4 million and current liabilities $183.7 million. Stockholders’ equity was $481.3 million. Long-term pension and other postretirement liabilities were $200.2 million.
- Debt consisted principally of $375 million of 7.125% senior notes due 2018 and $150 million of 10.625% senior notes due 2016. Management estimated annual cash interest obligations of $42.6 million for 2012 and 2013.
- Management believed operating cash flows, cash on hand and revolver capacity would be adequate for the next 12 months, while cautioning that cash generation and future borrowing availability were not assured.
Outlook, material developments and risks
- Shelby expansion: The North Carolina tissue project was estimated at $260–$280 million, excluding estimated capitalized interest of $18.2 million. $148.9 million had been incurred through March 31, including $39.6 million in Q1. Two further converting lines were expected late in 2012’s second half; the TAD paper machine was scheduled to start in Q4 2012. Full-year 2012 capital expenditures were forecast at $215–$220 million, including $165–$170 million for the expansion.
- Cellu Tissue synergies: Clearwater recognized approximately $5.3 million of acquisition-related savings in Q1. Management expected about $20 million of net savings in 2012 and to be on track by year-end for $35–$40 million annually in future years.
- Tax uncertainty: The decision to convert tax-credit gallons from the Cellulosic Biofuel Producer Credit back to the Alternative Fuel Mixture Tax Credit produced $5.5 million of discrete tax expense, including a $3.0 million increase in uncertain-tax-position liabilities. The Q1 effective tax rate was 76.6%, versus 52.2%; the estimated 2012 annual rate was 34.6%. Clearwater said qualification, retention and tax treatment of the credits remain uncertain.
- Pensions and inputs: Clearwater contributed $15.5 million to qualified pension plans in Q1 and expected about $5.0 million more in 2012, plus interest. Firm-price contracts covered about 33% of expected monthly natural gas needs for the remainder of 2012; market-priced pulp agreements covered about 36% of expected annual pulp needs.
- Legal contingency: First Quality Tissue sought to block delivery of the Shelby TAD machine under a dispute with supplier Metso Paper. The court denied preliminary injunctive relief; trial was scheduled to begin May 7, 2012. The dispute could affect project timing or completion.
- Other stated risks include raw-material, energy and transportation costs; customer concentration and competitive pricing; integration and expansion execution; manufacturing disruptions; pension funding; debt restrictions; and economic and industry cyclicality. The filing reported no material changes to previously disclosed risk factors and no material change in internal financial controls.
Most important facts to verify
- Whether the TAD machine litigation or construction schedule affected Shelby start-up, spending or expected capacity.
- Whether the company achieved its 2012 capital-spending and Cellu Tissue synergy targets.
- Developments in IRS review or law affecting the alternative-fuel credits and the uncertain-tax-position liability.
- Whether operating cash flow can support expansion spending, debt service and remaining pension contributions without increased borrowing.
- Whether consumer-tissue gains can continue to offset weaker Pulp and Paperboard results and elevated maintenance and input costs.