Clearwater Paper (CLW) 10-Q2021 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Our disclosure and analysis in this report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding capital expenditures; the impact of COVID-19 on our operations; the impact of the closure of our Neenah, Wisconsin mill; inventory levels; our impairment loss calculation; liquidity; borrowing and credit facilities; disclosure controls; interest rate risk; and legal proceedings. Words such as “anticipate,” “expect,” “intend,” “plan,” “target,” “project,” “believe,” “schedule,” “estimate,” “may,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are based on management’s current expectations, estimates, assumptions and projections that are subject to change. Our actual results of operations may differ materially from those expressed or implied by the forward-looking statements contained in this report. Important factors that could cause or contribute to such differences in operating results include those risks discussed in Item 1A “Risk Factors” in our 2020 Form 10-K, as well as the following:

Forward-looking statements contained in this report present management’s views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management’s views to reflect events or circumstances occurring after the date of this report. You are advised, however, to consult any further disclosures we make on related subjects in our quarterly reports on Form 10-Q and current reports on Form 8-K filed with the Securities and Exchange Commission, or SEC.

CLEARWATER PAPER CORPORATION

Index to Form 10-Q

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position, results of operations, stockholders' equity and cash flows for us and our subsidiaries for the interim periods presented. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020. All dollar amounts are shown in millions, except per share.

We reviewed all other new accounting pronouncements issued in the period and concluded that they are not applicable or not material to our business.

Carrying amounts reported on the balance sheet for cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. From December 31, 2020 we have made voluntary prepayments of principal of the Term Loan Credit Agreement of $40.0 million.

The fair value of our debt is included in the following table:

We measure certain nonfinancial assets at fair value on a nonrecurring basis. These assets include inventory and property, plant and equipment that are written down to fair value when they are held for sale or determined to be impaired. During the second quarter of 2021, we announced the closure of our Neenah, Wisconsin tissue and converting operations and accordingly measured the inventory and property, plant and equipment at fair value on a nonrecurring basis based upon our expected proceeds from the related asset sales less applicable selling costs. This resulted in an impairment of $36.9 million in the first nine months of 2021.

NOTE 4 RECEIVABLES

Receivables consist of:

NOTE 5 INVENTORIES

Inventories consist of:

NOTE 6 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consists of:

Included in accounts payable and accrued liabilities is $8.9 million and $12.1 million related to capital expenditures that had not yet been paid as of September 30, 2021 and December 31, 2020.

NOTE 7 INCOME TAXES

For interim periods, accounting standards require that income tax expense be determined by applying the estimated annual effective income tax rate to year-to-date results, unless this method does not result in a reliable estimate of year-to-date income tax expense. Each period, the income tax accrual is adjusted to the latest estimate and the difference from the previously accrued year-to-date balance is adjusted to the current quarter.

For the nine months ended September 30, 2021, our income tax expense reflects an income tax benefit of $13.8 million as compared to an income tax provision of $14.1 million in the comparable period of 2020. Our effective tax rate for the first nine months of 2021 of 26.8% varied from the U.S. statutory tax rate of 21% primarily due to the effects of state taxes and nondeductible compensation. Our effective tax rate for the first nine months of 2020 approximated the statutory U.S. federal income tax rate of 21% and included a $7.0 million benefit from the provisions of the Coronavirus Aid, Relief, and Economic Security Act.

The major components of “Other operating charges, net” in the Consolidated Statements of Operations for the quarter and nine months ended September 30, 2021 and 2020 are reflected in the table below and described in the paragraphs following the table:

During the third quarter of 2021, we recorded $10.2 million of expenses in "Other operating charges, net." The components of the expense include:

During the second quarter of 2021, we recorded $44.5 million of expenses in "Other operating charges, net." The components of the expense include:

During the first quarter of 2021, we recorded $0.4 million of expenses in "Other operating charges, net." The components of the expense include:

During the third quarter of 2020 we recorded $0.3 million of expenses in "Other operating charges, net." The components of the expenses include:

During the second quarter of 2020 we recorded $3.0 million of expenses in "Other operating charges, net." The components of the expenses include:

During the first quarter of 2020, we recorded $8.6 million of net expenses in "Other operating charges, net." The components of the expense included:

The components of “Non-operating expense” in the Consolidated Statements of Operations for the quarter and nine months ended September 30, 2021 and 2020 are reflected in the table below:

The following table details the components of net periodic cost of our company-sponsored pension and other postretirement employee benefit plans for the periods presented:

We record the service component of net periodic cost (benefit) as part of "Cost of sales" and "Selling, general, and administrative expenses," while the non-service components of net periodic cost (benefit) are recorded to "Other non-operating expense" on our Consolidated Statements of Operations. For the quarter and nine months ended September 30, 2021, we recorded $0.6 million and $1.5 million to "Cost of sales" and less than $0.1 million and $0.2 million to "Selling, general, and administrative expenses." For the quarter and nine months ended September 30, 2020, we recorded $0.3 million and $1.1 million to "Cost of sales" and $0.2 million and $0.7 million to "Selling, general, and administrative expenses."

NOTE 12 STOCKHOLDERS' EQUITY

We have stock-based compensation plans under which restricted stock awards and stock options are outstanding or granted subject to time or performance vesting requirements. At September 30, 2021, approximately 1.1 million shares were available for future issuance under our current plan.

At September 30, 2021, $14.1 million of compensation cost related to unvested restricted stock units and performance awards had not yet been recognized.

During the nine months ended September 30, 2021, we granted 179,528 restricted stock units (time vesting) at an average grant date fair value of $35.68 per share and 68,070 restricted stock units (performance vesting) at an average grant date fair value of $39.79 per share.

Basic income per share is based on the weighted-average number of shares of common stock outstanding. Diluted income per share is based upon the weighted-average number of shares of common stock outstanding plus all potentially dilutive securities that were assumed to be converted into common shares at the beginning of the period under the treasury stock method. This method requires the effect of potentially dilutive common stock equivalents be excluded from the calculation of diluted earnings per share for the periods in which net losses are reported because the effect is anti-dilutive.

Anti-dilutive shares excluded from the calculation were 0.3 million and 0.4 million for the quarter ended September 30, 2021 and 2020 and 0.6 million and 0.6 million for the nine months ended September 30, 2021 and 2020.

We operate in two segments: Pulp and Paperboard and Consumer Products. Our business units have been aggregated into these two segments based upon the similarity of economic characteristics, customers and distribution methods. Our results of operations are summarized below for each of these segments separately. Segment information was prepared in accordance with the same accounting principles as those described in Note 1 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020. Certain amounts have been reclassified from the prior year presentation to reflect the realignment of Clearwater Paper’s baled pulp sales to record inter-segment sales at market price and the realignment of outside pulp sales to the producing segment.

Net sales, classified by major products were as follows:

We recorded a decrease of 2% in net sales to $450.5 million for the quarter ended September 30, 2021 compared to $457.4 million for the quarter ended September 30, 2020. We recorded net income for the quarter ended September 30, 2021 of $1.9 million, or $0.11 per diluted share, compared to net income of $21.4 million or $1.28 per diluted share in the quarter ended September 30, 2020. We recorded Adjusted EBITDA for the quarter ended September 30, 2021 of $49.9 million compared to $77.2 million in the quarter ended September 30, 2020.

We recorded a decrease of 9% in net sales to $1.3 billion for the nine months ended September 30, 2021 compared to $1.4 billion for the nine months ended September 30, 2020. We recorded net loss for the nine months ended September 30, 2021 of $37.6 million, or $2.25 per diluted share, compared to net income of $54.5 million or $3.27 per diluted share in the nine months ended September 30, 2020. We recorded Adjusted EBITDA for the nine months ended September 30, 2021 of $119.0 million compared to $211.5 million in the nine months ended September 30, 2020.

See discussion on segment level results regarding net sales, operating results and Adjusted EBITDA in “Our Operating Results” below.

The preparation of financial statements in accordance with GAAP requires our management to select and apply accounting policies that best provide the framework to report our results of operations and financial position. The selection and application of those policies requires management to make difficult, subjective and complex judgments concerning reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. As a result, it is possible that materially different amounts would be reported under different conditions or using different assumptions.

We monitor our long-lived assets for impairment indicators on an ongoing basis in accordance with GAAP. If impairment indicators exist, we perform the required impairment analysis by comparing the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the net book value exceeds the undiscounted cash flows, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived assets. Fair value is estimated based upon a combination of market and cost approaches, as appropriate.

Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values. We do not believe a material change in the estimates or assumptions that we use to calculate long-lived asset impairments is likely. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.

Customer programs and incentives are a common practice in our businesses. Our businesses incur customer program costs to obtain favorable product placement, to promote sales of products and to maintain competitive pricing. Customer program costs and incentives, including rebates and promotion and volume allowances, are accounted for as a reduction in net sales at the time the program is initiated and/or the revenue is recognized. The costs include, but are not limited to, volume allowances and rebates, promotional allowances, and cooperative advertising programs. These costs are recorded at the later of the time of sale or the implementation of the program based on management’s best estimates. Our estimates are based on historical and projected experience for each type of program or customer. Volume allowances are accrued based on our estimates of customer volume achievement and other factors incorporated into customer agreements, such as new products, new store allowances and merchandising support. We review accruals for these rebates and allowances, and adjust accruals when circumstances indicate (typically as a result of a change in volume expectations). As of September 30, 2021 and December 31, 2020, we had $8.8 million and $10.5 million accrued as customer rebates.

As of September 30, 2021, other than the items mentioned above, there have been no significant changes with regard to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

In evaluating our business, we utilize several non-GAAP financial measures. A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so excluded or included under applicable GAAP guidance. In this report on Form 10-Q, we disclose overall and segment earnings (loss) from operations before interest expense, net, non-operating pension and other postretirement benefit costs, taxes, depreciation and amortization, other operating charges, net, and Adjusted EBITDA which is a non-GAAP financial measure. Adjusted EBITDA is not a substitute for the GAAP measure of net income (loss) or for any other GAAP measures of operating performance.

We have included Adjusted EBITDA on a consolidated and segment basis in this report because we use them as important supplemental measures of our performance and believe that they are frequently used by securities analysts, investors and other interested persons in the evaluation of companies in our industry, some of which present Adjusted EBITDA when reporting their results. We also use Adjusted EBITDA to evaluate our performance as compared to other companies in our industry that have different financing and capital structures and/or tax rates. It should be noted that companies calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA measures may not be comparable to Adjusted EBITDA reported by other companies. Our Adjusted EBITDA measures have material limitations as performance measures because they exclude interest expense, income tax (benefit) expense and depreciation and amortization which are necessary to operate our business or which we otherwise incur or experience in connection with the operation of our business. In addition, we exclude other income and expense items which are outside of our core operations.

The following table provides our Adjusted EBITDA for the periods presented, as well as a reconciliation to net income and segment operating income.

Our results of operations for each of our segments are discussed below. See Note 14 "Segment Information" of the Notes to the Consolidated Financial Statements included in Item 1 of this report for further information regarding our segments.

Consumer Products

n.m. - not meaningful

Corporate expenses for the quarter and nine months ended September 30, 2021 were $14.3 million and $44.8 million compared to $14.6 million and $45.6 million in the same periods in the prior year. The reduction between periods is primarily related to the lower incentive compensation based upon lower operating results. Corporate expenses primarily consist of corporate overhead such as wages and benefits, professional fees, insurance and other expenses for corporate functions including certain executive officers, public company costs, information technology, financial services, environmental and safety, legal, supply management, human resources and other corporate functions not directly associated with the business operations.

See Note 8 "Other operating charges" of the Notes to the Consolidated Financial Statements included in Item 1 of this report for additional information.

Interest expense for the quarter and nine months ended September 30, 2021 compared to the same periods in the prior year was lower by $3.3 million and $9.6 million due to lower debt outstanding. See Note 9 "Non-operating income (expense)" of the Notes to the Consolidated Financial Statements included in Item 1 of this report for additional information.

We review from time to time possible dispositions or reorganization of various assets in light of current and anticipated economic and industry conditions, our strategic plan and other relevant factors. Because a determination to dispose or reorganize particular assets may require management to make assumptions regarding the transaction structure of the disposition or reorganization and to estimate the net sales proceeds, which may be less than previous estimates of undiscounted future net cash flows, we may be required to record impairment charges in connection with decisions to dispose of assets.

Our principal sources of liquidity are existing cash balances, cash generated by our operations and our ability to borrow under such credit facilities as we may have in effect from time to time. Our principal uses of liquidity are paying the costs and expenses associated with our operations, servicing outstanding indebtedness and making capital expenditures. We may also from time to time prepay or repurchase outstanding indebtedness (including by issuing new indebtedness subject to market conditions to refinance such outstanding indebtedness) or acquire assets or businesses that are complementary to our operations.

Net cash flows provided by operating activities for the nine months ended September 30, 2021 were $64.4 million compared to $176.1 million in the first nine months of 2020. This decrease was driven by lower net income and increases in inventory. Accounts receivable and accounts payable agings have remained relatively consistent with balances as of December 31, 2020.

During the nine months ended September 30, 2021, net cash flows used in investing activities were $29.9 million compared to $27.5 million in the prior year period. Included in "Accounts payable and accrued liabilities" on our Consolidated Balance Sheets was $8.9 million and $4.6 million related to capital expenditures that had not yet been paid at September 30, 2021 and 2020.

Throughout 2021, we expect cash paid for capital expenditures to be approximately $42 million to $47 million.

As of September 30, 2021, our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have carried out, with the participation of our Disclosure Committee and management, an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Act). Based upon this evaluation, the CEO and CFO have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that material information required to be disclosed by us in reports we file under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and that information required to be disclosed by us in the reports we file or submit under the Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2021 that has materially affected, or is likely to materially affect, our internal control over financial reporting.

We may from time to time be involved in claims, proceedings and litigation arising from our business and property ownership. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition.

There are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020. See Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, entitled “Risk Factors.”

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