Clearwater Paper(CLW) - 2022 Q4 - Annual Report

Part I Item 1. Business Clearwater Paper Corporation manufactures and supplies bleached paperboard and consumer tissue through its Pulp and Paperboard and Consumer Products segments, focusing on high-end SBS paperboard and private-branded tissue products Segment Sales | Segment | 2022 Sales (millions) | 2021 Sales (millions) | YoY Change | | :--- | :--- | :--- | :--- | | Pulp and Paperboard | $1,136.3 | $946.0 | 20.1% | | Consumer Products | $950.2 | $835.0 | 13.8% | | Total | $2,080.1 | $1,772.6 | 17.3% | Pulp and Paperboard Segment This segment manufactures and markets Solid Bleached Sulfate (SBS) paperboard for the high-end packaging industry, focusing on applications like folding cartons, liquid packaging, and cups[369] A key competitive advantage is that the company does not produce converted paperboard end-products, positioning it as a supplier to, rather than a competitor of, its packaging converter customers[370] Consumer Products Segment The segment produces a full line of quality private branded at-home tissue products (bath, paper towels, facial, napkins) for large retail channels[401] The company estimates it accounted for 5% of the overall U.S. at-home tissue market in 2022, including both branded and private branded products[401] Input Costs and Operations The principal raw material is wood fiber (chips, sawdust, logs), with the company also purchasing approximately 315,000 short tons of pulp annually, primarily for the Consumer Products segment[371][12] Significant operational costs include energy (electricity, natural gas), chemicals (caustic, polyethylene, starch), and freight for raw material and finished product transport[13][372][404] Human Capital and Safety The company employs approximately 3,000 people, focusing on safety, competitive benefits, and a multi-year diversity, equity, and inclusion plan[19] As of December 31, 2022, approximately 1,250 employees are covered under collective bargaining agreements[19] Item 1A. Risk Factors The company faces various operational, market, employee plan, and financial risks, including increased tissue supply, cyclical paperboard conditions, customer concentration, volatile input costs, underfunded pension plans, and substantial indebtedness Risks Related to Business Operations and Markets A substantial increase in North American tissue supply could depress product pricing and margins if demand does not grow commensurately[20] Significant customer concentration, with the top 10 customers accounting for 48% of sales in 2022, makes the company vulnerable to the loss of any large customer[20] The Pulp and Paperboard business is subject to cyclical industry conditions affecting pricing, production levels, and cash flows[20] The business is exposed to significant fluctuations in the cost and availability of key inputs, including wood fiber, market pulp, chemicals, and energy[411][382] Risks Related to Employee Plans The company contributes to two multiemployer pension plans, PIUMPF and IAM NPF, which are in 'critical and declining' or 'critical' financial status[387][28] A complete withdrawal from these plans could trigger significant liabilities, estimated at annual payments of $5.7 million for 20 years (present value of ~$72 million) for PIUMPF and a single payment of approximately $4.0 million for IAM NPF as of December 31, 2022[28][387] Risks Related to Indebtedness and Tax Positions The company has substantial debt, approximately $569 million face value outstanding as of December 31, 2022, which could limit operational flexibility and increase vulnerability to adverse economic conditions[29] The company expects a tax deduction for a worthless stock loss related to a subsidiary dissolution but has fully reserved for this uncertain tax position due to potential challenges by tax authorities[31] Item 2. Properties The company operates principal executive offices in Spokane, Washington, and manufacturing facilities across the U.S., including major sites in Lewiston, Cypress Bend, and Shelby, producing tissue, pulp, paperboard, and sheeting services Annual Production Capacity | Product | Annual Capacity (short tons) | | :--- | :--- | | Tissue Parent Rolls | 390,000 | | Tissue Converting | 377,000 | | Pulp | 904,000 | | Paperboard | 840,000 | | Sheeted Paperboard | 191,000 | Item 3. Legal Proceedings The company is involved in various claims and litigation, but management believes these proceedings will not materially adversely affect its financial condition, results of operations, or cash flows The company does not expect current legal proceedings to have a material adverse effect on its financial condition[67] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Clearwater Paper's common stock trades on the NYSE under "CLW", with no cash dividends paid, and the company repurchased $5.0 million of common stock in 2022, leaving $24.9 million available under authorization The company repurchased 149,860 shares for approximately $5.0 million in 2022[428] As of December 31, 2022, $24.9 million remained under the stock repurchase authorization[428] The company has not paid any cash dividends, and future dividends are subject to Board of Directors' review and debt covenant restrictions[429] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, net sales increased 17.3% to $2.1 billion, driven by price increases across segments, leading to a net income of $46.0 million and Adjusted EBITDA of $226.9 million, with cash from operations at $150.2 million and projected 2023 capital expenditures of $70-80 million Key Financial Metrics | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Sales | $2.1 billion | $1.77 billion | | Net Income (Loss) | $46.0 million | ($28.1 million) | | Diluted EPS | $2.68 | ($1.67) | | Adjusted EBITDA | $226.9 million | $174.6 million | Results of Operations by Segment Pulp and Paperboard: Operating income and Adjusted EBITDA increased significantly in 2022 due to higher sales prices from previously announced increases, offsetting inflation and higher maintenance outage costs[77] Consumer Products: Operating income and Adjusted EBITDA increased in 2022 due to higher sales volumes from stabilized demand and new customer programs, along with price increases partially offsetting higher input costs, primarily for pulp and packaging[78] Liquidity and Capital Resources Cash from operations increased to $150.2 million in 2022 from $96.4 million in 2021, driven by improved operating performance[112] Net cash used in financing activities was $88.6 million, primarily for the full prepayment of the term loan, open market purchases of 2014 Notes, and common stock repurchases[445] The company expects capital expenditures to be approximately $70 million to $80 million in 2023[339] As of December 31, 2022, the company had availability of approximately $264.3 million under its ABL Credit Agreement[29] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure on its variable-rate ABL Credit Agreement, which had no outstanding borrowings as of December 31, 2022, and it faces minimal foreign currency exchange risk Market risk is limited to the ABL Credit Agreement, which had no outstanding borrowings at year-end 2022[113] The company has minimal foreign currency exchange risk[114] Item 8. Financial Statements and Supplementary Data This section includes KPMG LLP's unqualified opinion on the consolidated financial statements and internal controls, presenting balance sheets, income statements, cash flow statements, and stockholders' equity for 2020-2022, along with detailed notes The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of the company's internal control over financial reporting as of December 31, 2022[328][289] A critical audit matter identified was the evaluation of the discount rate used in the measurement of the pension benefit obligation, due to the subjectivity and judgment involved[90] Consolidated Financial Statements Consolidated Financial Highlights | (In millions) | 2022 | 2021 | | :--- | :--- | :--- | | Balance Sheet | | | | Total Assets | $1,703.5 | $1,690.1 | | Total Liabilities | $1,131.5 | $1,178.3 | | Total Stockholders' Equity | $572.1 | $511.7 | | Income Statement | | | | Net Sales | $2,080.1 | $1,772.6 | | Income from Operations | $113.9 | $12.0 | | Net Income (Loss) | $46.0 | ($28.1) | | Cash Flow | | | | Net Cash from Operating Activities | $150.2 | $96.4 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, debt obligations, retirement and pension plans, and segment information, highlighting the company's $569.2 million debt and underfunded multiemployer pension plans Debt (Note 7): As of Dec 31, 2022, total debt was $569.2 million, primarily consisting of $270 million in 5.375% Senior Notes due 2025 and $275 million in 4.750% Senior Notes due 2028, with the company fully repaying its term loan in 2022[184][202] Retirement Plans (Note 10): The company participates in multiemployer pension plans (PIUMPF and IAM NPF) in 'critical' (Red Zone) status, indicating significant underfunding, with an estimated withdrawal liability exceeding $76 million as of year-end 2022[225][250] Segment Information (Note 15): In 2022, the Pulp and Paperboard segment generated operating income of $183.5 million on $1.14 billion in sales, while the Consumer Products segment had operating income of $11.3 million on $950.2 million in sales[264] Item 9A. Controls and Procedures Management, including the CEO and CFO, concluded that both disclosure controls and internal control over financial reporting were effective as of December 31, 2022, a conclusion affirmed by KPMG LLP's unqualified opinion Management concluded that both disclosure controls and procedures, and internal control over financial reporting, were effective as of December 31, 2022[288] There were no changes in internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[288] Part III Item 10. Directors, Executive Officers and Corporate Governance This section lists executive officers as of February 1, 2023, with information on directors and corporate governance, including the Code of Business Conduct and Ethics, incorporated by reference from the 2023 Proxy Statement Arsen S. Kitch serves as President and Chief Executive Officer, and Michael J. Murphy serves as Senior Vice President, Chief Financial Officer[271] The company has adopted a Code of Business Conduct and Ethics applicable to all directors and employees, and a separate Code of Ethics for Senior Officers[271] Items 11, 12, 13 & 14 Information for these items, covering executive compensation, security ownership, related party transactions, director independence, and principal accounting fees, is incorporated by reference from the company's 2023 Proxy Statement Detailed information on executive compensation, security ownership, related party transactions, and auditor fees is not contained in this 10-K but is incorporated by reference from the 2023 Proxy Statement[272][296][273] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists the financial statements and provides a detailed index of all exhibits filed with the Form 10-K, including corporate governance documents, debt agreements, and compensatory plans Lists all financial statements, the report of the independent registered public accounting firm, and all exhibits filed as part of the annual report[275][300]