Clearwater Paper(CLW) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis for the company ITEM 1. Consolidated Financial Statements This section presents Clearwater Paper Corporation's unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes Consolidated Balance Sheets The Consolidated Balance Sheet shows a decrease in total assets to $1,826.9 million from $1,877.7 million at year-end 2019, primarily due to lower property, plant, and equipment, while total liabilities decreased to $1,330.8 million and total stockholders' equity increased to $496.2 million Consolidated Balance Sheet Highlights (in millions) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $1,826.9 | $1,877.7 | | Total Current Assets | $492.0 | $465.8 | | Property, plant and equipment, net | $1,200.9 | $1,257.7 | | Total Liabilities | $1,330.8 | $1,445.7 | | Long-term debt | $785.5 | $884.5 | | Total Stockholders' Equity | $496.2 | $432.0 | Consolidated Statements of Operations The company reported a significant turnaround in profitability, with net income of $21.4 million in Q3 2020 and $54.5 million for the nine months ended September 30, 2020, driven by increased net sales Key Operating Results (in millions, except per-share data) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $457.4 | $445.2 | $1,415.8 | $1,326.0 | | Income (loss) from operations | $49.2 | $(2.4) | $116.2 | $27.2 | | Net income (loss) | $21.4 | $(11.0) | $54.5 | $(7.6) | | Diluted EPS | $1.28 | $(0.66) | $3.27 | $(0.46) | Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $176.1 million for the nine months ended September 30, 2020, while cash used in investing activities decreased due to the completion of the Shelby expansion, and financing activities primarily focused on debt repayments Cash Flow Summary for Nine Months Ended Sep 30 (in millions) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash from Operating Activities | $176.1 | $(16.2) | | Net cash used in Investing Activities | $(27.5) | $(125.8) | | Net cash (used in) from Financing Activities | $(122.5) | $127.4 | | Increase (decrease) in cash | $26.1 | $(14.7) | Notes to Consolidated Financial Statements The notes provide detailed information supporting the financial statements, covering accounting standards, fair value, debt, leases, and segment performance, including the issuance of new senior notes and changes in the effective income tax rate - The company issued $275 million of 4.75% senior notes due 2028 and used the proceeds to redeem its 4.50% notes due 2023, resulting in a $3.2 million loss on early debt extinguishment[37][42] - The effective income tax rate for the first nine months of 2020 was 21%, down from 38% in the same period of 2019, benefiting from a $7.0 million provision from the CARES Act[44] Segment Net Sales and Operating Income (in millions) | Segment | Q3 2020 Sales | Q3 2019 Sales | Q3 2020 Op. Income | Q3 2019 Op. Income | | :--- | :--- | :--- | :--- | :--- | | Consumer Products | $248.3 | $228.5 | $31.3 | $(4.4) | | Paperboard | $209.1 | $216.6 | $32.8 | $17.1 | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial impact of the COVID-19 pandemic, segment operating results, and the company's liquidity and capital resources - The COVID-19 pandemic led to a significant increase in demand for 'at home' tissue products in the first nine months of 2020, while paperboard demand saw increases in food packaging but decreases in food service[62] Financial Performance Summary (in millions) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $457.4 | $445.2 | $1,415.8 | $1,326.0 | | Net Income (Loss) | $21.4 | $(11.0) | $54.5 | $(7.6) | | Adjusted EBITDA | $77.2 | $31.5 | $211.6 | $115.6 | Our Operating Results The Consumer Products segment experienced an 8.7% sales increase and significant operating income growth due to COVID-19-driven retail tissue demand, while the Paperboard segment's sales decreased but operating income grew 92.1% due to lower input costs Consumer Products Segment Performance (Q3 2020 vs Q3 2019) | Metric | Q3 2020 | Q3 2019 | % Change | | :--- | :--- | :--- | :--- | | Sales | $248.3M | $228.5M | +8.7% | | Operating Income (Loss) | $31.3M | $(4.4)M | n.m. | | Adjusted EBITDA | $48.3M | $14.6M | +230.8% | | Retail Shipments (tons) | 86,292 | 79,526 | +8.5% | Paperboard Segment Performance (Q3 2020 vs Q3 2019) | Metric | Q3 2020 | Q3 2019 | % Change | | :--- | :--- | :--- | :--- | | Sales | $209.1M | $216.6M | -3.5% | | Operating Income | $32.8M | $17.1M | +92.1% | | Adjusted EBITDA | $42.0M | $28.3M | +48.6% | | Shipments (tons) | 211,820 | 214,537 | -1.3% | Liquidity and Capital Resources The company's liquidity significantly improved with $176.1 million in operating cash flow for the first nine months of 2020, enabling substantial debt repayments and a sharp decrease in capital expenditures - Net cash from operating activities increased to $176.1 million in the first nine months of 2020 from a use of $16.2 million in 2019, driven by higher net income and lower inventories[82] - Cash used for investing activities fell to $27.5 million from $125.8 million year-over-year, primarily due to the completion of the Shelby expansion in late 2019[83] - Improved operating results and lower capital spending allowed for significant debt repayments, resulting in a net cash use of $122.5 million in financing activities for the first nine months of 2020[84] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to interest rate fluctuations on its variable-rate debt, specifically the Term Loan and ABL Credit Agreements, with $199.3 million in borrowings subject to this risk as of September 30, 2020 - A one percentage point change in interest rates would have an approximate $2.0 million annual effect on interest expense, based on the $199.3 million of variable-rate debt outstanding at the end of Q3 2020[87] ITEM 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2020, with no material changes to internal control over financial reporting during the third quarter - The CEO and CFO concluded that the company's disclosure controls and procedures are effective in ensuring that material information is recorded, processed, and reported in a timely manner[89] - No changes occurred during the third quarter of 2020 that materially affected, or are likely to materially affect, the company's internal control over financial reporting[90] PART II. OTHER INFORMATION This section covers legal proceedings, key risk factors, and a list of exhibits filed with the report ITEM 1. Legal Proceedings The company may be involved in various claims and litigation arising from its business operations, but management believes the outcomes will not have a material adverse effect on its financial condition - The company does not expect any ongoing legal proceedings to have a material adverse effect on its financial condition[92] ITEM 1A. Risk Factors The COVID-19 pandemic is identified as a significant risk factor, potentially impacting operations, supply chains, demand, and financial markets despite short-term tissue demand increases - The primary risk factor discussed is the COVID-19 pandemic, which could materially and adversely affect the business through various channels despite the initial surge in tissue demand[93] - Specific pandemic-related risks include: facility closures, supply chain disruptions (e.g., eucalyptus pulp from Brazil), decreased paperboard demand in a recession, interruptions to distribution, and volatility in pension plan assets[93] - The company notes that the initial stocking up of tissue products by consumers will likely lead to a future drop in purchasing as the pandemic subsides, with demand expected to normalize[93] ITEM 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the indenture for the 2028 Senior Notes, an amendment to the ABL Credit Agreement, CEO/CFO certifications, and XBRL data files