Clearwater Paper(CLW) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Consolidated Financial Statements This section presents Clearwater Paper Corporation's unaudited consolidated financial statements, highlighting increased net income and operating cash flow Consolidated Balance Sheets Total assets slightly decreased to $1,841.5 million, while liabilities reduced and stockholders' equity increased to $470.8 million Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $1,841.5 | $1,877.7 | | Cash and cash equivalents | $48.2 | $20.0 | | Inventories | $235.3 | $281.4 | | Property, plant and equipment, net | $1,219.7 | $1,257.7 | | Total Liabilities | $1,370.7 | $1,445.7 | | Long-term debt | $827.9 | $884.5 | | Total Stockholders' Equity | $470.8 | $432.0 | Consolidated Statements of Operations Net sales increased to $480.5 million for Q2 2020, with net income significantly improving to $22.8 million from a prior-year loss Statement of Operations Highlights (in millions, except per-share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $480.5 | $452.0 | $958.4 | $880.8 | | Income from operations | $48.1 | $15.3 | $67.0 | $29.7 | | Net income (loss) | $22.8 | $(0.4) | $33.1 | $3.4 | | Diluted EPS | $1.36 | $(0.03) | $1.99 | $0.21 | Consolidated Statements of Cash Flows Operating cash flow significantly increased to $121.1 million, with reduced investing outflows and net cash used in financing for debt repayment Cash Flow Summary for Six Months Ended June 30 (in millions) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $121.1 | $14.7 | | Net cash used in investing activities | $(17.8) | $(108.4) | | Net cash provided by (used in) financing activities | $(76.5) | $113.0 | Notes to Consolidated Financial Statements Notes detail financial statements, including debt structure, tax calculations, and segment performance, highlighting a $60 million debt prepayment and 11% effective tax rate - The company made a voluntary prepayment of $60 million on its Term Loan during the second quarter of 2020[39] - The effective income tax rate for the first six months of 2020 was 11%, significantly lower than 54% in 2019, primarily due to tax credits and a $7.1 million CARES Act benefit[43] Segment Operating Income (in millions) | Segment | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Consumer Products | $50.9 | $(3.9) | | Paperboard | $58.7 | $63.0 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses COVID-19's impact, boosting Consumer Products sales and profitability, while Paperboard sales declined, and the company improved liquidity - The company experienced a significant increase in demand for 'at home' tissue products in H1 2020 due to COVID-19, while paperboard demand was mixed[59] Key Financial Metrics Comparison (in millions) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $480.5 | $452.0 | $958.4 | $880.8 | | Net Income (Loss) | $22.8 | $(0.4) | $33.1 | $3.4 | | Adjusted EBITDA | $79.0 | $44.3 | $134.3 | $84.1 | Operating Results by Segment Consumer Products sales increased 22.6% due to COVID-19 demand, boosting operating income, while Paperboard sales decreased 9.8% Consumer Products Segment Performance - Q2 2020 vs Q2 2019 (in millions) | Metric | Q2 2020 | Q2 2019 | % Change | | :--- | :--- | :--- | :--- | | Sales | $275.1M | $224.3M | +22.6% | | Operating Income (Loss) | $36.6M | $(5.1)M | n.m. | | Adjusted EBITDA | $53.7M | $12.3M | +337.8% | | Retail Shipments (tons) | 95,432 | 76,175 | +25.3% | Paperboard Segment Performance - Q2 2020 vs Q2 2019 (in millions) | Metric | Q2 2020 | Q2 2019 | % Change | | :--- | :--- | :--- | :--- | | Sales | $205.4M | $227.7M | -9.8% | | Operating Income | $32.2M | $33.6M | -4.2% | | Adjusted EBITDA | $41.4M | $43.1M | -3.8% | | Shipments (tons) | 207,410 | 225,188 | -7.9% | Liquidity and Capital Resources Liquidity significantly improved in H1 2020, with operating cash flow increasing to $121.1 million, enabling a $60 million debt prepayment and covenant compliance - Net cash from operating activities increased to $121.1 million for H1 2020, compared to $14.7 million in H1 2019, due to higher net income and lower inventories[79] - Capital expenditures are expected to be approximately $45 million to $50 million for full year 2020, a significant decrease from the prior year[80] - The company was in compliance with all debt covenants as of June 30, 2020, with a first lien secured leverage ratio of 0.97x, below the 2.00x threshold[39][82] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its $239.3 million variable-rate debt, with a 1% change impacting interest expense by $2.4 million annually - The company is exposed to interest rate risk on $239.3 million of variable-rate debt outstanding as of June 30, 2020[84] - A one percentage point change in interest rates would have an approximate $2.4 million annual impact on interest expense[84] Controls and Procedures CEO and CFO concluded disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[86] - No material changes to the company's internal control over financial reporting occurred during the second quarter of 2020[87] PART II. OTHER INFORMATION Legal Proceedings Management does not expect ongoing legal proceedings to have a material adverse effect on the company's financial condition - The company does not expect any ongoing legal proceedings to have a material adverse effect on its financial condition[89] Risk Factors The COVID-19 pandemic is a significant risk, potentially causing facility closures, supply chain disruptions, and demand volatility, with its full impact highly uncertain - The COVID-19 pandemic is identified as a significant risk factor with a highly uncertain and difficult-to-predict impact on the business[90][92] - Specific risks heightened by the pandemic include facility closures, supply chain disruptions, volatility in consumer demand, and potential inability to collect on accounts receivable[90] - The initial surge in tissue product demand due to consumer stocking will likely lead to a drop in purchasing as the pandemic subsides, with demand expected to normalize[90] Exhibits This section lists exhibits filed with Form 10-Q, including amendments to stock and compensation plans, and CEO/CFO certifications - Filed exhibits include amendments to the 2017 Stock Incentive Plan and other compensation plans, as well as required CEO and CFO certifications[96]