Clearwater Paper Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Clearwater Paper produces consumer tissue and pulp and paperboard products at 15 U.S. and Canadian locations.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $487.8 million | $480.2 million | $1,419.7 million | $1,411.6 million |
| Operating income | $18.8 million | $39.8 million | $61.0 million | $109.9 million |
| Operating margin | 3.9% | 8.3% | 4.3% | 7.8% |
| Net earnings | $13.3 million | $19.1 million | $24.1 million | $44.3 million |
| Diluted EPS | $0.60 | $0.80 | $1.07 | $1.87 |
| Adjusted EBITDA (non-GAAP) | $43.1 million | $60.8 million | $134.2 million | $173.1 million |
Q3 revenue rose 1.6%, but operating income fell about 53%; nine-month revenue rose 0.6%, while operating income fell about 44%. Cost of sales increased faster than revenue, reducing operating margins. GAAP income taxes included significant discrete benefits: the company recorded a tax benefit of $5.2 million in Q3 and $12.9 million for the nine-month period. These tax outcomes should not be treated as a straightforward indicator of recurring profitability.
Cash flow, liquidity and debt
- Operating cash flow: $91.5 million for the first nine months, down from $160.6 million. Management attributed the decline mainly to lower working-capital cash generation and changes in non-current accrued taxes; inventory build and receivables timing were factors.
- Investing and capital spending: Investing cash outflow was $123.4 million, including $54.4 million of plant and equipment additions and a $69.0 million increase in short-term investments. Capital spending was down from $155.4 million in the prior-year period, when TAD expansion spending was substantially higher.
- Cash and liquidity: At September 30, cash was $20.9 million, restricted cash $1.5 million and short-term investments $89.0 million. The company reported $118.4 million available under its revolving credit facility, with no borrowings and $6.6 million supporting letters of credit. Management said available cash, operating cash flow and revolver capacity should cover the next 12 months’ needs.
- Debt: Long-term debt was $650.0 million, versus $523.9 million at year-end 2012. The company issued $275 million of 4.5% notes due 2023 and used proceeds in part to redeem $150 million of 10.625% notes due 2016. The redemption generated $17.1 million of debt-retirement costs. Outstanding notes also include $375 million of 7.125% notes due 2018.
- Capital returns: The company repurchased $75.8 million of shares during the first nine months. The $100 million repurchase authorization was completed in October 2013.
Business changes and management commentary
- Consumer Products: Q3 sales were essentially unchanged at $292.9 million; operating income fell to $13.4 million from $18.5 million. Nine-month sales rose 1.6%, but operating income declined to $38.4 million from $70.4 million. TAD transition costs, added depreciation, energy, packaging and employee costs weighed on results. Higher retail tissue prices and mix partly offset lower shipments.
- Pulp and Paperboard: Q3 sales increased 4.1% to $194.9 million, while operating income fell to $16.3 million from $34.4 million, primarily due to $17.5 million of planned Idaho maintenance costs and higher employee and energy costs. Nine-month sales declined 1.0% and operating income declined to $58.6 million from $78.1 million, reflecting pricing pressure, maintenance and Arkansas operational issues.
- Thomaston closure: The Georgia converting and distribution facility was scheduled to cease operations by year-end 2013. Expected exit costs were $6–$7 million; $2.9 million had been incurred by September 30. Management expected cost-savings benefits to be fully realized beginning in Q4 2014.
- Outlook disclosed: Management expected Q4 2013 SG&A expense of approximately $28 million. It expected $1.9 million of additional qualified pension contributions for the remainder of 2013, following $12.6 million contributed in the first nine months. The filing does not provide a clear full-year earnings or revenue forecast.
Risks, contingencies and unusual items
- Operating pressures include TAD capacity ramp-up and customer acceptance, competitive pricing, pulp and wood-fiber availability and costs, energy and transportation costs, and potential manufacturing disruptions. The Arkansas recovery boiler experienced operational issues; the Idaho facility underwent planned major maintenance.
- The IRS audit of tax years 2008–2012 was ongoing. The company’s alternative-fuel and cellulosic-biofuel tax-credit positions remain subject to uncertainty, including qualification, retention and potential tax treatment. State tax audit settlements and additional claimed credits contributed to 2013 tax benefits.
- The EPA referred alleged Clean Air Act violations concerning the Lewiston, Idaho pulp facility to the Department of Justice. Discussions were ongoing; the parties’ statute-of-limitations tolling agreement ran through February 28, 2014 unless extended. The filing does not quantify a potential loss.
- Pension obligations remain material: the balance sheet reported $187.4 million of pension and other postretirement liabilities. The company also cited possible volatility in benefit-plan funding requirements.
- Natural-gas firm-price contracts covered about 33% of expected average monthly requirements for the remainder of 2013, and lesser amounts for 2014. Debt covenants restrict certain actions; the revolver’s fixed-charge coverage ratio was 2.6-to-1.0 at September 30.
Important facts for investors to verify
- Whether TAD production, sales mix and customer acceptance improve enough to offset transition costs, depreciation and higher operating expenses.
- How recurring operating performance compares with reported earnings after removing discrete tax benefits and the debt-retirement charge.
- Whether operating cash flow recovers as inventory and receivables normalize, and how much capital spending is required going forward.
- The outcome and potential financial effect of the IRS tax-credit audit and the EPA/DOJ Clean Air Act matter.
- Progress on Thomaston closure costs and the timing and realization of expected savings, alongside pension funding needs and debt-service capacity.