Clearwater Paper Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. The company manufactures pulp-based consumer tissue, paperboard, and pulp at 15 locations in the U.S. and Canada. Amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $473.6 | $494.6 | $931.4 | $960.5 |
| Operating income | $44.5 | $33.8 | $70.1 | $57.3 |
| Operating margin | 9.4% | 6.8% | 7.5% | 6.0% |
| Net earnings | $21.5 | $13.9 | $25.2 | $19.5 |
| Diluted EPS | $0.91 | $0.59 | $1.07 | $0.82 |
| EBITDA | $64.2 | $52.4 | $109.4 | $94.2 |
| Adjusted EBITDA | $66.2 | $52.4 | $112.4 | $94.2 |
EBITDA and Adjusted EBITDA are company-defined non-GAAP measures. Adjusted EBITDA adds back the foam-asset sale loss and Metso litigation costs in 2012.
- Cash flow: First-half operating cash flow was $88.3, versus $44.9 a year earlier. Investing used $64.9, primarily reflecting $100.9 of plant and equipment additions; financing used $14.6. Cash at June 30 was $17.2.
- Liquidity: Current assets were $495.1 and current liabilities $161.9. Short-term investments were $20.0. The $125 million revolving facility had no borrowings; $5.9 supported letters of credit and approximately $119.1 was available to draw.
- Debt: Long-term debt was $523.8. Senior notes include $375 million due 2018 at 7.125% and $150 million due 2016 at 10.625%. Estimated annual cash interest payments for 2012 and 2013 were $42.6.
- Other balance-sheet items: Total assets were $1,583.1 and stockholders’ equity $502.2. Pension and other postretirement liabilities totaled $209.1, including current and long-term amounts.
Material changes versus comparable periods
- Q2 sales fell 4.3%, while operating income rose 31.7% and net earnings rose 54.3%. First-half sales declined 3.0%, while operating income increased 22.3% and net earnings increased 29.1%.
- Consumer Products improved: Q2 sales rose 5.2% to $283.1 and operating income increased to $25.7 from $6.9. Higher tissue pricing and shipments, lower purchased-pulp costs, and added North Carolina converting capacity supported results.
- Pulp and Paperboard Q2 sales declined 15.5% to $190.5 and operating income fell to $32.0 from $34.5. The company cited the 2011 sawmill sale, lower external pulp sales and prices, and lower paperboard volume.
- Lower purchased pulp, wood-fiber, transportation, and energy costs improved cost of sales as a share of revenue to 84.2% from 87.6% in Q2. Higher chemical costs and maintenance expenses were offsets.
- First-half operating cash flow improvement reflected working-capital cash generation versus use in 2011 and higher adjusted earnings; higher pension contributions partially offset the increase.
Outlook, commentary, risks, and unusual items
- Expansion: The Shelby, North Carolina TAD tissue project was estimated at approximately $275 million, excluding capitalized interest. Costs incurred through June 30 were $191.9 million. Management expected about $70 million of spending in the second half of 2012 and $15 million in 2013; total 2012 capital expenditures were forecast at $195–$200 million, including $145–$150 million for the TAD project. The new paper machine was scheduled to start in Q4 2012; Las Vegas upgrades were expected to finish in Q3 2012.
- Cellu Tissue synergies: Management reported $6.7 million of Q2 and $12.0 million of first-half 2012 savings. It expected approximately $28 million of net savings for 2012 and to be on track for $35–$40 million annually in 2013.
- Taxes: The first-half effective tax rate was 50.8%, including $8.1 million of net discrete tax expense. A $5.5 million item reflected the decision to convert certain 2009 fuel-credit gallons back to the Alternative Fuel Mixture Tax Credit and an increase in uncertain-tax-position liabilities. The company said IRS eligibility, retention, and tax treatment of the credits remained uncertain.
- Legal matter: A federal court ruled for Clearwater Paper and Metso Paper in the First Quality dispute over the TAD machine and dismissed the complaint with prejudice. The appeal period expired July 23, 2012. The company reported approximately $1.9 million of related first-half legal expense.
- Other items and risks: Q2 included a $1.0 million loss on legacy Cellu Tissue foam assets. Planned Arkansas maintenance was expected to cost an additional $4.3 million in Q4 2012. Management cited exposure to raw-material and energy prices, customer concentration, competitive pricing, project completion and integration, pension funding, tax-credit uncertainty, and debt restrictions. It believed available cash, operating cash flow, and borrowing capacity would cover needs over the next 12 months, while cautioning that this was not assured.
- Qualified pension contributions were $15.5 million in the first half, with another $2.1 million contributed in July; approximately $3.0 million plus interest remained expected for 2012. The filing described the plans as underfunded by $89.1 million at December 31, 2011.
Most important facts for investors to verify
- Whether the TAD machine and converting-line schedules, remaining project costs, and projected 2012 capital spending were achieved.
- Whether Consumer Products growth and Cellu Tissue synergies persisted, and whether Pulp and Paperboard volumes, pricing, and margins stabilized.
- The status and tax consequences of AFMTC/CBPC claims, uncertain tax positions, and any IRS review.
- Actual pension contributions and funding status, plus planned maintenance costs and their effect on production and cash flow.
- Available revolver capacity, debt-service needs, and compliance with facility covenants as investment spending continues.