Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CLW > SEC Filings for CLW > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for CLEARWATER PAPER CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CLEARWATER PAPER CORP


5-Nov-2012

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS
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 our construction of additional converting and paper making capacity and the cost and timing to complete new facilities, including our facilities in Shelby, North Carolina, the cost and timing to upgrade existing paper making facilities, including those in Las Vegas, Nevada, the integration of and expected benefits from the former Cellu Tissue operations, including expected cost savings from synergies, future growth opportunities, the stock repurchase program, future revenues, cash flows, capital expenditures, tax rates, operating costs, manufacturing capability, liquidity, benefit plan funding levels, total selling, general and administrative costs, interest expenses, the tax treatment of the alternative fuels and cellulosic biofuels tax credits and the conversion of additional gallons of fuel from the Alternative Fuel Mixture Tax Credit to the Cellulosic Biofuel Producer Credit. 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 include those risks discussed in the section entitled "Risk Factors" in our 2011 Form 10-K, as well as the following:
difficulties with the integration process or the realization of the benefits expected from the acquisition of Cellu Tissue;

difficulties with completion, or significant delays in the construction or upgrade of, our new and existing tissue manufacturing and converting facilities, including the completion of our new through-air-dried, or TAD, paper machine;

changes in the cost and availability of wood fiber used in the production of our products;

changes in transportation costs and disruptions in transportation services;

changes in raw material and energy costs and availability;

the loss of business from any large customer;

changes in customer product preferences and competitors' product offerings;

our qualification to retain, or ability to utilize, tax credits associated with alternative fuels or cellulosic biofuels and the tax treatment associated with receipt of such credits;

labor disruptions;

changes in the U.S. and international economies and in general economic conditions in the regions and industries in which we operate;

changes in expenses and required contributions associated with our pension plans;

cyclical industry conditions;

competitive pricing pressures for our products, including as a result of increased capacity as additional manufacturing sites for consumer tissue products are constructed by our competitors;

changes in exchange rates between the U.S. dollar and other currencies;

reliance on a limited number of third-party suppliers for raw materials;

unforeseen environmental liabilities or expenditures;

unanticipated manufacturing or operating disruptions, including equipment malfunction and damage to our manufacturing facilities caused by fire or weather-related events and IT system failures;

an inability to fund our debt obligations;

restrictions on our business from debt covenants and terms; and

changes in laws, regulations or industry standards affecting our business.

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.


Table of Contents

OVERVIEW
Background
We manufacture and sell pulp-based products. We currently manufacture quality consumer tissue, away-from-home tissue, parent roll tissue, machine-glazed tissue, bleached paperboard, and pulp at 15 manufacturing locations in the U.S. and Canada. Our private label tissue products, such as facial and bath tissue, paper towels and napkins, are used primarily at home and are principally sold to major retailers and wholesale distributors, which include grocery, drug, mass merchant and discount stores. Our paperboard is sold primarily in the high-end segment of the packaging industry and is ultimately used by our customers to make packaging for products ranging from liquids to pharmaceuticals to consumer goods packaging, all of which demand high quality construction and print surfaces for graphics. Our products primarily utilize pulp made from wood fiber. In addition to wood fiber, other major cost categories include chemicals, transportation, energy, packaging, and costs associated with our manufacturing facilities.
Recent Developments
Consumer Products Expansion
In 2010, as part of our TAD tissue expansion project, or TAD project, we began construction of new tissue manufacturing and converting facilities in Shelby, North Carolina to expand our Consumer Products segment in the Eastern United States. This site will include a TAD paper machine capable of producing ultra grades of private label tissue products and is currently expected to have five converting lines. The first two converting lines became operational during the second quarter of 2011. Two additional converting lines are expected to become operational in the fourth quarter of 2012 and the fifth line in 2013. The new TAD paper machine is scheduled to start-up in the fourth quarter of 2012. Also as part of our TAD project, during the third quarter of 2012, we began improvements to our TAD tissue manufacturing capabilities in Las Vegas that we completed in October 2012.
The TAD project will allow us to supply a full range of TAD products, including paper towels and bath tissue, to customers across the U.S., while minimizing transportation costs. We believe this project, along with our existing manufacturing capabilities, will establish us as the only private label tissue products company to offer a full line of tissue products to our customers. We estimate the TAD project will cost approximately $275 million, excluding capitalized interest. As of September 30, 2012, we have incurred a total of $231.2 million in TAD project costs, of which $39.3 million and $121.9 million were incurred in the three and nine months ended September 30, 2012, respectively. We expect approximately $23 million will be spent during the fourth quarter of 2012, with the remaining balance of approximately $21 million to be spent in 2013. We have capitalized $13.2 million of interest related to the TAD project to date, of which $4.1 million and $9.0 million were incurred in the three and nine months ended September 30, 2012, respectively, and we estimate total capitalized interest for the project will be approximately $18 million.
Integration of Cellu Tissue Holdings, Inc. On December 27, 2010, we acquired Cellu Tissue Holdings, Inc., or Cellu Tissue, which includes nine tissue manufacturing facilities located in the Southern, Midwestern and Eastern United States and one facility in Eastern Canada. These facilities allow us to better serve existing private label grocery customers by creating a national manufacturing footprint and provide us with the capability to expand into new private label channels. We recognized $8.6 million of net cost savings from synergies relating to the acquisition in the third quarter of 2012, and $20.6 million for the first three quarters of 2012. We expect to achieve total net cost savings from synergies of approximately $29.0 million in 2012, and by the end of 2012 to be on track to achieve $35 to $40 million annually in net cost savings from synergies in 2013.


Table of Contents

Components and Trends in our Business
Net sales
Net sales consist of sales of consumer tissue, paperboard products and pulp, net of discounts, returns and allowances and any sales taxes collected. Prices for our consumer tissue products primarily tend to be driven by the value of our products to our customers, and are generally priced relative to the prices of branded tissue products. Demand and pricing for our pulp and paperboard products are largely determined by general global market conditions and the demand for high quality paperboard.

Operating costs

                                         Three Months Ended September 30,
(Dollars in thousands)                 2012                              2011
                                            Percentage of                  Percentage of
                              Cost          Cost of Sales       Cost       Cost of Sales
Purchased pulp           $    61,785              15.1 %     $  80,351           17.9 %
Chemicals                     45,546              11.1          43,931            9.8
Transportation1               43,348              10.6          49,510           11.0
Chips, sawdust and logs       40,856              10.0          47,606           10.6
Energy                        27,658               6.7          33,412            7.4
Packaging supplies            20,644               5.0          23,775            5.3
Maintenance and repairs2      20,597               5.0          23,767            5.3
                         $   260,434              63.5 %     $ 302,352           67.3 %



                                        Nine Months Ended September 30,
(Dollars in thousands)                2012                            2011
                                         Percentage of                  Percentage of
                             Cost        Cost of Sales       Cost       Cost of Sales
Purchased pulp           $   184,181           15.2 %     $ 229,772           17.7 %
Chemicals                    138,410           11.4         126,817            9.8
Transportation1              126,859           10.5         141,762           10.9
Chips, sawdust and logs      124,777           10.3         150,477           11.6
Energy                        81,013            6.7          98,872            7.6
Maintenance and repairs2      77,706            6.4          74,974            5.8
Packaging supplies            63,981            5.3          70,688            5.5
                         $   796,927           65.8 %     $ 893,362           68.9 %

1 Includes internal and external transportation costs.

2 Excluding related labor costs.

Purchased pulp. We purchase a significant amount of the pulp needed to supply our consumer products, and to a lesser extent our pulp and paperboard, manufacturing facilities from external suppliers. For the three and nine months ended September 30, 2012, total purchased pulp costs were 15.1% and 15.2%, respectively, of our cost of sales, representing decreases of 2.8 percentage points and 2.5 percentage points, respectively, compared to the same periods in 2011. Our costs for purchased pulp, which were at record highs in 2011, decreased through the first three quarters of 2012 due to lower average external pulp prices and our continued focus on using our internally produced pulp. Chemicals. We consume a substantial amount of chemicals in the production of pulp and paperboard. The chemicals we generally use include polyethylene, caustic, starch, sodium chlorate, latex and specialty paper process chemicals. A large portion of the chemicals used in our manufacturing processes, particularly in the pulp-making process, are petroleum-based and are impacted by petroleum prices. Our chemical costs increased $1.6 million, or 1.3 percentage points, for the three months ended September 30, 2012, compared to the comparable period ended September 30, 2011. Chemical costs for the nine months ended September 30, 2012, increased $11.6 million, or 1.6 percentage points, over the 2011 comparable period. Costs increased during both the three and nine month periods primarily as a result of increased production volumes and year to date increased caustic and other chemical costs.


Table of Contents

Transportation. Fuel prices largely impact transportation costs related to delivery of raw materials to our manufacturing facilities, internal inventory transfers and delivery of our finished products to customers. Changing fuel prices particularly affect our margins for consumer products because we supply customers throughout the U.S., and we transport unconverted parent rolls from our tissue mills to our tissue converting facilities. Our transportation costs for the three and nine months ended September 30, 2012, compared to the prior year periods, decreased as less fuel was used due to an overall decline in miles shipped as a result of synergies from the Cellu Tissue acquisition, as well as improvement in negotiated rates. In addition, as a result of the sale of our Lewiston, Idaho sawmill in November 2011, overall transportation costs were lower for the nine months ended September 30, 2012, compared to the same period ending 2011.
Chips, sawdust and logs. We purchase chips, sawdust and logs used to manufacture pulp. We source these residual wood fibers under both long-term and short-term supply agreements, as well as in the spot market. Overall costs for chips, sawdust and logs for the three and nine months ended September 30, 2012, decreased compared to the same 2011 periods, both in dollars and as a percentage of cost of sales, primarily due to the sale of our Lewiston, Idaho sawmill in November 2011. Excluding the effects of our former sawmill, the cost of chips, sawdust and logs decreased slightly when compared to the prior year periods primarily due to lower pricing at our Idaho pulp and paperboard mill. Energy. We use energy in the form of electricity, hog fuel, steam, natural gas and, to a much lesser extent, coal to operate our mills. Energy prices have fluctuated widely over the past decade. We have taken steps to reduce our exposure to volatile energy prices through conservation. In addition, cogeneration facilities that produce steam and electricity at our East Hartford, Connecticut, Lewiston, Idaho and Menominee, Michigan manufacturing sites help to lower our energy costs. To help mitigate our exposure to changes in natural gas prices, from time to time we have used firm-price contracts to supply a portion of our natural gas requirements. As of September 30, 2012, these contracts covered approximately 18% of our expected average monthly natural gas requirements for our manufacturing facilities for the remainder of 2012, plus lesser amounts for 2013. Energy costs for the three and nine months ended September 30, 2012 were lower than the prior year period due to lower natural gas and electricity costs. Our energy costs in future periods will depend principally on our ability to produce a substantial portion of our electricity needs internally, on changes in market prices for natural gas and on our ability to reduce our energy usage.
Maintenance and repairs. We regularly incur significant costs to maintain our manufacturing equipment. We perform routine maintenance on our machines and periodically replace a variety of parts such as motors, pumps, pipes and electrical parts.
Major equipment maintenance and repairs in our Pulp and Paperboard segment also require maintenance shutdowns annually at our Idaho facility and approximately every 18 months at our Arkansas facility, which increases costs and may reduce net sales in the quarters in which the major maintenance shutdowns occur. In the first quarter of 2012, we had 17 combined days of scheduled machine downtime for the two paperboard machines at our Idaho pulp and paperboard mill and incurred approximately $15.5 million in major maintenance costs, excluding labor, compared to major maintenance costs of $11.4 million and $3.1 million, respectively, at the same mill in the first and third quarters of 2011. There was no major maintenance in the second and third quarters of 2012. A portion of our major maintenance originally planned for the fourth quarter of 2012 at our Arkansas facility has been deferred to the first quarter of 2013. Of the $4.3 million of costs we expect to incur for this major maintenance, $2.0 million is expected to be incurred in the fourth quarter of 2012, and the remainder is expected to be spent in the first quarter of 2013.
In addition to ongoing maintenance and repair costs, we make capital expenditures to increase our operating capacity and efficiency, to improve our safety and to comply with environmental laws. Excluding $39.3 million and $121.9 million, respectively, of expenditures for our TAD project during the three and nine months ended September 30, 2012, we spent $16.1 million and $36.7 million, respectively, on capital expenditures during the three and nine months ended September 30, 2012, compared to $8.6 million and $32.7 million in the same periods in 2011. Capital expenditures for 2012 are expected to be between approximately $205 million and $210 million, which include an estimated $145 million associated with our TAD project.
Packaging supplies. As a significant producer of private label consumer tissue products, we package to order for retail chains, wholesalers and cooperative buying organizations. Under these agreements, we incur expenses related to the unique packaging of our products for direct retail sale to consumers. For the three and nine months ended September 30, 2012, packaging costs were lower than the same period in 2011 primarily due to procurement synergies resulting from the Cellu Tissue acquisition.
Other. Other costs not mentioned in the above table primarily consist of wage and benefit expenses and miscellaneous operating costs. Although period cut-offs and inventory levels can impact other cost of sales amounts, we would expect this amount to stay relatively steady as a percentage of costs.


Table of Contents

Selling, general and administrative expenses Selling, general and administrative expenses primarily consist of compensation and associated expenses for sales and administrative personnel, as well as commission expenses related to sales of our products. Our selling, general and administrative expenses for the three months ended September 30, 2012, and 2011, were $30.6 million and $26.8 million, respectively. The $3.8 million increase was primarily a result of higher wage and benefit, incentive based compensation and director equity-based compensation expenses. Interest expense
Interest expense is mostly comprised of interest on our $375.0 million aggregate principal amount 7.125% senior notes due 2018 issued in October 2010, which we refer to as the 2010 Notes, and our $150.0 million aggregate principal amount of 10.625% senior notes due 2016 issued in June 2009, which we refer to as the 2009 Notes. Interest expense also includes amortization of deferred finance costs associated with the 2009 Notes, 2010 Notes, and our revolving credit facility. Interest expense will be partially offset by our continued capitalization of interest for our TAD project, which we estimate will be $13.8 million in 2012 and approximately $18 million in total over the construction phase of the project. Interest expense before reductions for capitalized interest in 2012 is expected to continue decreasing slightly compared to 2011 as a result of the 2011 third quarter redemption of our industrial revenue bonds. Income taxes
Income taxes are based on reported earnings and tax rates in the jurisdictions in which our operations occur and offices are located, adjusted for available credits, changes in valuation allowances and differences between reported earnings and taxable income using current tax laws and rates. We generally expect our effective income tax rate, excluding discrete items, to remain fairly constant, but it could fluctuate due to changes in tax law. We are registered with the Internal Revenue Service, or IRS, as both an alternative fuel mixer and a producer of cellulosic biofuel. During 2009 we received refundable tax credit payments in connection with our use of an alternative fuel mixture to produce energy at our pulp mills. The amount of the refundable tax credit is equal to $0.50 per gallon of alternative fuel mixture used. The Alternative Fuel Mixture Tax Credit, or AFMTC, expired on December 31, 2009.
The Cellulosic Biofuel Producer Credit, or CBPC, enables us to claim $1.01 per gallon in regards to black liquor produced and used as a fuel by us at our pulp mills in 2009. During 2010, the IRS issued guidance clarifying the treatment of the CBPC and the AFMTC in regards to the production or use of black liquor at the same facility, in the same tax year. Under the guidance provided, both credits may be claimed in the same year as long as the credits are not claimed for the same gallons of fuel. Furthermore, the IRS guidance clarified the ability to convert previously claimed gallons from the AFMTC to the CBPC. In the first quarter of 2012 Congress identified the elimination or modification of the CBPC in connection with black liquor as a possible revenue source. Such proposed legislative action, if enacted, could limit or eliminate our ability to convert AFMTC gallons to CBPC gallons and/or CBPC gallons to AFMTC gallons and, accordingly, limit or eliminate our ability to claim carry forward credits. Although provisions relating to CBPC and AFMTC were removed from the proposed Highway Investment, Job Creation and Economic Growth Act of 2012, the ultimate outcome of these provisions or future provisions could be adverse. As a result, we made the determination to convert all gallons relating to CBPC carryforwards back to AFMTC and as of September 30, 2012 we have no remaining CBPC carryforwards. As a result of this determination, we recorded net discrete expense of $6.5 million through the nine months ended September 30, 2012 comprised of $3.4 million relating to the conversion back to the AFMTC and a resulting additional $3.1 million increase in our liabilities for uncertain tax positions. Although under current federal tax law we have the ability to convert gallons of AFMTC to CBPC until 2013, we do not currently intend to do so. See Note 5 "Income Taxes" of our Condensed Consolidated Financial Statements for further discussion.
There is relatively little guidance regarding the AFMTC and the law governing the issue is complex. Accordingly, there remains uncertainty as to our qualification to receive the tax credit in 2009, as well as to whether we will be entitled to retain the amounts we received upon further review by the IRS. In addition, while it is our position that payments received or credits taken in relation to the AFMTC should not be subject to corporate income tax, there can be no assurance as to whether or not the amounts we have received will be subject to taxation.
Subsequent to September 30, 2012, the IRS has undertaken an audit of the company for the 2009 through 2011 tax years. Other audits opened during the third quarter of 2012 include a Canada Revenue Agency audit of our Canadian subsidiary, which we acquired in the Cellu Tissue acquisition, for the fiscal year ended February 2010 and calendar years 2010 and 2011.


Table of Contents

RESULTS OF OPERATIONS
Three Months Ended September 30, 2012 Compared to Three Months Ended
September 30, 2011
The following table sets forth data included in our Condensed Consolidated
Statements of Operations as a percentage of net sales.

                                                   Three Months Ended September 30,
(Dollars in thousands)                               2012                    2011
Net sales                                    $ 480,233     100.0 %   $ 501,125     100.0 %
Costs and expenses:
Cost of sales                                 (409,822 )    85.3      (448,927 )    89.6
Selling, general and administrative expenses   (30,649 )     6.4       (26,815 )     5.4
Total operating costs and expenses            (440,471 )    91.7      (475,742 )    94.9
Income from operations                          39,762       8.3        25,383       5.1
Interest expense, net                           (7,900 )     1.6       (12,100 )     2.4
Other, net                                           -         -         1,290       0.3
Earnings before income taxes                    31,862       6.6        14,573       2.9
Income tax provision                           (12,798 )     2.7        (5,928 )     1.2
Net earnings                                 $  19,064       4.0     $   8,645       1.7

Net sales-Third quarter 2012 net sales decreased by $20.9 million, or 4.2%, compared to the third quarter of 2011, due to the sale of our Lewiston, Idaho sawmill in November 2011. Excluding net sales of $22.0 million from the sawmill in the third quarter of 2011, net sales for the third quarter of 2012 were slightly higher as a result of record quarterly shipments of approximately 139,000 tons from our Consumer Products segment as well as higher paperboard shipments. The increase in net sales was partially offset by lower external pulp sales due to increased internal usage of the pulp we produce, a 2.4% decline in paperboard net selling prices, and slightly lower overall tissue net selling prices due to increased non-retail tissue sales, which had lower net sales prices. These items are discussed further below under "Business Segment Discussion."
Cost of sales-Cost of sales was 85.3% of net sales for the three months ended September 30, 2012 and 89.6% of net sales for the same period in 2011. The decrease was due primarily to lower costs for purchased pulp, chips, sawdust, logs, transportation and energy, partially offset by higher chemical costs. Selling, general and administrative expenses-Selling, general and administrative expenses increased $3.8 million over the prior year period primarily as a result of higher wage and benefit, incentive compensation and director equity-based compensation expenses.
Interest expense-Interest expense decreased $4.2 million during the three months ended September 30, 2012, compared to the same period of 2011. The decrease was largely attributable to capitalized interest of $4.1 million associated with our TAD project, compared to $0.8 million of capitalized interest in 2011. The increase in capitalized interest was due to a higher level of cumulative capital expenditures associated with the TAD project in the 2012 period.
Income tax expense-We recorded income tax expense of $12.8 million in the three months ended September 30, 2012, compared to $5.9 million in the three months ended September 30, 2011. The effective rate for the three months ended September 30, 2012, was 40.2%, compared to an effective rate of 40.7% for the same period of 2011. Income tax expense for both quarters included interest accrued on uncertain tax positions.


Table of Contents

Business Segment Discussion

Consumer Products

                          Three Months Ended
                             September 30,
(Dollars in thousands)    2012          2011
Net sales              $ 292,959     $ 285,237
Operating income          18,453         7,075
Percent of net sales         6.3 %         2.5 %
. . .
  Add CLW to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CLW - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.